The financial advice industry has been under the regulator's microscope since the global financial crisis shed light on some of the shadier advice practices occurring across the financial services landscape. A sudden decline in capital markets, as seen in the GFC, unearthed a subset of consumers who were the unwitting recipients of negligent advice, unaware of the degree of investment risk they were actually exposed too. The uncovering of systemic cultural and procedural flaws, resulting in inappropriate advice from a subset of advisers, many within some of Australia's leading institutions, forced a broad based governmental response.
To date, the broad raft of industry reform has tended to create more noise than action. Although there are some notable positives, there remains significant room for improvement.
The path so far
There have been Parliamentary Joint Committee reviews and detailed Inquiries by some rather serious people, a variety of legislative amendments, lots of reporting, a great deal of media buzz and, from stage right, a change in government. Legislative uncertainty has prevailed, media scrutiny has continued and further occurrences of flawed advice within leading institutions have emerged.
Due to the uncooperative nature of some rogue senators the partial legislative unwinding proposed by the current government was itself unwound when FOFA revisions failed to pass through the Senate. Throughout this period of reform our political leaders displayed the incredible knack of communicating the very essence of complicated industry reform through one line slogans, zingers and poorly executed winks. It comes as no surprise that it has been incredibly difficult to address wholesale and complex industry reform when there are many stakeholders whose needs/views have to be canvassed and contemplated. With the financial services industry making up approximately one twelfth of the Australian economy, getting reform right should remain a significant priority to our economic custodians.
Financial advisers provide an important role as conduits between the financial services industry and consumers. Industry reform was initiated to enhance adviser professionalism, so all advisers acted impartially and ethically, in the best interest of consumers. A simple goal to be sure, but one which is too often distorted by competing stakeholder interests.
The results so far
- Consumer awareness, particularly amongst more sophisticated investors, is at an all-time high;
- A best interest duty is now law;
- Banning of conflicted remuneration is now law (eradicating direct conflicts of interest);
- Far more transparent fee reporting requirements have been introduced;
- Significant increase in the regulator’s influence on the provision of advice has somewhat commoditised advice delivery, potentially resulting in sub-optimal outcomes for clients;
- Education standards for advisers remain far too low;
- Professional bodies have not been empowered to transition the industry into a profession;
- Indirect conflicts of interest still exist for advisers employed by, or licensed through, a financial institution;
- There remains a lack of differentiation between aligned advisers and those who operate without any indirect conflicts of interest;
- Overly prescriptive regulatory requirements may have the unintended consequence of adviser consolidation into vertically integrated institutions.
The way forward
To date, too much focus has been on constraining the manner with which advisers engage clients. There has been a considerable lack of action on improving the ethical, educational and professional standards of advice providers. To truly address the needs of consumers seeking financial advice, policy makers and regulators will be more effective if their focus shifts from legislating how market participants engage, to empowering the transition of advisers into professionals.
The Parliamentary Joint Committee (PJC) inquiry, released in December 2014 has provided a catalyst for detailed discussion in this area, floating a set of reforms that specifically targeted education and professional standards. This focus on professionalism, deliberate on by the PJC Inquiry, has been strongly echoed by an array of key financial services stakeholders in their respective submissions to Treasury, responding to the recent Financial System Inquiry (FSI) report.
In pursuit of a transition to professionalism, some simple measures will be far more effective at improving advice quality than the previous seven years of noisy but somewhat toothless reform:
- Legislate that all financial advisers must become a member of an accredited professional body, such as the FPA or AFA; and
- Legislate that these professional bodies have the capacity to impose sanctions or disqualify membership;
These two simple changes will fast track the path to a self-regulated profession where industry participants are motivated to enhance the standing of their profession by weeding out providers of inappropriate advice. Both the AFA and FPA already have in place a rigorous code of ethics and are both well attuned to the intricacies of the financial services industry. A myriad of other professions, like medicine, dentistry and the law are self-regulated in this manner. By empowering a profession to self-regulate, the participating professionals take responsibility for elevating industry standards and protecting the value of their profession. This is not a new idea.
Introduce a higher educational barrier to entry.
A higher level of education, results in a higher barrier to entry, which in turn increases the opportunity cost of acting unprofessionally. An obvious beneficiary of higher education standards are advice consumers, who become recipients of more aptly skilled advisers. Additionally, increased education standards provide a broader set of learning opportunities for individuals to develop an appropriate understanding of personal moral and ethical frameworks.
It is not, and should not, be a regulator’s responsibility to mandate down to a process level how and in what capacity market participants engage each other. However, in the absence of professionalism amongst a subset of market participants, this regulatory response is an understandable reaction. The latest report reviewing the role advisers have in providing life insurance advice, the Trowbridge Report released in March, has again taken an unnecessarily prescriptive approach to advice provision. This is yet another example of an industry review significantly overlooking the far more important aspect of improving adviser professionalism. In fact, a likely outcome if recommendations from the Trowbridge report are accepted, is further consolidation of advisers into vertically integrated institutions.
If industry regulators continue to externally constrain how market participants engage each other, or introduce further prescriptive advice process requirements, we are certain to see a significant reduction in client access to qualified advisers, especially those practising independently. The recommendations outlined above are no different to the existing structures in place for almost all other professions. For once a solution that is simple, cost effective and proven to have worked in other industries exists and yet for all its merit has been, at present, quietly overlooked.
By Matt Vickers CFP® of Snowgum Financial Services