It's the elephant again: Vertical integration and conflicts of interest

 

Vertical integration isn't necessarily a problem, but successive ASIC reports tend to suggest that it is. Report 562 casts shade both on vertically integrated advice businesses and the effectiveness on their compliance frameworks.

 

Report 562 summarises ASIC's review of "Australia's largest banking and financial services institutions" and notes that 75% of the advice they reviewed was "non-compliant advice".

Read the report (and REP 515) to understand why vertical integration, the elephant in the room, needs to be addressed if an advice profession is to emerge.


In those advice reviews we observed a higher level of non-compliant advice where advisers recommended an in-house product compared to where an adviser recommended an external product.
— Report 562 at 26

The report also highlights the difference between reality and substance in retail advice; while only 21% of products on Licensees' Approved Product Lists are 'in-house products', 68% of recommendations involved in-house products. 

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We'll analyse the insights, consequences and implications of this report in a future article. In the interim read the report and consider our previous posts "Compliance Insights: Lessons from REP515", "Who watches the watchers" and "Gliding over all: Beyond banking bad". 

Over the past eighteen-months we've consistently advocated for an independent advice industry and outlined our prescription for better compliance.

Licensees, vertically integrated or otherwise, need to invest time and resources in building better, and more effective compliance arrangements.

In our opinion, effectiveness requires independent, third party compliance support. At the very least, Licensees should take this opportunity to:

  • improve their monitoring and supervision framework;
  • reconsider their policies, guides and processes; 
  • review and assess their internal capabilities and controls; and
  • revise and improve their advice processes.