Claire Wivell Plater

The Australian Securities and Investments Commission (ASIC) will analyse life company records in order to find advisers who churn, according to Claire Wivell Plater, Managing Director of The Fold Legal.

“It is pretty clear that ASIC would have liked to see life insurance commissions banned as part of the Future of Financial Advice reforms,” Ms Wivell Plater said. “Because they weren’t, ASIC has to find other ways of rectifying the high levels of churning its shadow shopping uncovered.”

Data from life companies is a good place to find out which advisers have high instances of product replacement, said Ms Wivell Plater. “ASIC will be looking at the typical longevity of policies and how often they are ‘upgraded’,” she said. “This will provide a pretty targeted indicator of which advisers are engaging in inappropriate switching.”

Ms Wivell Plater warned that ASIC will no longer be investigating advisers at random. “The regulator will be conducting an investigation to specifically expose advisers who churn. There will no longer be anywhere for churners to hide,” she said. “Some of these advisers may believe they are honestly doing the right thing for their clients and in some cases, they may be. But that’s a judgment call that ASIC will now make.”

And just because advisers are taking hybrid or level commissions instead of up front commissions, doesn’t mean the issue ceases to exist. “If an adviser takes over a client from another adviser, the best they could get if they continue an existing policy would be a small trail commission,” she said. “So hybrid and even level commissions can still incentivise advisers to churn, although obviously, to a lesser extent than full upfront commissions.”

According to Ms Wivell Plater, even if recommendations to replace a policy are appropriate, there is still a high risk that the adviser’s disclosure won’t be adequate, if ASIC’s March 2012 shadow shopping study of retirement advice is any guide. “The study found that nearly half of the switching recommendations inadequately provided the required information about the recommendation to change,” she said.

Advisers need to be reviewing their business practices now to ensure their life advice practices truly put the client first. Ms Wivell Plater said advisers should:

• Develop a Product Replacement Policy that clearly explains the circumstances in which they can recommend how existing insurance products can be replaced
• Review their Statement of Advice template to ensure that they are compliantly explaining the implications of switching

“The common industry practice of incorporating system-produced product comparisons, with little else, is not adequate,” she said.

The post ASIC set to burn the churn appeared first on AdviserVoice.

Greg Medcraft

The following is a speech by Greg Medcraft, Chairman, Australian Securities and Investments Commission delivered at the Financial Services Council (FSC) Annual Conference, 31 July 2013:

“Thank you Martin (Codina) for the kind introduction. It’s always a pleasure to attend the FSC Annual Conference. It’s an important forum in which we can discuss key issues affecting industry, and work towards a common solution.

Today I’d like to talk about an issue is relevant for many countries, as it affects how future growth will be funded. There is a significant structural shift that is occurring towards market-based financing. That is, debt and capital markets as opposed to traditional bank lending.

This issue is occurring worldwide and is gaining recognition as Governments are focusing on economic growth:

• the Australian Centre for Financial Studies (supported by Treasury and the RBA) recently launched a project on the Funding of Australia’s Future
• at the International Organization of Securities Commissions (IOSCO) we’ve been discussing this issue
• and last month, the Association for Financial Markets in Europe commissioned Oliver Wyman to produce a report on unlocking funding for European investment and growth.

Market-based financing is increasing and is now seen as a key source for funding economic growth.

This structural change is being driven by:

• increased banking regulation
• the growth of the pension and superannuation sectors.

New rules to strengthen the banking system are imposing higher capital and liquidity requirements. The net effect of this is often a decreased access to debt capital and an increased cost to business. As a result, many businesses are turning to market based financing to source their capital.

The second driver of market-based financing is the continuing global growth of the pension and superannuation sectors – much of which is invested in debt and equity capital markets.

This global growth is expected to continue in the coming decade as:

• governments in emerging markets start or expand retirement savings programs
• there is a demographic shift underway in many developed countries, as the population ages and people start to contemplate how to fund their retirement. 

A good example is the growth in super in Australia:

• The rate of super is rising from 9% to 12%. 
• Funds in superannuation are expected to grow from A$1.5 trillion to A$3 trillion by the end of the decade. 
• Baby boomers are beginning to plan their retirement. 

The growing importance of market-based financing presents a challenge for financial services and markets regulators to ensure we have the right tools and resources in place, so that debt and equity capital markets can perform their critical role in funding economic growth.

This increase in activity in our capital markets will have a flow-on effect to financial service providers such as financial advisers, investment managers, custodians, research houses, credit rating agencies, and auditors and accountants.

This presents a major challenge to financial services and markets regulators globally. We will need to remain proactive in order to address emerging risks. Maintaining a dialogue with industry to better understand what is happening in the markets, is fundamental in this regard.

It will challenge our strategic objectives of:

• ensuring financial markets are fair, orderly and transparent
• ensuring investors are confident and informed when they participate in the market
• mitigating systemic risk in the financial system.

These strategic objectives are critical in having an efficient financial system where business has access to cost effective capital in order to fund economic growth.
With the right people and infrastructure and the right level of cooperation, I am confident that we will meet the challenge.
Thank you.”

The post Speech to FSC Annaul conference: The future of financial regulation appeared first on AdviserVoice.