Australia’s financial regulator says it frets about the incentives structures of some of the businesses it regulates and is concerned that a mismatch between how firms are paid and their clients’ long-term interests will prove costly.

Australia’s financial regulator says it frets about the incentives structures of some of the businesses it regulates and is concerned that a mismatch between how firms are paid and their clients’ long-term interests will prove costly. It also remains concerned, it said, about the competence of some advisors.

“Structural change in the financial system through increasing assets held in superannuation (including self-managed superannuation funds) and globalisation is magnifying this risk [of weak compliance and investor protection], the Australian Securities and Investments Commission said in a 2014/2015 strategy outlook.

The quality of financial advice can be affected by an adviser’s conflicts of interest or lack of competence. This can lead to some investors and financial consumers being encouraged or advised to make financial decisions that are not in their best interests. When licensees have weak compliance systems or poor cultures, there may be loss of assets, inadequate compensation arrangements or unlawful benefits given to related third parties.

The country has, by comparison to some other developed nations, a highly developed investment industry linked to pensions because of compulsory retirement savings. This has spawned a large wealth management and advisory sector over recent decades. There have been moves to make advice more objective: Since July of 2012, the country has outlawed trail commission payments to advisors, mirroring the kind of changes enacted in the UK under the Retail Distribution Review programme.

The watchdog did not name names of specific firms in the report in terms of specific concerns it has. In recent months, ASIC has carried out enforcement actions against a number of firms over findings of poor advice. For example, Commonwealth Bank has undertaken a sweeping review of its wealth management business following a poor advice saga.

“Larger amounts of retirement savings are at risk and investors and financial consumers have more products to choose from. Investors and financial consumers need access to good-quality tailored advice that is not conflicted. Where financial advisers and licensees fail to deliver this, there is potential for significant investor losses,” ASIC said.

In a varied view of the financial services industry, ASIC described, as an example of actions, risk-based surveillance and a focus on tracking the compliance work of large financial institutions. Another area is in tracking how well and how fast companies report any alleged breaches of regulations.

Fund management
ASIC noted that the country’s asset management sector has seen “significant consolidation”: the four main Australia-based banks accounted for around 60 per cent of total industry revenue, as at 2013/14.

“Additional industry consolidation is expected over the five years to 2018–19, as banks are likely to continue to increase their interests in smaller fund managers. Consolidation is also more likely to occur as superannuation funds grow in size and start to bring fund management capabilities in-house,” the watchdog said.

“Vertical integration in banking and along the product distribution chain continues to pose challenges. Advisers may persuade investors and financial consumers to invest in in-house products when that may not be in their best interests. Platform operators that are also advisory dealer groups are in a position to direct many clients to in-house products,” it said.