Time to fix financial advice

CHOICE calls for a ban on conflicted advice to protect consumers.
 
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01.CHOICE calls for ban on conflicted advice

fofa-misleading-advice-lead

How can the finance system work better for consumers? CHOICE has answered this question in our submission to the Financial System Inquiry.

CHOICE is calling for long-standing problems to be fixed, starting with financial advice.

A series of high-profile financial advice scandals involving conflicted advice, including Storm Financial, Timbercorp and the Commonwealth Bank, have cost consumers over $5.7bn. Conflicts of interest distort the financial advice provided to consumers. Because of this, CHOICE wants all fees, commissions and conflicted remuneration banned.

Conflict of interest

The Financial System Inquiry has already recognised the corrupting influence that conflicts of interest have on financial advice. In its Interim Report, the inquiry recognised that “the principle of consumers being able to access advice that helps them meet their financial needs is undermined by the existence of conflicted remuneration structures in financial advice.

The Interim Report was finalised just a few days before protections for consumers seeking financial advice were watered down. These protections, known as the Future of Financial Advice (FoFA) reforms, were initially introduced in 2012. Many essential consumer protections, such as the obligation that an adviser act in the best interests of their client at all times, were removed in July this year. CHOICE is continuing to call for consumer needs to take priority in the ongoing debate about the quality of financial advice in Australia.

CHOICE believes that for financial advice to be truly valuable to consumers, any kind of payment that can influence a financial adviser to recommend one product over another must be removed. This can be a bonus linked to sales targets or asset-based fees, which are still common across the industry.

Asset-based fees are paid by a client to an adviser as a percentage of the total funds under advice. These fees weren’t banned by any version of the Future of Financial Advice reforms. In the submission, CHOICE argues that asset-based fees introduce many of the same risks as commissions and that fixed-fee payment for advice is needed to remove conflicts.

More power to the regulator

CHOICE’s submission to the Financial System Inquiry also looks at how the financial regulator, the Australian Securities and Investments Commission (ASIC), can be given additional powers to protect consumers.

CHOICE has recommended giving ASIC additional powers to intervene before disaster strikes. Additional powers include the ability to conduct market studies, to accept super complaints about systemic issues and to take stronger action when necessary through product intervention rules.

Product intervention rules would allow ASIC to temporarily or permanently restrict the sale of products and services that have been recognised as extremely high risk.

The submission also puts forward a proposal to develop an open data program similar to the midata scheme in the UK. This would provide consumers with a better understanding of their own consumption patterns and allow personalised product comparison for complex financial products.

For more information on how to protect your finances, visit our Money section.

 
 

 

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