Another scandal breaks.......................

  This article (click here) presents the financial services industry with yet another example of inadequate governance.

And it's futile to claim that "this can't happen here" - the NZ market is just as prone to inappropriate behavior as any

So far, the best you can surmise is that we've had less of it; the more cynical would opine that we've detected less of it.

While poor governance practices may have given rise to investors receiving inappropriate advice in Australia, we have a recent unfortunate example of an individual apparently being able to get away with market manipulation practices in contravention of the governance parameters and ethics of his employer.

But the question arises - were these governance parameters sufficiently robust? Without pre-judging the issue ahead of any official investigation, it's hard to see how any answer other than 'no' can reasonably be tabled.

So the investment advisory sector takes another hit in Australia, and I have no doubt that the NZ regulator is well aware of developments across the Tasman.

And it's not restricted to the financial planning sector exclusively, as ASIC concluded last year.

Implications for banks' Kiwisaver selling practices widely reported elsewhere should be swift and severe. Despite accusations of ASIC "living in darkness" - with some justification - they seldom shy away from a scrap, big end of town or not. Citibank, AMP, CBA, and now NAB, are among the bigger players who have been pinged by ASIC.

How effective has ASIC been in preventing further recurrences of such behaviour? That's another question for another time.

For now, the focus on governance by the FMA in its Strategic Risk Outlook 2015 publication should be on every adviser's agenda.

There are specific references to the application of monitoring resources to review the governance practices of all entities and practitioners in the industry irrespective of AFA, RFA, large organisation or sole practitioner.

There are further references to conflicts of interest created by incentive compensation structures - roughly translated, this means there will be a focus on churning. When the life risk market grows around 2% to 3% per annum (after deducting rate-for-age and CPI increases) and product providers are returning new business figures of 10%, 15%, and/or 20% - the obvious conclusion must be that, as the market is growing at a nominal rate, individual company growth must arise at the expense of the existing business of others.

Is this undertaken at the expense of the client's best interest? Not always - there are legitimate reasons for replacement, but the intensity of competition in such a small market would suggest that there is a significant amount of churn occurring and that the practice is both systemic and endemic.

There are two practical solutions -

1. Enforce the standards implied in the 'reason for transfer' forms. I wonder how many applications have been returned to advisers based on "inadequate reason for replacement provided"? This is a product provider issue and the FSC should oblige their members to introduce robust scrutiny of such transfers - no exceptions.

2. New business commission is not paid on replacement business. This was adopted in South Africa, and largely eliminated the churn issue.

Of course, the industry does a whole load of things right, but in the current environment, participants need to tidy up the issues of poor advice and inappropriate replacement.

These are symptoms of a cultural malaise which should be addressed by defined governance practices reflecting the ethical values of the adviser entity, and the sooner the issue of effective governance is addressed, the sooner confidence in the financial services industry can be re-built.

Ignore the requirements of effective governance and we can expect see more articles like this emerging.

The choice is yours...............


Slainte mhath!!


The Laird