“Bad apple” financial advisers run rampant, says ASIC

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Yesterday ASIC publicly released its submission to the Financial System Inquiry, and it was full of “bad apples”.

The regulator chose this buzz word to describe advisers with questionable ethics throughout the submission, in a biting review of the financial services industry.

“There is a real and significant problem with ‘bad apples’ in the financial advice industry,” it said. “These bad apples typically change employment when they are identified, moving from one AFS licensee to another.”

But ASIC offered a number of solutions to solve the problem of rotten fruit, including mandated reference checking, an enhanced adviser register, the ability to ban managers of advice businesses, and a national competency exam.

One major problem within the industry is poor or non-existent reference checking that fails to weed out any bad apples, the submission said. To overcome this, mandated reference checking should apply to all advisers that offer Tier 1 (complex) product advice.

Furthermore, the current adviser register needs to be expanded, it said.

“Under the current financial services regulatory regime, authorised representatives must be registered with ASIC; however there is no central register for employee representatives…This can result in very real difficulties in ASIC’s ability to locate and take action against bad apples in the financial services industry.”

The submission asserts that the regulator should be given the power to extend its current registers to include all individuals authorised to give advice on Tier 1 products, not just AFS licensees and authorised representatives.

ASIC must also have the power to prevent a person from having a role in managing a financial services business or credit business, it said.

Currently, the regulator can only cancel an AFS or credit licence or ban a person from providing financial services, which means that ASIC can have difficulty removing managing agents from the industry where there is a strong argument for it.

Another major legislative change that the watchdog has urged the FSI to consider is lifting the standard of financial advice. It said that beyond the FoFA reforms, regulatory gaps still remain that stop the promotion of high industry standards.

“Such gaps affect the public’s perception of the financial advice industry, and reduce ASIC’s ability to fulfil our mandate of promoting confidence in the financial system,” the submission said. “We are concerned that, in our most recent stakeholder survey, less than a quarter of respondents (23%) agreed that financial advisers act with integrity.”

There needs to be an objective process to determine whether advisers have met a minimum standard of competency, and the most effective way to achieve that is through a national exam, it said.

Under this model, advisers would need to pass the examination before being able to give personal advice on Tier 1 products. They should also be required to complete regular knowledge updates subsequent to passing the exam.

“The national examination proposal would require amendments to the general obligations for AFS licensees in the Corporations Act to stipulate that representatives must have passed the [exam] to be deemed competent,” the ASIC submission said.

The recommendations to improve and clean up financial services reflect the regulator’s longstanding concern about the quality of financial advice provided to consumers based on thorough monitoring and surveillance work, it said.

“Over the past 15 years ASIC has identified broad and sustained problems in the quality of retail financial advice arising from embedded conflicts of interest and low levels of competence, compounded by weaknesses in the regulatory system.”

Looks like apple picking season has arrived.


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