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Best interests duty for financial advisers flawed: RC

The best interests duty for wealth advisers has not been effective in managing the conflicts of interest inherent in vertically integrated models, Commissioner Hayne has concluded in his long-awaited final report.

In the final report for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which was handed to the Governor-General on Friday (1 February) and publicly released on Monday (4 February), Commissioner Kenneth Hayne addressed concerns about conflicts of interest in vertically integrated models, where an entity producing and selling products is also the entity advising customers on what products to purchase.

He argued in the final report that while the “one-stop-shop” model promises the “virtue of efficiency” for financial institutions, while offering simplicity to consumers who can deal with just one financial institution to fulfil their needs, the model creates a bias towards promoting the owner’s products above others, even where they may not be ideal for the consumer.”

“The internal efficiency of the ‘one-stop shop’ does not necessarily produce efficiency in outcomes for customers,” the final report states.

Citing figures from the Australian Securities and Investments Commission’s (ASIC) January 2018 report, Financial Advice: Vertically Integrated Institutions and Conflicts of Interest, the final royal commission report notes that more than two-thirds (by value) of the investments made by clients were made in in-house products.


Commissioner Hayne said the very fact that this result is “not surprising” (because history indicates that “interest trumps duty”) suggests that the premise of the Future of Financial Advice (FoFA) reforms – that conflicts of interest can be managed and regulated – is “flawed”.

He argued that FoFA reforms “emphasise process rather than outcome”. For example, the best interests obligations that were introduced are considered met if advisers follow the “safe harbour” provision in section 961B(2) of the Corporations Act, including “[conducting] a reasonable investigation into the financial products that might achieve the client’s objectives and meet the client’s needs”.

This focus on process, according to the final report, could be counter-intuitive as it encourages advisers to adopt a “tick a box approach” to compliance. 

The commissioner also criticised the wording of certain steps – such as “conduct a reasonable investigation” – claiming that in practice, it requires “little or no independent inquiry into, or assessment of, products.”

“In most cases, advisers and licensees act on the basis that the obligation to conduct a reasonable investigation is met by choosing a product from the licensee’s ‘approved products list’,” the report states.


The provision that further steps should be taken by advisers that “would reasonably be regarded as being in the best interests of the client” was also criticised for its wording, with the commissioner arguing that it lacks comparisons “that would merit the use of the superlative ‘best’ in the collocation of ‘best interests’”.  


The commissioner presented the possibility of amending the best interests duty for financial advisers to be “more prescriptive” about how they pursue the client’s best interests.

“This could be achieved, for example, by requiring advisers to make explicit in the statement of advice the comparisons they have made between products, or to make explicit their reasons for any recommendation to switch products,” he wrote.

However, Commissioner Hayne remains unconvinced of the effectiveness of this approach, arguing that prescribing specific steps and allowing advisers to employ a “tick a box approach” to compliance could “undermine the broader obligation for advisers to act in the best interests of their clients.”

The final report also presented the option of removing the safe harbour provision entirely.

While this is not considered immediately necessary, the royal commission recommended that the safe harbour provision be assessed by ASIC in three years' time as part of a broader review of the effectiveness of the various measures that have been introduced by regulators and financial services entities to improve the quality of advice. 

“Unless there is a clear justification for retaining that [safe harbour provision], it should be repealed,” the royal commission report states, further suggesting that ASIC conduct its review preferably by 30 June 2022, but no later than 31 December 2022. 

Better disclosure of the lack of independence of advisers operating under one-stop-shop models was also recommended. Commissioner Hayne suggested that the law be amended so that an adviser is obligated to provide their client with a written statement “explaining simply and concisely why the adviser is not independent, impartial and unbiased.”

The report also acknowledged other regulator-imposed measures underway, such as stricter education and personal development requirements for advisers as well as design and distribution obligations proposed in the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 that “revolve around making an appropriate target-market determination for products and dealing with the product accordingly”.

While Commissioner Hayne noted these measures could help improve the quality financial advice, he believes they are not enough to effectively manage conflicts of interest.

The group executive of financial services at Canstar, Steve Mickenbecker, commented that while the structural conflict in vertical integration “assures the inevitability of a separation of advice from product manufacturing”, the absence of vertical integration could mean “a shrinking of the availability of advice in a market where financial literacy is challenged”.

“The soft touch will encourage the emergence of other models for advice that avoid the conflict, via a regulatory regime that allows change and avoids the excesses exposed at the commission,” Mr Mickenbecker added.

“Hope for balance in response to the royal commission recommendations, or be careful what you wish for.”

The royal commission did not call for an end to vertical integration, saying that the enforcement of structural separation would depend on whether the benefits outweigh the costs. 

Find out more about what the final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry means for the broking industry, and what the next steps are, by attending the Better Business Summit 2019.

Running across five different states every Thursday from 14 February, the Better Business Summit provides brokers with straight-talking, practical advice to help them grow and improve their businesses in this time of change.

Tickets are selling out – so make sure you secure your ticket today to stay ahead of the curve and prepare your business.

[Related: RC’s final recommendations revealed]

Best interests duty for financial advisers flawed: RC
Kenneth Hayne

If you’re feeling overworked and overwhelmed in this fast-paced mortgage market, it’s time to make some changes, and the Business Accelerator Program can help! Work smarter, not harder, in 2022 and beyond, visit the website here to secure your ticket.

Tas Bindi

Tas Bindi is the features editor on the mortgage titles and writes about the mortgage industry, macroeconomics, fintech, financial regulation, and market trends.  

Prior to joining Momentum Media, Tas wrote for business and technology titles such as ZDNet, TechRepublic, Startup Daily, and Dynamic Business. 

You can email Tas on: This email address is being protected from spambots. You need JavaScript enabled to view it.



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