Managing conflicts of interest in financial advice

The Australian Securities and Investments Commission (ASIC) has released a report of its review of financial advice provided by ANZ, CBA, NAB, Westpac and AMP, the five biggest vertically integrated financial institutions which identifies areas where improvements are needed to the management of conflicts of interest in financial advice. The review looked at the products that the 5 financial advice licensees were recommending and at the quality of the advice provided on in-house products.

The review was part of a broader set of regulatory reviews of the wealth management and financial advice businesses of the largest banking and financial services institutions as part of ASIC’s Wealth Management Project.

The review found that there was generally a good mix of both in-house products and external products on the approved product lists of the advice licensees ASIC reviewed: 79% of the financial products on the firms’ approved products lists (APL) were external products and 21% were internal or ‘in-house’ products. However, 68% of clients’ funds were invested in in-house products.

The split between internal and external product sales varied across different licensees and across different types of financial products. For example, it was more pronounced for platforms compared to direct investments. However, in most cases there was a clear weighting in the products recommended by advisers towards in-house products.

ASIC noted that while vertical integration can provide economies of scale and other benefits to both the customer and the financial institution, conflicts of interest are inherent in vertically integrated firms, and these firms still need to properly manage conflicts of interest in their advisory arms and ensure good quality advice.

ASIC also examined a sample of files to test whether advice to switch to in-house products satisfied the ‘best interests’ requirements. ASIC found that in 75% of the advice files reviewed the advisers did not demonstrate compliance with the duty to act in the best interests of their clients.

ASIC commonly saw the unnecessary replacement of financial products, where advisers recommended that customers switch to a new product when their existing product appeared to be suitable to meet the customer’s needs and objectives.

ASIC says 10% of the advice reviewed was likely to leave the customer in a significantly worse financial position. ASIC says it will ensure that appropriate customer remediation takes place.

Print Friendly, PDF & Email

Your Compliance Support Plan

We understand you need a cost-effective way to keep up to date with regulatory changes. Talk to us about our fixed price plans.