Our earlier post covered the first of the three approaches to consumer protection that were discussed in the IFMR Financial Systems Design Conference 2012. This post carries details of the session that discussed a framework for consumer protection based on eliminating conflicts of interest.
This approach believes that the root of mis-sale of products and services is the conflict of interest between the manufacturer and distributor of financial services. It attempts to align incentives within a financial service provider or across providers involved in developing and delivering a service.
Conflicted remuneration1 means any benefit, whether monetary or non-monetary, given to a financial service licensee, or a representative of a financial services licensee, who provides financial product advice to persons as retail clients that, because of the nature of the benefit or the circumstances in which it is given:
• might influence the choice of financial product recommended by the licensee or representative to retail clients; or
• might otherwise influence the financial product advice given to retail clients by the licensee or representative
Susan Thomas, Professor at Indira Gandhi Institute for Development Research (IGIDR) provided research based insights on the topic. Her presentation covered the problems of incentive alignment, costs of incentive misalignment and regulatory approaches to contain conflicts of interest. The presentation also discussed the various proposals that have been made to eliminate conflicts of interest. One approach that was discussed was based on the paper ‘A Regulatory approach to financial product advice and distribution’ to separate out advice from the sale, such that the advisor is independent of the manufacturer. This paper calls for an industry body which recognizes financial advisors as professionals and regulates them. Some implementation approaches -a series of business models to implement in the current framework and implementing guidelines were also discussed.
Click here for the Presentation.
1 – Section 963A, Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 available at http://www.comlaw.gov.au/Details/C2011B00265