An investigation into financial advice from Australia's biggest banks found a staggering 75% did not comply

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Financial advice about superannuation from Australia’s big four banks, as well as AMP, did not demonstrate customers would be better off in a staggering 75% of cases, a review of 200 customer files by the corporate watchdog, the Australian Securities & Investment Commission (ASIC), has found.

More concerning, one in every 10 — 20 of the 200 — files ASIC looked at had “significant concerns about the impact of the non-compliant advice on the customer’s financial situation”.

“We were significantly concerned because, for these customers, switching to the new superannuation platform resulted in inferior insurance arrangements and/or a significant increase in ongoing product fees—without additional benefits being identified that were consistent with the customer’s relevant circumstances,” ASIC said in its review into conflicts of interest and vertical integration in the sector, released last week.

“We also found that in 75% of the customer files we reviewed (which includes the 10% identified above) the adviser had not demonstrated compliance with the best interests duty and related obligations.”

ASIC defines “non-compliant advice” as personal advice to a retail client by an adviser who has not demonstrated compliance with the best interests duty under the Corporations Act, which requires advisers to act in the best interests of the customer, prioritising their interests over the adviser’s or those of a related party.

In 10% of cases, ASIC concluded “it was readily apparent that customers were likely to be significantly worse off as a result of following the advice”.

The corporate regulator looked at the superannuation advice given by the five largest financial planning advice licensees: AMP, ANZ , Commonwealth, NAB and Westpac. It specifically investigated the in-house superannuation platform with the largest amount of funds received from new customers in February 2015, selecting 80 customer files for each licensee at random.

ASIC says it wanted to review a sample of 40 customer files from each company. Staff reviewed 100, with the other 100 sent to an independent external company to review using the same review template.

“We found that the combined total of all products across the approved product lists of the two largest advice licensees of each institution included a higher proportion of external products (79%), compared with in-house products (21%),” the review said.

Here’s what the corporate watchdog concluded about the products sold by advisers and how much they were in-house:

We found that the combined total of all products across the approved product lists of the two largest advice licensees of each institution included a higher proportion of external products (79%), compared with in-house products (21%). However, the value of funds invested by customers in these external products, as a result of the advice provided, was 32% of the total value of funds invested, compared with 68% invested in in-house products.

There was variation in the results between each advice licensee. While more than half of the advice licensees had more than 60% of the customers’ funds invested in in-house products, there were three advice licensees where customers had invested less than half of total funds in in-house products.

There was also variation across product types. For example, of customers’ funds invested in platforms, 91% of funds were transacted through in-house products, while funds invested in investments were more evenly split between in-house (53%) and external products (47%).

There did not appear to be a significant change from the first relevant period to the second relevant period in either the composition of the approved product lists, or the proportion of total funds invested by customers in in-house products compared with external products.

Two specific areas led to a customer’s file being rated as not having demonstrated compliance with the best interests duty and other obligations.

They were when the advisers had not demonstrated:

(a) sufficiently researched and considered the customer’s existing financial products; and/or
(b) based all judgements on the customer’s relevant circumstances.

“The fact that 75% of the customer files we reviewed were non-compliant does not mean that these customers were significantly worse off as a result of following the advice,” ASIC said.

While 10% of those files led to the conclusion the customers were “likely to be significantly worse off”, for the balance (65%), ASIC said “the fact that customer files reviewed were non-compliant does not mean that the advice, if implemented, would result in negative outcomes. However, these files did not demonstrate that the customer would be in a better position following the advice”.

While the regulator noted that there had been “some improvements”in the practices of the advice licensees and their advisers compared to before 2013’s Future of Financial Advice (FOFA) reforms, ASIC remained concerned about how they managed conflicts of interest.

“The high level of non-compliant advice, combined with the high proportion of funds invested in in-house products, suggests that the advice licensees we reviewed may not be appropriately managing the conflict of interest associated with a vertically integrated business model,” they said.

You can read the full report here.

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