Many industry super funds vertically-integrated too

Industry superannuation funds operating in-house investment management functions are just as much vertically-integrated as banks with financial planning arms, according to the Australian Bankers Association (ABA).

The ABA has sought to use its submission to the current Senate Inquiry into the Scrutiny of Financial Advice to argue that claim that forms of vertical integration are common across the financial services value chain, including with respect to superannuation funds.

The submission said that recent commentary in the financial advice community, the Financial System Inquiry (FSI) interim report and the media had focussed on the concept of vertically integrated business models and "the impact these structures have on the management of perceived and actual conflicts interest".

"The term ‘vertically integrated' has come to mean a business operating model where legally related companies run financial services businesses across the financial services value chain," it said. "This is an example of vertical integration; however, some form of vertical integration is common across the financial services industry."

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The submission then exampled:

Superannuation funds operating in house investment management functions; product issuers providing financial advice, including intra-fund advice, on products they manufacture;

Product issuers having commercial partnerships with financial advice businesses, administration services and other relationships;

Commercial financial advice referral arrangements; and

Financial advice businesses operating or having an interest in investment platforms or Managed Discretionary Account (MDA) facilities.

The ABA submission said most attention was being directed towards financial product manufacturers such as banks with related party financial advice businesses with the suggestion that this gave rise to conflicts of interest.

However it claimed there was a well-developed set of obligations relating to the management of conflicts of interest including the provisions of the Corporations Act and the Superannuation Industry Supervision Act as well as general law obligations.

"For consumers, vertically integrated business models offer a value proposition of investment, innovation, specialisation and capital strength," the ABA submission said. "A relationship with a bank, across the financial services value chain, can allow the bank to develop a better understanding of the objectives, financial situation and needs of their client, and therefore provide better quality financial advice and, where reasonable and appropriate, better targeted product solutions."