Need to know
- CHOICE has been pushing to get conflicts of interest out of the financial advice industry for over thirty years
- The Future of Financial Advice (FOFA) reforms introduced new consumer protections that CHOICE strongly endorsed
- The recommendations from the newly published Quality of Advice review will wind back many of the FOFA reforms and serve the interests of the financial advice industry
Conflicts of interest lead to poor outcomes in any industry, but in the financial advice industry they often lead to long-term financial damage for everyday Australians.
When an adviser makes a recommendation based on the commissions they stand to gain, the advice sometimes backfires, and the client pays the price.
A 2014 investigation by the Australian Securities and Investments Commission (ASIC), for instance, found a strong link between high upfront life insurance commissions and poor recommendations, including the advice to switch to a new policy.
In 2021, ASIC reviewed the financial advice provided to life insurance clients and found that 42% of the files showed advisers were in violation of the requirement to act in the best interest of the clients. More than 90% of the cases involved the payment of a commission to the adviser.
While CHOICE and other consumer advocates have fought hard to remove conflicts of interest from the financial advice industry, recommendations from a newly released report could see some of these hard-won protections stripped away.
The long campaign to reform financial advice
CHOICE has been pushing to get conflicts of interest out of the financial advice industry since at least 1990, when we wrote: "Many financial advisers are simply agents for fund managers and investment companies. Although they claim to offer impartial and independent advice, their main priority is to sell as many investments as possible."
In 1995, we launched our first shadow shop of the financial advice industry. Less than 10% of the 58 financial plans we examined were classified as good, based on the scores of our expert panel; 65% ranged from acceptable to poor, while a quarter were sub-standard.
Conflicts can mean that advisers are effectively salespeople of product providers. Conflicts can encourage advisers to sell products instead of providing strategic advice
In 2003, we undertook another industry shadow shop in partnership with ASIC, with similar results. "The advice given often seemed like thinly disguised product selling. Far too many planners behaved more like salespeople for fund managers than impartial financial guides," we wrote. Over a quarter (27%) of the adviser plans we reviewed were rated poor or very poor.
In 2010, a CHOICE investigation revealed that Australia's six largest financial planning groups had consistently directed customers to their own superannuation products. The breakdown showed deep-rooted conflicts of interest, since advisers were clearly inclined to recommend products that stood to increase their commissions.
In all, advisers recommended products from their direct or indirect employer a whopping 73% of the time. These were unlikely to be the best products for their clients.
While giving evidence to a Parliamentary Joint Inquiry in September 2009, CHOICE said: "Conflicts can mean that advisers are effectively salespeople of product providers. Conflicts can encourage advisers to sell products instead of providing strategic advice. Conflicts may provide incentives to recommend products that are inappropriate. They can encourage advisers to churn clients through products. Worse yet, they can encourage clients to borrow inappropriately to invest."
Future of Financial Advice reforms: A win for consumers
Our continuing efforts culminated in the introduction of the Future of Financial Advice (FOFA) reforms, which came into force in July 2013.
It was a watershed moment in the history of financial advice regulation in Australia, and brought with it a raft of consumer protections meant to ensure that the advice given to everyday Australians was in their best interests – and not primarily in the interest of commission-driven advisers.
Not surprisingly, the industry pushed back, and the reforms have been revised over the years, in some cases to the detriment of clients
To that end, a 'best-interest' duty was introduced that required advisers to "place the interests of their clients ahead of their own".
The July 2013 version of the FOFA reforms also included a ban on conflicted remuneration structures, including commissions and volume-based payments (or payments to advisers from product issuers based on how many products the adviser sells).
Not surprisingly, the industry pushed back, and the reforms have been revised over the years, in some cases to the detriment of clients.
For instance, the ban on conflicted remuneration was lifted when it came to general advice in certain circumstances (or advice from a financial services professionals that doesn't take your personal financial circumstances into account).
New report recommends winding back consumer protections
The struggle to protect consumers from biased financial advice – and to preserve key elements of the FOFA reforms – continues.
In 2022, the government commissioned an independent review of the financial advice industry. The resulting Quality of Advice report made a number of recommendations that threaten to strip away many of the hard-won reforms, including making it easier for banks, super funds, and insurers to sell their own products to consumers, rather than having an independent adviser without ties to the bank or super fund provide advice.
Critically, the report recommends carving out areas of financial advice where the best-interest duty wouldn't apply, such as advice provided by banks and super funds.
Instead, a 'good advice duty' would come into play in these cases, effectively watering down the best-interest duty.
All in all, the Quality of Advice report charts a course that would reinsert some of the practices in the financial advice industry that made the FOFA reforms necessary.
The biggest scandals in financial advice have involved large banks and super funds, yet they will be the greatest beneficiaries of the recommendations in this report
CHOICE CEO Alan Kirkland
Responding to the report in early February, CHOICE CEO Alan Kirkland expressed the views of many in the consumer advocacy movement.
"To make such radical and untested changes at a time when global financial markets are unstable will be a disaster," Kirkland says.
"The proposed changes to the tests for the quality of advice – with a new best interests duty for independent advice and a 'good advice' test for advice provided by banks and super funds – will add even more complexity to the system. This will be a lawyer's picnic. It will take years for the courts to clarify new legal definitions and lots of people will lose money in the meantime."
The protections against self-serving advice from banks and super funds are under particular threat.
"The biggest scandals in financial advice have involved large banks and super funds, yet they will be the greatest beneficiaries of the recommendations in this report. They will be able to undercut independent professional advisers by pushing out cheap and shoddy advice on a mass scale, provided by unqualified staff," Kirkland says.
The government is currently considering the report's recommendations.
We're on your side
For more than 60 years, we've been making a difference for Australian consumers. In that time, we've never taken ads or sponsorship.
Instead we're funded by members who value expert reviews and independent product testing.
With no self-interest behind our advice, you don't just buy smarter, you get the answers that you need.
You know without hesitation what's safe for you and your family.
And you'll never be alone when something goes wrong or a business treats you unfairly.
Learn more about CHOICE membership today
Stock images: Getty, unless otherwise stated.
