An inability to take swift and effective action against the managers and executives of businesses that offer financial planing, including super funds, remains a gap in the corporate regulator’s armoury that it wants to fill, according to ASIC commissioner Peter Kell.

Speaking at an Association of Superannuation Funds of Australia (ASFA) conference on Tuesday, Kell said ASIC is seeking greater powers to take action to ban managers and executives of businesses that offer financial advice, “not just the front-line advisers, but the people responsible for training them, the compliance systems, remuneration, and whatnot, that often drive the culture”.

Responding to questions, Kell said ASIC currently has the power to take action against executives, but “it’s not straightforward to use in this area, and that is why we have made an argument it would be much better and much more cost effective for us to have a direct power, like they have in the UK, to take banning actions and other relevant actions against the managers and executives of financial advice firms”.

“It hasn’t been a major part of our work, but we are aware that, frankly, it is a gap,” he said.

“On occasions we’ve had some fairly blunt discussion, as you could imagine, with some advice firms about some of their managers and executives, and that has resulted in changes. But there haven’t been a lot. There have been some. Wealthsure is an example; that was the big firm in WA where we took action directly against some of the key executives there –so we do it, but we’re also arguing for the powers to allow us to do it more easily. We think that will help change [behaviour].”

Inherent conflict

Kell said ASIC was particularly concerned about the conflicts of interest inherent in vertically integrated advice businesses, and about the conflicted remuneration arrangements that remain legal – for example, under grandfathering provisions of the Future of Financial Advice (FoFA) laws.

“We continue to regard conflicted remuneration arrangements as a key risk indicator, and it is an area of focus for us,” Kell said.

Kell said the trend towards vertical integration is well entrenched, and in some respects it has been beneficial for consumers.

“For example, it can allow institutions to provide integrated product solutions for customers,” he said.

“Moreover, the financial capacity of these larger businesses means they are typically able to ensure compensation for their clients if something goes wrong and there is a decision against them- for example, the ombudsman scheme.

“However, there are also inherent conflicts of interest created by vertical integration. It may not always be readily apparent to consumers.”

Kell said the regulator is running a surveillance program “looking at conflicts of interest in vertically integrated structures and how they are managed – and that’s the key thing for all of you to think about”.

“That program I expected to run until about the middle of this year, with a report on our findings in the second half of the year,” he said.

“In addition, ASIC is also focusing on the quality of advice and the potential mis-selling of advice in large vertically integrated advice businesses. So FoFA has made some very important changes to conflicts of interest, remuneration structures, but there are still conflicted remuneration structures that are allowed and we will continue to focus on those to ensure they are being appropriately managed and handled, and I think that is a question that anyone in this business needs to ask themselves on a regular basis: how are we dealing with potential conflicts? How are we ensuring they are not getting in the way of our relationship with the client?”

Key to restoring trust

Kell said lifting financial planning standards is “key to restoring trust and key to getting better long-term outcomes for Australian consumers”. And while ASIC has taken a facilitative approach to compliance as FoFA is bedded down, that changes on July 1 this year – and at no time will the regulator tolerate willful misconduct.

“Let me be crystal clear, because there has been some misunderstanding around this in the media and the parliament: we are still cracking down on misconduct during this period, where we see problematic conduct, where we see egregious conduct,” he said.

“We will continue to enforce the laws that were not changed as a result of the disallowance of the regulations, and enforce other obligations more broadly.

“We are and have been taking enforcement action where we see deliberate breaches of the new requirements and where we find deliberate and systemic breaches we will act as quickly as we can, given our resources.

“Since the facilitative approach started in 2013, we’ve banned 17 people from providing financial advice, we’ve removed another five advisers through enforceable undertakings, we’ve cancelled 18 licences, we’ve accepted enforceable undertakings from six licensees requiring them to undertake major improvements in their compliance procedures; we’ve entered into agreements with two licensees requiring them to review the way they undertake advice provision; we’ve issued 24 infringement notices for misleading and deceptive advertising in relation to financial advice-related matters.

“That’s a non-exhaustive list, but it gives you a sense of what we’re seeking to do.”

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