On Friday 28 September, Commissioner Kenneth Hayne handed down the interim report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services industry. And while the report didn’t provide any recommendations, it did raise a number of key questions for the industry.

In its response to the interim report, IMAP’s submission specifically referenced five of the ‘particular issues’ raised by the Royal Commission regarding financial advice and the use of managed accounts as services that:

• are likely to improve client outcomes;
• lead to a more efficient and sustainable advice profession, the benefits of which are demonstrably passed on to clients in lower costs; and
• support the separation of roles, which encourage specialisation and professionalism.

Following is IMAP’s response to the five issues raised by the Royal Commission.

1. Can conflicts of interest and duty be managed?

IMAP acknowledged that actual and potential conflicts of interest may arise for advisers, licensees or managed account providers. Those conflicts may include: remuneration, product selection, platform biases and incentives.

However, IMAP believes substantial work has already been undertaken by ASIC and other Government agencies to identify and address conflicts, and the way these are treated by advisers and financial product manufacturers. These include the FoFA reforms, the Royal Commission, ASIC 2018 Report 562 ‘Financial Advice: Vertically integrated institutions and conflicts of interest’, increased powers for ASIC, and impending changes to ‘Design and Distribution’ obligations.

As a result, IMAP believes managed accounts provide more protections for retail investors than other areas of retail financial services. This is achieved through:

• Fiduciary standard best interest obligations of responsible entities and MDA providers;
• Best interest duty obligations of providers of personal advice to retail clients;
• Extensive disclosure of fees under RG97, both initially and on an annual basis; and
• Obligations on superannuation trustees to review products offered through their platforms.

“We note that Treasury is of the view that the actions taken to date and heightened awareness by AFS licensees, ‘act to mitigate the misconduct risks involved’,” says IMAP Chair, Toby Potter.

“Given the extensive consumer protections in place, we maintain that, in regard to managed accounts, conflicts of interest and duty can be effectively managed.”

2. How far can, and how far should, there be a separation between providing financial advice and manufacture or sale of financial products?; and
3. Should financial product manufacturers be permitted to provide financial advice?

According to IMAP, ASIC already provides AFSL authorisations to issue financial products – registered managed investment schemes, MDAs or IDPS – to those AFSLs that have adequate resources to provide these services, and whose staff have appropriate knowledge and experience, and which meet other conditions, like net tangible assets.

On this basis, IMAP does not support restricting the rights of an appropriately authorised AFSL to provide personal financial advice to retail clients in respect of managed accounts with which it, or a related entity, might be associated. IMAP bases this view on:

• the structural advantages of managed accounts and the benefits this type of service provides to clients; and
• managed accounts being viewed as a way of implementing advice, rather than an investment in their own right, even though the law considers a managed account as a separate financial product from the underlying investments.

“To the extent that structural separation is mandated, managed accounts should be exempt because of the benefits they provide clients in the implementation of the advice received,” Potter said.

4. Should an authorised representative be permitted to recommend a financial product manufactured or sold by the advice licensee (or a related entity of the licensee) with which the representative is associated?

According to IMAP’s response to the Royal Commission’s question, an AFSL that is appropriately authorised to issue interests in a managed account is bound by explicit best interest obligations in respect of the operation of the managed account.

“We are not aware of regulatory action over the 14 years since the MDA regulations were issued resulting from these obligations being breached by MDA providers or responsible entities in regard to managed accounts,” Potter said.

“The adviser and advice licensee are already bound by obligations in making the recommendation, which include demonstrating how the recommendation is appropriate given the client’s objectives, a comparison with the client’s current circumstances and consideration of other alternatives. Where the managed account is an in-house product, the best interest duty obligations require a clear demonstration of the ‘additional benefits’ of that product.”

As such, as a result of the existing protections in place for retail investors, IMAP believes that, in respect of managed account services, an adviser should be permitted to provide personal advice on a service with which the advice licensee is associated.

5. Is structural change in the industry necessary?

The Treasury submission to the Royal Commission notes that there has been substantial work by regulators in eliminating the potential for conflicts of interest to lead to poor consumer outcomes. Treasury noted that structural changes in the advice industry and recent or imminent reforms, heightened awareness, and increased attention by ASIC, meant that the misconduct risk arising from vertical integration should be mitigated.

IMAP supports Treasury’s view, adding that there are substantial protections available through the current law which apply, in particular, to the provision of managed accounts to retail investors.

Instead, IMAP believes that structural separation of advice from product manufacture, at least in relation to managed accounts, would likely be counterproductive for several reasons. These are:

• Encouragement of ‘General Advice’ models, resulting in a substantial deterioration in the quality of advice being offered;
• Reduction in the efficiency of implementation of advice, with a subsequent deterioration in the outcomes for clients; and
• Reduction in the ability of advice organisations to develop service models that meet client needs or meet the costs of technology development.

“For these reasons, IMAP believes that banning AFSLs that provide personal advice from also being associated with or directly implementing that advice through a managed accounts, would result in poorer outcomes for retail investors,” Potter said.

In October, IMAP surveyed members in relation to the interim report’s findings, with the feedback helping shape IMAP’s submission in response to the report. The Royal Commission will be conducting a further round of public hearings before handing down its final report in early 2019.

To read IMAP’s full submission to the interim report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, go to imap.asn.au.