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BFCSA: Banking royal commission targets vertical integration

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Banking royal commission targets vertical integration

Australian Financial Review Apr 16 2018 6:34 PM

Fiona Buffini


AMP, CBA, NAB and Westpac have admitted making payments that were outlawed five years ago under reforms designed to clean up conflicts in financial advice.

The admissions were revealed in a tranche of new submissions they were forced to provide to the banking royal commission tackling concerns about "vertical integration", where banks both make and sell financial products.

Vertical integration is a hot topic for the inquiry given five of the major groups operate this model, and corporate regulator Peter Kell, who also gave evidence to the commission on Monday, said it was "inherently conflicted".

Counsel assisting Rowena Orr, QC, told the first day of hearings into the financial advice industry that the latest submissions contained multiple new breaches of the Corporations Act, which the banks had failed to disclose until now.

AMP admitted paying so-called "prohibited conflicted remuneration" in a range of breaches over the past five years, amounting to $817,000 in relation to some 1800 customers.

It has been illegal since July 2013 for financial planners to pay or receive commissions that could reasonably be expected to influence the choice of financial product, or influence the advice given to clients.

Conflicted remuneration

Ms Orr said AMP waived $411,000 in planning fees for 913 customers where the adviser recommended the customers transfer from an external product into one on AMP's approved product list. A year later, AMP waived $352,000 in fees for 856 customers in the same situation.

"AMP did not disclose any of these events in any of the three submissions to the commission that it made earlier this year, despite these events constituting a breach of the Corporations Act," Ms Orr also noted on Monday.

Commonwealth Bank subsidiaries Count Financial and Financial Wisdom admitted its advisers also received prohibited conflicted remuneration.

Ms Orr said the CBA entities failed to disclose whether it paid prohibited payments "so it's not clear whether there have been further contraventions".

NAB admitted providing free support services to advisers who recommended particular bank products; was investigating whether its infamous introducer program was in breach of the law where the fees were paid to financial advisers; and admitted paying $500,000 in non-monetary benefits to advisers in breach of the law.

In-house products

"NAB did not disclose any of these events in the two submissions it provided earlier this year, despite each of them constituting a breach of the Corporations Act," Ms Orr said.

Westpac admitted paying $200 million in permitted conflicted remuneration and admitted paying over $222,000 in prohibited payments. The bank disclosed "some but not all" of these events in its earlier submissions.

Earlier, Australian Securities and Investments Commission deputy chairman Peter Kell told the commission that vertical integration was an inherent conflict of interest.

"There is inherently a conflict between manufacturing a product and supplying a product but then having advice network or advisers who are supposed to be providing advice in the best interests of the clients, putting the clients – or prioritising the interests of the clients – so doing both within the same firm is allowed under the regime, but it does produce a conflict that needs to be appropriately managed," Mr Kell said.

An ASIC review in January was damning, finding that the majority of products recommended to clients in bank-owned financial advice networks were "internal in-house products" and that 75 per cent of advice provided was not in the best interests of clients.


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