Sent: 25-11-2009 07:55:03
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Ripoll Committee - Special Edition Commentary
As I mentioned in yesterday's regular weekly email, the Ripoll Inquiry (formally known as the Parliamentary Joint Committee on Corporations and Financial Services' Inquiry Into Financial Products And Service In Australia) handed down its report yesterday evening.
Many will find the majority of the report interesting but I expect most people will find Chapter 6 the most relevant because it contains all the Committee's recommendations and the rationale for them.
The Committee spent a lot of time hearing evidence on the Storm Financial collapse and this is reflected in this report. However the politicians aren't judges and many aspects of Storm's collapse are not settled and are still progressing through the Courts. Consequently the Committee merely summarises the information presented to it in relation to this sorry saga.
Overall I think the Committee has conducted initial research for the Government and identified complex areas that need further investigation. In other words in important areas, the Committee provides no definitive recommendations.
Perhaps the Committee has formed the view that financial advice is an activity in transition. This is probably true. But it is also true that there are many different views about what it is transitioning to and how it should reach the disputed destination.
What follows are some short observations of the Committee's views:
1. Investor Education
"...the reality is that better investor education is not the only answer to protecting investors from poor financial advice. It is a solution often proposed by those in the industry wishing to maintain the regulatory status quo, but is not in the committee's view effective at protecting the most vulnerable investors. The complexity of investment strategies leaves the prospect of clients determining the quality of financial advice they receive, through the filter of personal knowledge, beyond the capacity of many. Most clients quite legitimately trust in the knowledge and professionalism of their financial adviser to provide them with good advice, and do not have the confidence in their own understanding of the subject to challenge the advice they are given. Therefore the regulatory system should, to a reasonable extent, protect consumers from poor advice, rather than relying on consumer's being sufficiently financially literate to determine for themselves whether their adviser's recommendations are in their interests."
2. Fiduciary duty
As has been well covered elsewhere the Committee has recommended that the law be changed.
As my colleague Peter Townsend said today, "the client will simply have to show that it was more likely than not that, in some aspect, the adviser did not place their interests ahead of the client's. The onus of proof will then shift to the adviser to defend themselves. In most cases that defence will be to show that any benefits received in respect of the recommended product were irrelevant to the advice and that the product was chosen purely on its merits." (emphasis in original)
3. Independent versus aligned advice and separate licensing categories
The committee rejected these suggestions on the basis that it adds a layer of complexity and would be unnecessary if the fiduciary duty requirements was implemented.
4. Risk based surveillance
The Ripoll Committee has called for greater resourcing for ASIC to adequately carry out its role. This implies higher regulatory fees to help fund this additional expenditure.
5. ASIC Shadow shopping
The Committee thinks this should be conducted annually.
6. Disclosing conflicts of interest
The Committee would like to see this adequately disclosed and believes it is "particularly important in the case of advise from vertically integrated financial institutions." This will take forever to be resolved.
Here is one area where the Committee has told the Government to go away and do some further work but overall has agreed that commissions need to go
8. Shelf space fees and associated fund manager payments
The Committee has nothing specific to say about these at any stage (only one reference is made to shelf space fees in the whole report and it's from a quote from the Industry Super Network submission)
9. Tax deductibility of advice
Again the Committee has told the Government to do some further work
8. Adviser Competency standards
The Committee notes several views but doesn't express any definitive view itself. It does say that a Professional Standards Board should be established at the first available opportunity "to oversee nomenclature, and competency and conduct standards for financial advisers".
9. Accountants exemption
The Committee addresses this but doesn't have anything substantive to say.
10. Licensing of individual planners
The Committee rejects this suggestion as too costly.
11. Statutory last resort compensation
The Committee has recommended that one be established
12. Investor education
The Committee thinks ASIC needs to work more effectively in this area
What has the Government said about this report? It's considering the recommendations and will consider it in conjunction with the Cooper Review. This means that it will be sometime before anything concrete comes out of the Ripoll inquiry.
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Two purchase options are available - once only subscription - $55 inc GST - or an annual subscription will gives you access to all the updates made throughout the year ($120 inc GST).
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This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.