The recently-appointed chair of Australia’s financial regulator has threatened a ban on all “conflicted remuneration” if the industry doesn’t pull its socks up.
James Shipton, chair of the Australian Securities and Investments Commission (ASIC) since last October, told a superannuation conference last week that the corporate cop would push for a zero tolerance policy on product-tainted advice payments.
Shipton said the 2013 Future of Financial Advice (FOFA) reforms in Australia, which banned commissions on investment products (while grandfathering existing arrangements), recognised that “the best way to deal with some conflicts was not to manage or disclose them, but to remove them altogether.”
“This is an option that ASIC favours in relation to conflicted payments in advice. There can be no ambiguity in this area,” he said in the speech.
“So, I would strongly suggest that all financial firms keep this in mind when considering how to deal with conflicts of interest arising from remuneration structures.”
He told the Australian Council of Superannuation Investors conference in Sydney that the Royal Commission (RC) into financial services had uncovered serious flaws in the Australian industry.
Notably, Shipton said the RC revealed some Australian Financial Services Licence (AFSL) entities had neglected their duties as “first line regulatory responsibilities”.
“And whilst we have been trying to do our job, unfortunately, all too often, the firms who have failed in their first line responsibilities have made matters worse by not cooperating with us and, in some unacceptable cases, actually obstructed our work,” he said.
“These firms have not just failed in their first line compliance duty, they have jeopardised the entire regulatory structure. What’s more they have endangered the financial system they are meant to support.
“This cannot stand – because if firms continue to fail to step up to their responsibilities, the integrity of our regulatory structure, and our financial system, is undermined.”
Since 2011 ASIC had banned 800 people from financial services, seen over 160 individuals convicted on criminal charges, and clawed back “more than $230 million in compensation for consumers this year and over $1.7 billion”, he said.
Shipton said “investor engagement” had an important role in reining in poor corporate behaviour in financial services businesses.
“The sustained engagement and active stewardship of assets by investors will be fundamental to restoring trust, better governance and good corporate cultural in Australia,” he said.
ASIC was also ramping up its ‘Wealth Management Project’ that was responsible for uncovering much of the evidence on show at the RC.
“We intend to accelerate and expand this intense program,” Shipton said.
Furthermore, the regulator was seeking more powers to investigate and punish licensees that breached the law.
“For example, a breach of section 912A [of the Corporations Act], the ‘efficiently, honestly and fairly’ obligation that I referred to earlier, currently does not incur a penalty!” he said. “It would under proposed reforms.”
As well as any reforms that might emerge out of the RC, the Australian financial services industry was already facing a raft of reforms including:
- measures aimed at lifting the educational standards of advisers; and,
- imposing a new code of ethics (currently in draft form) for Australian financial advisers – similar to the Code of Conduct under construction in NZ.
Post the RC financial advice rounds, ASIC has also advocated for an end to grandfathered commissions “as soon as reasonably practicable and to the maximum possible extent”.
Overall, Shipton said the Australian financial services industry would have to work hard to restore the public “trust deficit”.
“And this current predicament is of the sector’s own making,” he said. “And because it is largely of its own making, the sector must be held to account and must take responsibility for its repair.”
Last Friday NZ banks were due to file evidence with the Financial Markets Authority (FMA) and the Reserve Bank showing that “misconduct of the type highlighted in Australia is not taking place here”.
The FMA was allocated $36 million in last week’s budget – the same as in 2017. Both ASIC and fellow regulator – the Australian Regulatory Prudential Authority (APRA) – saw cuts of about A$26 million and $3.5 million as the Malcolm Turnbull government delivered its budget earlier in May.