Bracing for disruption

Former ASIC insider and founder of Erskinomics Consulting Alex Erskine: What ASIC can – and can't – do well

When the Murray Inquiry was going on, I got asked to do a paper on what changes should we make to regulation. I proposed some architecture changes, which included making them a bit more transparent and tangible and visible to everyone. That would force them to do all sorts of good things.

I mainly wanted the scope of operation of ASIC to change [so it] narrows substantially. Also, to get ASIC to only agree to do the things it can actually do well – which is market integrity – and to move the consumer and competition bits, which it can't do well, to somewhere else.
I think in some future time we'll realise we've loaded ASIC with far too much. They shouldn't agree to do what they're being asked to do and we'll reform that, but not yet.
ASIC's capability is being reviewed even though we just had the Murray Inquiry.

Although ASIC is not actually implementing FOFA, it's pushing against irresponsible lending. Irresponsible lending we define in an odd way in Australia.
ASIC is also pushing against bad culture, and bad culture is code for payments by bonuses. That's going to be a pretty contentious issue.

Should culture be a topic of market integrity? Or should it be a topic, because it affects consumers, to go off to the [Australian Competition and Consumer Commission]?
Or should it be a list of things that wrecks banks because they always lend too much? In which case it should be an APRA regulation issue. Or maybe it'll go to the Council of Financial Regulators, which is probably where it will end up.

ASIC also wants to charge for service, which is fine. My personal view is that what ASIC does should be paid for by taxpayers. So, I wouldn't be praising a general levy on the industry.

It wouldn't be a bad idea if there was a charge for more realistic – in other words, heavier – fines for doing things wrong. If the investigation costs ASIC a million dollars, why not charge $3 million for the fine?
Some of the fines levied in other countries have been astronomic compared to fines in Australia, so there's a lot more we could do. But levying industry as a whole, that's just going to lead to more resources for ASIC and that's really bad policy.

Where ASIC is on the right course is in keeping markets taking risk and in particular, the chairman of ASIC is trying to push back against the banker-dominated FSB. So I think the industry needs to support ASIC in this push back.
And where we really should be supporting ASIC is on this market integrity. Their [job] is market supervision, and they're doing that job really well.

Forte Asset Solutions managing director Steve Prendeville: Mid-size dealer groups to disappear as tech firms buy up

This has been the most dramatic six months that I've seen in our industry and, particularly, it's focused on the merger activity.

[For example], Premium Wealth Management was acquired by Australian Unity, and Sentry [Group merged] with Wealthsure.

It's been the largest period of mergers in any period of time. It's really quite easy to see why it's happened and why this is going to continue for the remainder of this year and also in 2016.

The market is hot at the moment. There are not many dealer groups in the country that are currently not for sale. I think we're going to see a dumbbell effect and there'll be very few mid-size dealer groups left.

We'll have small boutiques and see a substantial amount of growth in self-licensing. The practice that gets to a certain size will go with its own licensing and the reason for that is there's such good support out there. It's easy to get dealer services brought in.

What we'll see is our industry morph. We're going to have very small boutiques and larger [dealer groups]. But the larger market has got a significant amount of challenges in front of them.

What we're seeing also are advances in technology. OneVue has been one of the most active acquirers in the market and I don't see [chief executive] Connie [Mckeage] stopping yet.

[And] the only way you can really lift in the managed accounts space is you have to go and get distribution, either by acquisition or partnering in some shape or form.
[So technology companies] are cashed up, they need distribution and they're going to be a lot more active in the space. And I think you will see dealer groups with technology partners and owners.

We will see Google, Apple and Amazon come into the financial services market. They've got the trusted brands, they've got the depth and penetration, they've got technology, and they've got capital.

When you've got a trusted brand that's going to be enabled with robo-advice technology, all of a sudden they're going to become the new dealer groups and the new fund managers.

The Fold Legal managing director Claire Wivell Plater: MDAs and their regulatory scrutiny

Managed discretionary account (MDA) services are seen as a way for advisers to provide additional value to their clients by offering a more closely tailored and actively managed investment strategy.

But not all advisers can genuinely add value in this manner. Unless they have unique and specialist investment management expertise, you would have to question whether the average – and particularly the less-than-average – adviser can genuinely offer better outcomes than professional investment managers.

Perhaps this is why, until the past few years, MDA services have been a relatively rare phenomenon. [They are] the province of high-conviction advisers with investment management backgrounds or the ability to put together a suitably specialist investment management package that offers clients a better alternative to the traditional approved product list selection of managed investment schemes or direct shares administered through a platform.

Since the introduction of the ban on conflicted remuneration that prevents products and platform providers from paying not only commission but more significantly, volume bonuses or profit shares, without informed client consent and direction, advisers have increasingly seen MDAs as a way to replace this type of top-up income.

The theory is that when offering an MDA service, the adviser provides two services for which they can charge fees.

[For instance], ongoing strategic financial planning advice of the more traditional kind on the one hand, and investment selection and active management [on the other].

The advent of platforms in the 1990s squeezed the margin away from fund managers and put it in the hands of the platform operators. But FOFA has significantly diluted the power of the platforms, which have been forced to offer naked rate cards resulting in a flight to the bottom of the price.

This has provided advisers, whose power lies in their stranglehold on access to clients, with a golden opportunity to scoop up this newly available margin.

In terms of the best interest duty, the question for advisers is 'Is the MDA service that they construct in the client's best interests?' One thing is for sure. ASIC will scrutinise these offerings very carefully.

The regulator has made it clear that they don't believe that the average financial planner has the skills to provide investment management services and that they expect this aspect of the MDA service to be provided by suitably qualified investment management professionals.

So advisers who don't incorporate this type of expertise into their MDA service offering are likely to be the subject of adverse regulator scrutiny. But this creates opportunities for the people in this room.