25 August 2014

The corporate regulator is seeking tougher powers to allow it to take action against bank managers when their financial planners dupe customers.

The Australian Securities and Investments Commission wants legal changes to allow it to change the design of financial products to remove conflicts of interest that are plaguing the advice industry.

As the big banks scramble to improve education standards of planners following a string of scandals, ASIC will tell the financial system inquiry that it should be able to target bank staff to change cultures to better protect customers.

Inquiry chairman and former Commonwealth Bank of Australia chief executive David Murray last week said he was reviewing the “vertically integrated” banking model, where existing customers are sold financial advice, after hearing from victims about the pain suffered from losses due to poor advice. Under the law as it stands, ASIC can ban a front-line financial adviser and take a licence away from a financial services business. ASIC says these powers are insufficient because the latter option can be disruptive to the clients, while the former does not attack the root of the problem – that remuneration structures can drive advisers to give bad advice.

Indicating the government’s Future of Financial Advice rules don’t go far enough to protect investors, ASIC says the ability to target managers, executives and directors would force banks and other planning groups to change.

“What we need is the power to more directly take action and impose penalties on the people who are driving the business, who are designing the remuneration and the performance structures, who are deciding on how much training is undertaken, and who are ultimately responsible for compliance,” said ASIC deputy chairman Peter Kell.

“If [ASIC] have the ability to ban or impose monetary penalties on those individuals if their firm has engaged in serious systemic misconduct, that will change the incentives around how they ensure those businesses comply with the law and meet consumer expectations. It’s a key missing piece of the regulatory framework at present.“Such a power might seem relatively simple, but we believe it would have a very important impact on the way the financial services industry operates and, in particular, the way financial services firms are managed.”

FoFA banned commissions on certain financial products but banks are still able to pay staff based on the sale of advice products, as long as that is part of a “balanced scorecard” (that is, that other factors are also taken into account to determine pay).

More aggressive approach

Industry Super Australia deputy chief executive Robbie Campo said last week: “The industry will not professionalise while advisers can be paid based on how much product they sell.”

ASIC’s willingness to take a more aggressive approach against the banks comes after a Senate inquiry report in June criticised the regulator’s approach to the scandal at CBA subsidiaries Commonwealth Financial Planning and Financial Wisdom, where advisers chasing big bonuses sold clients inappropriate investments that blew up in the global financial crisis.

In the report, the Senate lashed ASIC for its tardiness in responding to the original whistleblower complaints and its oversight of the compensation process. Since the report, CBA has been forced to announce a new remediation process for aggrieved customers which will include assessments by an independent panel, while ASIC has stepped enforcement efforts against Macquarie Private Wealth, alleging it misclassified retail clients as sophisticated clients to sell them riskier investments, maintained poor records and failed to report various breaches of the law.

ASIC will also use its second round submission to the inquiry, which will be filed on Tuesday, to call for new powers to enter banks to change the design of their financial products if the regulator thinks incentives could compromise investor safety. So-called “product intervention” powers were recently granted by the British government to its Financial Conduct Authority.

“ASIC will be indicating that a more flexible toolkit, which has not just disclosure but also intervention powers that may allow us to step in more directly with problem products, would deliver better market outcomes,” Mr Kell said in an interview.

“Of course, these powers would need to be carefully designed but we can see in the UK there are some precedents for so called intervention powers and they would be very helpful in dealing with significant problems around either products or the way products are distributed.”

In Britain, which has also been plagued by mis-selling scandals, the FCA can temporarily change the “charging structure” of a product, can ban certain product features, and can require certain products only be sold by advisers with a certain level of education. It also has power to ban them outright, powers that were used for the first time earlier this month to restrict the sale to British retail investors of the British equivalent of hybrids.

If introduced in Australia, such powers would allow ASIC to enter a bank and influence product design. For example, if it did not believe commission structures were appropriate, it could ban or change them.

ASIC is also asking the financial system inquiry, which will deliver a final report to Treasurer Joe Hockey in November, to expand its range of penalty powers. It wants to be able to “disgorge” ill-gotten profits from banks and redistribute them back to victims.

Mr Kell said the ability to take action against bank managers would also help ASIC tackle a growing problem where managers and advisers who might be banned as front line advisers re-appear as a manager of another financial services firm.