“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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Explosive allegations: ASIC "tainted by corruption"

ASIC reviews its penalties
  • Mark on 17/04/2014 2:49:09 PM

    Forget the Apples. ASIC is the head of a very rotten fish. They should have known what Storm were doing and done something about it. Gearing pensioners would never be correct. How about they enforce the rules instead of "Mea Culpa" all the time, Oh, we were slow with that one! Oh we would do it differently next time! Give us all a break and start doing your job ASIC.

    Come and talk to us on the ground, we will show you who is doing the wrong thing.

  • Hmmm on 10/04/2014 4:19:39 PM

    Craig I take on board your comments, but when was the last time a planner suggested direct investment in property? How about collectables, bullion, & other "non traditional" investments.
    The SOA style system is fundamentally flawed; perceptions of risk & investment allocation are skewed by licensors.

    Whilst we complicate matters for the consumer, there is opportunity for deception (something the telco industry has mastered).

    Regulation will not change people's ethics, working together & reporting impropriety must surely be the best way forward in improving our image.

  • ThenAgain on 10/04/2014 1:00:34 PM

    The ISA with their highly misleading, damaging 'Compare the Pair' campaign is perhaps the biggest, baddest apple of them all.

  • Adviser B on 10/04/2014 11:19:51 AM

    Bad Apples? Certainly.

    "Full of Bad Apples"? Not even close.
    With such over-exaggerated and sensationalist claims by ASIC, they are seemingly trying to compete with mainstream media hysterical and sensationalist reporting. Does Murdoch now own ASIC?!?

    ASIC, do your job, with less 'taints of corruption', less inaccurate attempts to grab headlines and be dramatic, and less bias.

    In short, try to start acting like professionals for a change.

    Sincerely yours, The Entire Finance Industry.

  • alleycat on 10/04/2014 10:40:01 AM

    @ Peter Corrie.
    Mate, ASIC don't care what we think otherwise they would consult those who work in the industry, not the FPA, not those self serving ISA critics or those with a political agenda.

  • Investor on 10/04/2014 10:33:47 AM

    I would think that it is well and truly in ASICS interest to scare the government and public into keeping them employed. It is a great little deal.

  • PETER CORRIE on 9/04/2014 5:26:55 PM

    Full of bad apples that's a nice generalization from ASIC to the Financial system inquiry. What does that mean more regulations in the future that don't work? Bad apples are few and far between equalling less than .2% of advisers and there are less than .1% of complaints from consumers about advisers.
    I don't think ASIC realize that they are a real discouragement to existing advisers and do little to encourage prospective advisers entering the financial services industry.
    We are already over regulated and this type of publicity is not helping us or enhancing this business.
    Chase the criminals by all means ASIC but stop the interference in our business activities, administration or procedures of the majority of good advisers which is resulting in negative ,regressive and counter productive outcomes and achieves very little.
    Our industry leaders should protest on our behalf at this latest outburst and abuse of power by ASIC otherwise it will just continue on to our detriment.

  • alleycat on 9/04/2014 4:36:37 PM

    Good old ASIC !!!
    Who could blame them for not acting before disastrous events happen. Clearly the so called "bad apples" quite often move between more than one AFS License before being discovered for what they are?
    The so called "bad apples" represent what percentage of the total financial planning industry/profession ?
    You want a national exam ?. How does that weed out the "bad apples ?" I've known of some very intelligent crooks because they've managed to outwit your own auditors.
    What do you have to say to that ?
    I know,.... lets blame the Licensees because it's easier to do so.
    All the legislation/supervision in the world will not eradicate poor or dishonest behaviour until you produce the perfect human being.
    I suggest you start with that before anything else and good luck.

  • Adviser B on 9/04/2014 1:45:27 PM

    If ASIC put as much effort into responding to complaints, notice of 'bad apples', tip offs, warning signs and policing, as they did into slagging off the industry as a whole, there would be a drastic reduction in bad apples.

    Only in the past week has there been more articles reminding us of ASIC's bad apple dealings with the Commonwealth Financial Plannings and the insider revealing that ASIC was 'tainted with corruption' (in relation to the super calculators).

    What ASIC don't realise is that bad apples in the industry are a reflection of them doing a poor job. They have in effect, shot themselves in the foot. They need to stop trying to divert negative attention onto others, and focus on start doing their job professionally.

  • gf in Bris on 9/04/2014 12:27:04 PM

    What about all the product manufacturers like the forest Industry firms/people - there are many of them - that have been very dishonest and misleading, Opus and many others. The directors and owners should have been hauled into court but all ASIC is interested is bullying us little fish - the adviser because its easier for them to do so. Do you call that justice, for the Mums and Dad investors that have lost so much in these "schemes' & Storm? No wonder ASIC has little credibility from advisers & especially when ASIC were given heads up on the practices of these dodgy firms but ignored the tip offs!!

  • Craig Yates on 9/04/2014 11:34:46 AM

    When some, but not all the Real Estate agents and Property Spruikers come under ASIC's focus and responsibility, then we will have a circus.
    Local, Real Estate Agents openly advertising in the newspaper and on the sign of a property, "A terrific investment opportunity for ANY Self Managed Superannuation Fund" !!
    is simply a joke. This practice goes on constantly and it would be interesting how that general, unqualified advice would be adapted to personal advice if an individual asked for specific and qualified advice as to how that may suit their needs and objectives.
    Real Estate agents are generally unlicensed to provide investment advice, so just how is it that these practices just continue?
    It is no different to a Financial Planner advertising that a certain investment was perfectly suited to ANY SMSF, without qualification or analysis whatsoever.
    People are investing hundred's of thousands or millions of dollars into property on the back of unqualified advice regarding investment potential and Superannuation Fund ownership and the advice in most cases is unregulated, not documented and seems to escape any form of responsibility or duty of care.
    If Real Estate agents had to complete a needs analysis, complete research and a Statement of Advice they would be imploding!
    And yet, for many people, it will be the largest investment they will ever make based mostly on verbal discussion and some stats on how property prices have been travelling in the next "hot" suburb.
    If ASIC think we have some "bad apples", wait until they discover what the rest of the orchard looks like.
    No doubt there are some highly professional property advisers that also are sick and tired of being tarnished by people not doing the right thing, but when the industry seems to be allowed to practice in this manner and is not seemingly breaching any regulation, then it will continue.

  • James Howarth on 9/04/2014 11:29:54 AM

    For ASIC to suggest getting to the "bad apples" is not possible as they change licensee, is symptomatic of the entire problem with licensing.

    All advisers should be licensed directly with zero onerous requirements other than educational barriers. Then if ASIC get direct complaints, remove the direct licensed Adviser.

    ASIC is the problem the way they use dealer groups to comply, but dealer groups are the problem they complain of here.

  • Grandad on 9/04/2014 11:10:12 AM

    They should all be CFP, oh wait... That designation as an educationn standard means nothing. :)

  • Adviser B on 9/04/2014 10:58:06 AM

    The 'competency exam' idea shouldn't really be linked to removing the 'bad apples'. 'Bad Apples' are the dodgy advisers - advisers with knowledge gaps are a completely separate issue.

    ASIC themselves don't help the situation:
    I have seen a case where the adviser breached so many regulations it was breathtaking, outright lied, made up figures etc to a client. The client's complaint with full details and evidence of the adviser's activities and corruption went to ASIC after the adviser continued to lie and the licensee didn't even bother to read the detailed and comprehensive complaint (this licensee went under in 2012/13 after being caught out by ASIC committing too many breaches).

    Once the adviser found out that both ASIC and the Credit Ombudsman had received the complaint with all the evidence of his actions, he paid the client a lump sum of money to withdraw the complaints and accept the money as settlement. He told them that even though these bodies would rule against him, he would challenge it in court instead, all the way up to the High Court, "because as your adviser, I can afford the best lawyers, and I know you cannot afford to go to court" was the accompanying threat. The clients took the settlement money, and withdrew their complaints, though unhappy that the adviser could continue his dodgy ways with all his other clients.

    So even though ASIC and the Credit Ombudsman have evidence of a corrupt adviser breaking many regulations and consumer laws, they throw the complaint out. This highlighted the ability of an adviser to be a 'Bad Apple' and just pay their way out of trouble, with ASIC's full knowledge.

    Oh, and as the adviser's licensee (of which he was on the board of - hence why the Licensee didn't make an attempt to deal with the complaint) went under due to so many breaches and complaints, the 'Bad Apple' just switched to a new licensee, and all those complaints against him which the licensee knew about are no longer recorded anywhere - it's like they never happened and he can continue to act in the same manner, giving the industry a bad name.

  • Adviser B on 9/04/2014 10:56:59 AM

    Was the report actually a mirror that ASIC held up to themselves? ;)

  • Andrew Dudman on 9/04/2014 10:41:26 AM

    Could this be just another public servant grasping for relevance?

    I hope common sense prevails and the FSI see this for what it is.

  • Andrew on 9/04/2014 10:38:59 AM

    It is a shame that the ASIC submission doesnt let Mr and Mrs Public know where you are more likely to find an Employee Representatives so that they can avoid those types of businesses.

  • John Walker on 9/04/2014 10:26:15 AM

    ASIc....aghhhh ASIC is this the same regulatory body that spent months in HIH offices before giving the all clear >>> 3 months before HIH imploded ?
    Where were before estate mortgage meltdown .... run by undisclosed bankrupts was the goss at the time ... or was that someones elses baby ?

    tell me how many bad apples specifically... then compare to the smelly ones in doctors surgerys, law offices, accounting practices... go for the jugular of the vulnerable

  • Funky Goose on 9/04/2014 10:16:27 AM

    So these bad apples typically change employment from one AFS to another and their screening practises in recruitment are flawed. Why then are we allowing institutions to deal directly with the public with employee 'advisers' given this model appears to be the root of the problem ? Why are the self employed advisers who have enduring client relationships ( which is the key preference of the clients ) being subject to such hostile criticism for simply receiving fees from the platform to cover our running costs ?

  • Joe on 9/04/2014 9:54:28 AM

    If ASIC want to improve the industry in a dramatic way, all they have to do is two simple things.

    Firstly, they need to beef up their supervision of licensee compliance monitoring to ensure that it is meaningful and that licensees can identify and either educate or force out those who cannot reach the required standard.

    Secondly, and most importantly, they need to identify those Financial planning practices that are unlicensed or are owned by unlicensed operators, or employ unlicensed advisers and go after them.

    Their strategy should be a simple one. Help the licensees identify and spit out the rogues then attack those who still want to play in the their backyard without an invitation.

    Instead, they are allowing the cowboys to infect the industry through their inactivity.

  • David L CFP on 9/04/2014 9:42:11 AM

    Can we please stop calling them "Financial Advisers"??!!

  • Tash on 9/04/2014 9:37:45 AM

    Geez, glad ASIC is on our side in trying to raise the profile of advisers. Would hate for them to be positive, constructive and engaged.

  • Anthony K on 9/04/2014 9:31:35 AM

    I would be shocked if this involved more than 1% of licensed and regulated advisers. What is real and significant is the level of economic and financial illiteracy and the level of underinsurance in Australia. Unfortunately ASIC's buzz words and windmill tilting don't help. By the way how is yesterday's real and significant issue of 'churning' going?

  • GAB on 9/04/2014 9:17:49 AM

    But I already do ongoing exams with Kaplan. I have an undergrad and postgrad qualification in finance. Looks like that stands for nothing in this industry. Some "rotten apples" have embarrassed ASIC so we all must be treated like a leper colony. I would like to see the questions from that stakeholder survey.

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