Home / Analysis / Dixon’s inquiry could be a reckoning for vertically integrated practices in advice

In the Dixon's inquiry vertical integration will not only be writ large, but it will have thousands of victims' names attached to it. The practice has run relatively unfettered for years, but that may be about to change.

In one of the more incongruous industry developments of 2024, One Nation’s Pauline Hanson may be responsible for an impending shakeup of vertical integration within financial advice.

This week the Financial Advice Association of Australia (FAAA) announced that after considerable lobbying it secured a Senate Economics Committee inquiry into the collapse of Dixon Advisory, after it was moved in the senate by Hanson.

The polarising One Nation senator managed to get cross-parliament support for the inquiry, which was initially headed for the Parliamentary Joint Committee before a final vote shifted it to the Senate Economics Committee.

All facets of the Dixon Advisory collapse should be closely examined in the inquiry, with committee members set to investigate why Dixon’s rewarded its advisers for pushing clients into its own failing New York property fund.

A total of 4,606 clients lost around $360 million when the fund eventually collapsed, with the formerly high-flying advice firm eventually filing for voluntary administration in January 2022.

It was a shocking dereliction of best interests duty, and a gut-punch for an advice industry trying to patch itself up after a bruising 2018 royal commission.

Industry touchpoints

The inquiry’s minutiae will shock and dismay the assigned senators. The details are likely to get played out in the mainstream press. As FAAA policy chief Phil Anderson noted in July this year when he called for the inquiry, “little has been done to get to the bottom of what happened”.

The corporate regulator’s role will be closely examined, with the maddeningly retrospective nature of its regulatory playbook on full show. Dixon’s was charging clients an absolute hodge-podge of exorbitant fees – up to five per cent in some cases – to invest in its highly-leveraged US Residential Masters Fund, and ASIC was not unaware.

The courts will get a work-over, with the decision to prevent ASIC from making Dixon Advisory pay any penalties levied against it likely to come under close scrutiny.

The Compensation Scheme of Last Resort should be examined, with its funding model one of Treasury’s most egregious failures. The central flaw in its design – that it punishes innocent actors for the misdeeds of the bad – has been neon-lit by the Dixon’s case, which is likely to cost advisers over $8,000 each.

Dixon Advisory’s parent company, E&P Financial Group, will also share the spotlight for its role in the scandal. The FAAA has made much of the fact that, after it put Dixon’s into administration, E&P subsequently folded many of its advisers into another subsidiary, Evans and Partners. This meant that while the rest of the industry was left to pay the bill for Dixon’s wrongdoing (via the CSLR), its parent group, E&P, actually benefitted by bringing remaining Dixon’s revenue on board.

The real star of the show

All these factors, however, should be co-stars to the main attraction.

The role of vertical integration will take centre stage, and senators will be forced to adjudge whether protective barriers like the Code of Ethics and Best Interests Duty provide a firm enough boundary to consumer harm, or let profiteering run relatively unfettered.

Vertical integration has, to this point, mostly been left alone by these sorts of enquiries. The 2014 Financial Services Inquiry noted that vertical integration was increasing and left it at that. Hayne skimmed it during the royal commission in 2018 and turned the page.

Levy made a decent attempt at addressing vertical integration in the 2023 Quality of Advice Review, with her ‘good advice’ proposal aimed at holding personal advice providers to a higher standard than the best interests duty. That proposal was blocked by financial services minister Stephen Jones.

The regulator took an infamous shot at it in 2018, but while the findings from Report 562: Financial advice: Vertically integrated institutions and conflicts of interest were damning, including that 68 per cent of client funds were invested via in-house products, it only covered institutional advice providers, which have subsequently (or perhaps consequently) exited the industry.

In the Dixon’s inquiry, however, vertical integration will not only be writ large, but it will have thousands of victims’ names attached to it.

There is no reason to think senators will recommend banning vertical integration. It remains entirely legal and, in many cases, beneficial to clients. At any rate, the practice is marbled with so many shades of grey (think managed accounts, for example) that identifying all of them would be a Sisyphean endeavour.

But the way financial services companies employ vertical integration will be examined thoroughly, and it may lead to a more robust framework being proposed. That prospect will make some in the advice industry nervous, and that might not be a bad thing.