Canberra - 23 November 2009: The long anticipated Ripoll report into Australia’s financial services industry was released today by the Parliamentary Joint Committee on Corporations and Financial Services.

In a post Storm and Opes Prime, the report explores the structure and delivery of financial services. The scope of the inquiry was later amended to include the lending practices of banks and other financial institutions and their interaction with investors and financial services providers.

Under the heading ‘lessons to be learned’ the report makes special note of three key problem areas:

Inappropriate provision of a sophisticated product to retail investors
Ineffective disclosure where investors were unaware of the implications of the investments they were making
The need for federal regulation of margin lending

The report provides 11 recommendations to improve Australia’s financial services system:

Recommendation 1 - The Corporations Act be amended to explicitly include a fiduciary duty for financial advisers operating under an AFSL, requiring them to place their clients' interests ahead of their own.

Recommendation 2 - The government ensure ASIC is appropriately resourced to perform effective risk-based surveillance of the advice provided by licensees and their authorised representatives. ASIC should also conduct financial advice shadow shopping exercises annually.

Recommendation 3 - The Corporations Act be amended to require advisers to disclose more prominently in marketing material restrictions on the advice they are able to provide consumers and any potential conflicts of interest.

Recommendation 4 - The government consult with and support industry in developing the most appropriate mechanism by which to cease payments from product manufacturers to financial advisers.

Recommendation 5 - The government consider the implications of making the cost of financial advice tax deductible for consumers as part of its response to the Treasury review into the tax system.

Recommendation 6 - Section 920A of the Corporations Act be amended to provide extended powers for ASIC to ban individuals from the financial services industry.

Recommendation 7 - As part of their licence conditions, ASIC require agribusiness MIS licensees to demonstrate they have sufficient working capital to meet current obligations.

Recommendation 8 - Sections 913B and 915C of the Corporations Act be amended to allow ASIC to deny an application, or suspend or cancel a licence, where there is a reasonable belief that the licensee 'may not comply' with their obligations under the licence.

Recommendation 9 - ASIC immediately begin consultation with the financial services industry on the establishment of an independent, industry based professional standards board to oversee nomenclature, and competency and conduct standards for financial advisers.

Recommendation 10 - The government investigate the costs and benefits of different models of a statutory last resort compensation fund for investors.

Recommendation 11 - ASIC develop and deliver more effective education activities targeted to groups in the community who are likely to be seeking financial advice for the first time.

While the report does not explicitly state that commission based remuneration for financial advisers should be banned, a commission based remuneration structure is likely to breach several of the key recommended requirements. Recommendation 1 requires the adviser to put the interests of their client ahead of their own. The question is, is it possible to receive a commission from a product provider and still be independent? Recommendation 4 prevents payments from a financial product provider to an adviser. Together, these recommendations would remove the existing commission based structure for financial advice.

The report also considers ASIC a vital watch dog and recommends a few extra regulatory teeth. ASIC view of remuneration structures is:

“While the reforms to clarify the fiduciary-style duty of advisers will have a significant impact on the ability to use commission remuneration, the Government should still assess changing the policy settings of the FSR regime so that advisers cannot be remunerated in a way that has the potential to distort the quality of advice given.

This would mean that the following forms of remuneration would not be permitted, particularly in relation to personal advice:

a. up-front commissions;
b. trail commissions;
c. soft-dollar incentives;
d. volume bonuses;
e. rewards for achieving sales targets; and
f. fees based on a percentage of funds under advice.”

The Government has stated that they will respond to the report in conjunction with the Cooper review into commission based fee structures in superannuation.

More information:
Ripoll report
Government welcomes report into financial services and products