The convenience of dealing with a single firm ASIC Report 562 that customers who obtain financial services from a vertically integrated advice business are attracted to the convenience of a relationship with a single financial firm. For example, customers of a bank may benefit from having access, when required, to financial advisers who are employees of the bank. Convenience may not, however, be significant for other forms of vertical integration. Customers are often not aware that they are dealing with an adviser practice affiliated with a major firm at the time a service is provided. In part, this was the basis for Recommendation 40 of the Financial System Inquiry that the ownership of financial advisers and mortgage brokers be disclosed. Where advisers separate from a financial firm, their clients will also often follow the adviser to the new licensee suggesting that consumers value their relationship with the adviser — over the firm. pockets’ and reputation ‘Deep There is clear evidence that prudentially regulated firms are more capable of remediating consumers. This can be seen in the case of unpaid external dispute resolution (EDR) arrangements. The amount of outstanding EDR determinations at May 2018 was around $15 million, and approximately 55 per cent of outstanding determinations were related to financial advice. However, none of the outstanding determinations were related to APRAregulated entities. A potential systemic response to problems of uncompensated consumer losses, arising in respect of smaller, non-prudentially regulated firms, would be to establish a limited and carefully targeted forwardlooking compensation scheme of last resort (CSLR) restricted initially to financial advice, as recommended by the Ramsay Review in 2017. The potential need for such a scheme is reflective of the limitations of professional indemnity insurance in this regard. The design of that scheme would, however, depend on the kinds of entities that were required to become members. A CSLR that was not able to include large, vertically integrated prudentially regulated firms could be different from a scheme which did include such participants. Without such firms being included and effectively crosssubsidising other advice firms, a CSLR may be less viable; the policy case for requiring such cross-subsidies is, however, unclear, and doing so could be self-defeating if large firms exit and stop providing advice as a consequence.
The convenience of dealing with a single firm ASIC Report 562 that customers who obtain financial services from a vertically integrated advice business are attracted to the convenience of a relationship with a single financial firm. For example, customers of a bank may benefit from having access, when required, to financial advisers who are employees of the bank. Convenience may not, however, be significant for other forms of vertical integration. Customers are often not aware that they are dealing with an adviser practice affiliated with a major firm at the time a service is provided. In part, this was the basis for Recommendation 40 of the Financial System Inquiry that the ownership of financial advisers and mortgage brokers be disclosed. Where advisers separate from a financial firm, their clients will also often follow the adviser to the new licensee — suggesting that consumers value their relationship with the adviser over the firm. ‘Deep pockets’ and reputation There is clear evidence that prudentially regulated firms are more capable of remediating consumers. This can be seen in the case of unpaid external dispute resolution (EDR) arrangements. The amount of outstanding EDR determinations at May 2018 was around $15 million, and approximately 55 per cent of outstanding determinations were related to financial advice. However, none of the outstanding determinations were related to APRAregulated entities. A potential systemic response to problems of uncompensated consumer losses, arising in respect of smaller, non-prudentially regulated firms, would be to establish a limited and carefully targeted forwardlooking compensation scheme of last resort (CSLR) restricted initially to financial advice, as recommended by the Ramsay Review in 2017. The potential need for such a scheme is reflective of the limitations of professional indemnity insurance in this regard. The design of that scheme would, however, depend on the kinds of entities that were required to become members. A CSLR that was not able to include large, vertically integrated prudentially regulated firms could be different from a scheme which did include such participants. Without such firms being included and effectively crosssubsidising other advice firms, a CSLR may be less viable; the policy case for requiring such cross-subsidies is, however, unclear, and doing so could be self-defeating if large firms exit and stop providing advice as a consequence.
Treasury-background-paper-24.docx