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ASIC missed chance to stop the rot in financial advice 12 years ago

ASIC's softly-softly approach to financial advice has failed. Photo: Jim Rice ASIC's softly-softly approach to financial advice has failed. Photo: Jim Rice

Twelve years ago the Australian Securities and Investments Commission (ASIC) faced a fork in the road concerning malpractice in financial advice. Unfortunately, for the hundreds of thousands of people who have lost money and sometimes their health since, the regulator chose the wrong option.

Treasurer Scott Morrison said the revelations before the banking royal commission of AMP misleading the corporate regulator and its own customers are "deeply disturbing," warning that such behaviour can be punished by jail time.

He said he was "very reassured by the fact that these matters were already being pursued by ASIC and will continue to be pursued by ASIC".

But Morrison needs some reminding of the history between ASIC and AMP.

In 2006, the regulator had an opportunity to take AMP to court over the way its financial advisers switched consumers into its master trust, AMP Flexible Lifetime Super.

It if had done so, it’s likely that the interests of consumers would have been better protected over the subsequent period as a message would have been sent to all players in the financial planning industry, including the big banks.

The financial planning arm of AMP was caught red-handed by ASIC for, among other things, switching consumers from low-fee industry funds into its own super products.

The enforceable undertaking agreed to by AMP said some of its advisers made these switches without disclosing a reasonable basis for the advice in their disclosure documents.

This included the statement of advice - an important plank in consumer protection because the adviser has to justify, in writing, the reasons for the advice.

In the 30-page enforceable undertaking you could see the ‘stitch’ marks where lawyers on both sides had gone back and forth to get the wording of the undertaking sufficiently nuanced.

In a pattern the regulator applied to others who were caught doing the wrong thing, the enforceable undertaking was the preferred feather of choice.

Yes, importantly, under the terms of the undertaking, AMP made restitution to some of its clients.

Yes, AMP had to introduce better processes and procedures. It had to correct misleading statements in its Financial Services Guide and on its website. But did AMP change its spots?

In just about every ASIC surveillance of financial planning since, AMP has featured.

It took some searching at the time, but buried in that enforceable undertaking of 12 years ago was the root of the problem.

ASIC said AMP "may have contravened" Section 945A of the Corporations Act - the part of the law that requires a planner to have a reasonable basis for the advice.

As I wrote at the time, this is the crux of the matter. That’s because there was always a sneaking suspicion that AMP did not adequately disclose reasons for giving the advice becasue there was no justifcation for switching super funds.

The problem has always been that the Corporations Act does not describe what constitutes "a reasonable basis for advice".

AMP gave ASIC the perfect opportunity to test the point – in court. Yes, it would have involved expensive lawyers and likely taken a long time but with what we now know, it would have been taxpayers' money well spent.

It may have headed-off the need for an expensive royal commission.

Of course, it is easy to be wise with the benefit of hindsight.

And ASIC did not take AMP to court for at least one very good reason that I am sure was a genuine part of its thinking.  It wanted AMP clients who had suffered detriment to get quick redress and legal action would have taken months.

However, as I wrote 12 years ago, there was a much bigger issue at play - how to avoid future misselling scandals.

Former ASIC chairman Jeffrey Lucy. Photo: AAP

ASIC's then chairman, Jeffrey Lucy, said the enforceable undertaking with AMP would help to bring about a cultural change in financial planning.

As we are hearing this week, the regulator’s softy-softy approach has not worked.

The law has been beefed-up under the Future of Financial Advice reforms under which, among other things, advisers have to put the best interests of their clients ahead of their own when providing personal advice.

Let's hope that ASIC takes its cue from the royal commission and takes a tougher approach to the policing of its beat.

This article was first published by https://www.smh.com.au/
Author: John Collett - Writes about personal finance for Fairfax Media, Sydney, Australia.
Last modified onThursday, 19 April 2018 21:22

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