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04-098 ASIC releases results of preferential remuneration project
The Australian Securities and Investments Commission (ASIC) today released the results of a surveillance project into payments of preferential remuneration by institutions to their financial advisers.
Preferential remuneration occurs where an adviser is paid higher commission for recommending an ‘in-house’ product than one offered by a third party fund manager.
ASIC undertook the project to identify the extent to which the payment of preferential remuneration for recommending in-house products affected the quality of advice available to consumers, and whether these payments were adequately disclosed to investors.
The surveillance visits for this project were conducted principally during the 2002-03 financial year, prior to the introduction of the Financial Services Reform Act.
‘ASIC conducted this project to help assess the issues involved with preferential remuneration, and to better design and target our future surveillance work’, ASIC’s Executive Director of Financial Services Regulation, Mr Ian Johnston, said.
The project’s findings revealed that financial advisers do not always disclose adequate information about the payment of preferential remuneration when ‘in-house’ products are recommended. The project uncovered deficiencies in documentation kept by advisors regarding what consumers are told about commissions paid, and what they are told about the advice they are given.
‘The disclosure requirements under the Financial Services Reform Act, and the associated need for more detailed record-keeping address many of the deficiencies identified during the conduct of this project, particularly in relation to the disclosure of preferential remuneration. The Act applies to all financial services businesses from 11 March this year, but did not apply when ASIC conducted the surveillance’, Mr Johnston said.
During this project, ASIC focused on three key legal requirements regarding the selling of financial products:
- commissions and other remuneration must be clearly disclosed to consumers;
- advice given to consumers must be appropriate for the consumer; and
- there must be a clear, concise and effective record of the remuneration paid to the adviser and the advice given to the consumer.
‘Financial institutions are on notice that ASIC will be paying particular attention to the selling of their ‘in-house’ products and the use of their ‘in-house’ master trusts or wrap accounts. ASIC expects that any payment of preferential remuneration will specifically be disclosed to the investor, and that licensees maintain clear records of how they and they advisers are complying with their legal obligations’, Mr Johnston said.
ASIC is aware that several institutions have reviewed their remuneration practices since ASIC undertook this work. ASIC acknowledges the work undertaken by industry bodies to assist their members comply with the requirements of the Financial Services Reform Act.
‘ASIC will continue to work with industry to develop appropriate guidelines for the disclosure of remuneration, and will conduct further surveillances to monitor compliance with record-keeping obligations’, Mr Johnston said.
End of release