ASIC floundering in stormy waters

It's all about timing.

It's all about timing. Days before new financial planning reforms are introduced and a week after all sides of politics called a Senate inquiry into the corporate regulator's performance, a consulting paper designed to beef up the training of financial advisers has been released by ASIC.

Given the timing, a cynic could be forgiven for thinking it was more than a coincidence, particularly given ASIC will release a draft regulatory guideline in November; in time for its Senate grilling.

The Senate inquiry was inspired by a financial planning scandal inside the Commonwealth Bank, which ASIC sat on despite being tipped off by whistleblowers and later the bank in relation to one of its planners, Ricky Gillespie, who was banned for life from the industry in November 2012.

Against this backdrop the regulator is also building a bank of fresh customer feedback, using five-minute online surveys. One survey, released last week, was aimed at collecting feedback from people who submitted a report on misconduct and had then been contacted by an ASIC staff member to discuss it. "We would like to seek your feedback on this experience to assist us in tailoring and improving our services to your needs," the email said. It also asks for comments about "communication (the way we make contact with you, eg. timeliness of emails, letters, telephone)".

While releasing regulatory guidelines designed to improve the training of financial planners as well as collecting customer feedback on its services is well and good, it needs to be reinforced by ASIC changing its culture and being quicker to pounce.

The new regulatory regime, the Future of Financial Advice, which will begin from July 1, is likely to be a lot of window dressing rather than truly cleaning up the industry.

Whistleblower Jeff Morris, who worked as a financial planner at CBA before leaving in February this year, summarised the stumbling block as vertical integration. "FOFA does nothing to address this. By encouraging consolidation in the industry it has probably added to the problem."

What he means is when the creator of products also controls the advice network and sets targets, little will change. Put simply, banks owning wealth management operations as well as the sales channel creates an immense conflict. As one planner said: "Under FOFA commissions will shift, and have shifted, to commissions in disguise."

It means while better training for planners should be implemented, it won't change fundamental problems in the industry.

The report released by ASIC on Monday into changing the training standards of financial planners is not a new proposal. ASIC admits that in its submission to the parliamentary joint committee on corporations and financial services for its inquiry into financial products and services in Australia in 2009, it noted its intention to "raise the training standards (subject to consultation) as part of our forward program to further reduce risks for retail investors".

It conducted two consultations in 2009 and 2010 and is now conducting another. "We are proposing to retain the current training standards in RG 146 as 'base-level' training standards and to introduce two further regimes of additional training standards (one in 2015 and one in 2019) - with the dual aims of increasing the training standards while also giving industry enough lead time to prepare for the increased training standards."

It has not proposed substantive changes to the specialist knowledge requirements for derivatives, managed investments, general insurance, life insurance and broking, deposit products and non-cash payment products, foreign exchange, margin-lending facilities or regulated emissions units because the research did not review these areas.

It says that depending on the feedback from the paper, it will consider what, if any, changes should be made to these areas.

One reader detailed a chilling account of poor and conflicted financial planning advice that wiped him out. The tale begins in 2007 in the Sydney suburb of Liverpool. The planner advised him to use his capital of $450,000 and borrow $550,000 from the bank and invest in a margin loan as the share trading was doing well. A portfolio of shares and investments was created and managed for commission.

After the downturn in 2008 his shares plunged and he received a margin call on his shares. The advice? Buy more shares in a falling market. "I mentioned to him that I had no other money and initially managed to cover the margin call using whatever shares I had in my name. After the weekend I had another call for a second margin call, I panicked, not knowing what to do and went to his office, only to find he had gone on a holiday."

In his place was a young planner, who advised the only course of action was to sell all his shares and get out quickly. All up, he lost his capital and investment of $1 million and is trying to get compensation for poor advice. It is a tale familiar to many. Let's hope the Senate inquiry and Sons of Wallis inquiry together make necessary changes.

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