Broader disclosure needed for VIOs: SiFA

MBIE recently sought submissions on its suggestions for disclosure rules for financial advisers under the new regime. It suggested that all advisers should have to tell their clients upfront what they would charge in commissions – and asked whether that should be done in dollar terms.

It proposed, when the scope of advice was known, the adviser should disclose details regarding the nature and the scope of the financial advice that the individual or firm would provide, including the providers whose products they would consider, details of any particular material commissions or incentives that they, or their employer, might receive and details of any particular material conflicts of interest.

SiFA made a submission arguing that did not go far enough for big product providers.

“We believe that where an adviser for a VIO gives ‘advice’ to purchase the VIO’s own product (where VIO includes the lead firm and all its associates both upstream and downstream) then the adviser should have to disclose all the fees and charges that the VIO will be paid right up the vertical integration.”

Pathfinder chief executive John Berry said it would be important for clients to understand when they were dealing with an "independent" adviser and when they were not

"Anecdotal evidence suggests that the breadth of products an adviser considers is not well understood by consumers (ie number of providers and number of products considered). New disclosure rules need to come up with a very simple and effective way to alert consumers that they need to read more."

He said the advisers' disclosure could start with a statement such as: "I am (or I am not) an independent financial adviser."

"The disclosure detail could then explain the conflicts etc that mean they are not independent."

He said it was right that all conflicts of interest be disclosed but said the test for disclosure needed to be higher than a factor "being perceived to materially influence" advice.

The threshold should be that if there was any doubt, the potential conflict should be disclosed, he said.

"Conflicts of interest are unavoidable in business but in financial services they need to be identified, managed and effectively disclosed to consumers. If they are not disclosed in a way consumers can understand, then the advice process is undermined."

Adviser Wayne Ross, of Newton Ross, said the MBIE proposals were not markedly different from what his firm already did.

“That said, I did have issues with some of what they were looking to change. I think there is a focus on costs with no corresponding analysis of benefits. There is also little to no recognition of the indirect/hidden cost of wider group revenue such as IPO underwriting, distribution and trading margins, and portfolio/security turnover, etc so again we will be left without an apples with apples comparison.”

Comments from our readers

On 15 June 2018 at 7:11 am Murray Weatherston said:

John Berry's comment about independence is at odds with what the current Code for AFAs says about independence.
Under the AFA Code, I am not independent. Under what I understand to be John's version, I am independent.
We should be slow to attribute comments by individuals who happen to be on the Code Working group to the CWG itself.John's submission will be his private view.
But in a vacuum of information, we will probably be drawn naturally to parse any comments by any member to see if it gives a lead as to what CWG might be thinking.

On 15 June 2018 at 7:39 am Pragmatic said:

I have extremely high praise for John Berry, and genuinely value his insights.

What I find unusual is when a member of any Board / Working Group is permitted to share their views (personal or otherwise) outside of the confines of the Board / Working Group environment.

It is a standard obligation for all members of such groups (usually captured within the terms of reference) to "speak with one voice" for all of the obvious reasons - especially when a number of the items are currently being considered by the group.

On 15 June 2018 at 8:27 am John Berry said:

Hi Murray

just to be clear my submission said that "new disclosure rules need to come up with a very simple and effective way to alert consumers that they need to read more." I suggested disclosure start with a succinct statement that is meaningful to consumers and encourages them to read on - rather than just starting with pages of detail.

"Independent" is one example because I couldn't think of a better one - you probably can. I'm well aware of the difficulties around the definition of "independent", its just an example to make a wider point.

Anecdotally I hear that clients typically aren't choosing to read disclosure docs, and not all advisers want to talk their clients through the disclosure docs. If consumers aren't currently choosing to read the docs, we need to find a new way to encourage them - or what's the point in making the disclosure?

Regards
John

On 15 June 2018 at 11:27 am Tash said:

While there is a view that being paid cammission forever prevents and adviser from calling themselves 'independent' for insurance and mortgage advisers perhaps a list of providers they are able to recommend and implement (have agreements with) should be mandatory disclosure. Then clients can decide for themselves the likelihood of getting the best advice.

On 15 June 2018 at 11:35 am dcwhyte said:

JB's comment no independence and Murray's observation suggest that the current definition of independence should be reviewed.

A purely compensation-based definition seems inappropriate these days as VIOs charge fees but cannot by any stretch be considered independent.

As we are contemplating a revised Code of Conduct a more contemporary definition related to transparency, clarity, and relevance should be considered.

I don't claim to have the answer, but I do suggest a debate should take place.

On 18 June 2018 at 2:25 am henry Filth said:

An interesting take on VIO accountability from ASIC.

"As Westpac held the financial services licence used by Mr Sinha, ASIC said the bank was liable for the alleged breaches of the best interests duty, which carry a maximum penalty of $1 million per breach."

https://www.canberratimes.com.au/business/banking-and-finance/westpac-faces-asic-legal-action-over-sacked-financial-adviser-20180615-p4zlpn.html

Broader disclosure needed for VIOs: SiFA

Advisers working for vertically integrated product providers should be required to disclose all the money the organisation could make from each product recommendation, right up the value chain, it has been argued.

Friday, June 15th 2018, 6:00AM 6 Comments

Comments from our readers

www.GoodReturns.co.nz