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Major bank blames industry misconduct on licensees

James Mitchell
James Mitchell
09 November 2018 2 minute readShare
Blame, finger pointing

One of the major banks has defended its vertically integrated financial advice model, arguing that licensees are the true source of misconduct uncovered by the banking royal commission.

In its response to the Hayne inquiry’s interim report, which raised concerns with vertical integration, Commonwealth Bank of Australia (CBA) argued that it is capable of managing conflicts of interests.

“Vertical integration provides benefits to consumers and while conflicts of interest exist, these can be effectively managed,” CBA said in its submission.

“The conduct examined by the royal commission, and that has emerged across the industry more generally, while occurring in a market where vertical integration exists, was (with some exceptions) not caused by that structure,” the bank said.

“It is important to note that the conduct identified by the Royal Commission, and also more generally across the financial services industry, arose largely as a result of misconduct on the part of particular individuals that was not appropriately managed or supervised by the relevant licensee, cultural shortcomings, or inadequate systems and processes that the licensees had in place. It was not conduct that arose directly as a result of the structure of a vertically integrated business.”

CBA considers that the root cause of many of the conduct issues in financial advice are unrelated to the structural integration of financial advice, investment platforms, and investment and superannuation products.

The bank further argues that the emergence and persistence of fee-for-no-service issues across the industry were related to “inadequate monitoring and detection by advice licensees, not the ownership of those licensees”.

“Whether a licensee is part of an integrated business does not affect its ability to adequately monitor and detect problems within its business.”

ANZ made some interesting observations about how the financial advice industry has developed over time to focus on sales.

“As a generalisation, it can be said that, over a number of years and due to various events, the financial services industry developed a culture that became overly focused on revenue and sales,” the bank’s submission states.

Hayne’s interim report noted that the roots of the financial advice industry are in sales and that industry is moving towards becoming a profession.

Where a financial adviser is an employee or authorised representative of a licensee that manufactures financial products, ANZ accepts that the licensee will have a commercial interest in maximising sales of that product.

“However, this will not be the sole interest of the licensee,” the bank said.

“The licensee will also have an interest in the conduct of its financial advice business in a manner that complies with the law, including the statutory duties owed by its employed or authorised financial advisers to their clients, and protects the licensee's reputation (including by having advisers known for providing quality advice such that customers will wish to engage them).”

Like its big four peers, ANZ believes structural change prohibiting related entities from providing financial advice and being involved in the manufacture of financial products is not necessary.

Major bank blames industry misconduct on licensees
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James Mitchell
James Mitchell

Adam Zuchetti is the former editor of MyBusiness and a senior freelance media professional, specialising in the fields of business, personal finance and property. In 2020, he also embarked on his own business journey – inspired in part by the entrepreneurs and founders he had met through his journalistic work – with the launch of customised pet gifting and subscription service Paws N’ All.

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