Last year I wrote an article I called “Regulation — friend or foe, crutch or protector” (Money Managementretitled it “Is it really necessary to have more rules from the financial services watchdog”, 19 August 1999).
I want to return to that theme in this article, and in doing so bring together a number of points that I have raised in recent articles. The trigger for this is the potentially explosive inherent conflict between corporations law (exacerbated by CLERP 6) and recent tax changes (alienation of personal income).
In recent articles, I have discussed: the future of fund managers, screen-scraping and wraps, licensing, CLERP 6 and the FPA. Although apparently disparate topics, recent events have caused an unexpected (even by me) confluence of topics.
In my article on fund managers (whichMoney Managementtitled “The death of the managed fund”, 30 March 2000), I argued that unless fund mangers got their administrative act together, advisers would turn more and more to listed securities. Well, according to a soon-to-be-released study by US-based Cerulli Associates, the percentage of assets invested in mutual funds by RIA’s (Registered Investment Advisers) has dropped from 23 per cent in 1995 to only 17 per cent in 1999 (even despite record inflows into mutual funds). Where are the RIA’s putting the money? Into managed accounts.
Which brings me to wraps. In the past few weeks, AMP, Macquarie and Suncorp-Metway have all announced screen-scraping services. At this stage, they are only for the consolidation of reporting, but transactions aren’t far away.
InvestorCities hopes to launch by the end of the year.
Managed accounts (personal mandates) are being developed in Australia too.
This means that if fund managers do not make it as easy to trade managed products as listed securities, support from advisers will decline.
These services (wraps, screen-scrapping) also give more power to the adviser because the client authorises them to conduct transactions for them. In the case of screen-scrapping, clients will be handing over passwords and pin numbers.
This is scary stuff – discretionary accounts by other names! But who has woken up to this? ASIC no, dealers – maybe some.
Which brings me to CLERP 6 and licensing. Treasury and ASIC are persisting with over-regulation of this industry, with methodologies that are not in keeping with current trends with technology or consumerism – they still believe in the straitjacket. They are missing the bigger picture, missing critical issues, providing consumers with false security and stymieing innovation and diversity.
They only want big dealers, and they want these big dealers to be their enforcers. Big dealers, in the main, means dealers owned by institutions. In the soon-to-be-released Money Management/ Look Research Top 100 survey, 18 out of the top 20 and 43 out of the top 50 are institutionally owned.
The hallmark of the industry has been diversity and innovation. It took over the over regulated, large, moribund life industry. CLERP 6 with the introduction of a single licensing regime offered the opportunity to breathe new life and competition into the industry. But unfortunately, CLERP 6 has manacled the industry with the entrenching of the two-tiered advice licensing structure. No proper authority is required if the adviser is an employee or belongs to a declared professional body.
This apparently was to further entrench the big. But, with some innovative thought, some of these provisions in CLERP 6 may provide a way out of the next assault on the diversity of the industry.
The recently legislated alienation of personal income provisions, in all likelihood means that, any adviser now operating as a independent contractor will be deemed to be an employee of the dealer. Further implications of this are workers compensation and payroll tax burdens for the dealer. It also captures multi-agents, independent contractors working for brokers (life and general) after CLERP 6 legislation is passed. Is this another Treasury initiative supporting big dealers and suppressing innovation and diversity?
If ever there was a time distribution needed to speak and lobby with one voice, it is now. But what do we have – one, two, three, even more associations representing distribution. The manufactures have only one association (IFSA) and it suits them for distribution to be fragmented. It’s about time the various associations put aside their petty issues and united for the good of their members.
Even assuming legislative changes are not on (either to corporations or tax law), there are some options open to the industry. These range from every independent contractor getting their own dealer’s licence through to the Financial Planning Association (FPA) and other distribution associations seriously considering the declared professional body route.
Another option would be for fund managers to pay commissions, and clients pay fees, directly to the adviser who then passes onto the dealer their split (the reverse of what happens now). This solution would be expensive, an administrative nightmare and unattractive to dealers. Imagine what games would be played.
In many ways, the option of all independent contractors becoming dealers, has similar problems – plus ASIC would lose its regulatory efficiency (as there would be about 10,000 dealers – currently about 700) and would have to lower its criteria for obtaining a dealer’s licence.
This leaves us with the dreaded declared professional body option. This way, say the FPA (once it obtained the status of a declared professional body) could ‘accredit’ advisers. As there would be no two tiered structure, the adviser would earn their income from multiple sources, easily satisfying the 80/20 rule. Those distribution channels with employed advisers could choose to go under either accreditation regime.
The effect of this option on the industry would be profound – but I believe for its long term benefit and vitality. It would free us up from the yoke of over and prescribed regulation. The industry, the associations and dealers would no longer have a regulatory crutch to support them. It would force dealers to justify their existence – probably more as consolidators, providers of brand and services.
They will and should still exist – but without the regulatory crutch. Further, this option would allow for further diversity, for big and small, and innovative ways of constructing and operating businesses and networks.
This option solves the problem of alienation of personal income and many others, but unfortunately cannot be implemented until CLERP 6 (Financial Services Reform Bill) is enacted. That will not be until 1 January 2001, but more likely 30 June 2001. Yet the alienation of income provisions came into affect 1 July 2000.
So there is a real problem in the meantime.
Possibly, if all the distribution associations got together with once voice, and some anti-declared professional bodies antagonists ate some humble pie, they could convince the government to provide some sort of temporary relief until FSRB is enacted. Otherwise, welcome to an emaciated industry.
As I said at the start “Regulation – friend or foe, crutch or protector”. At the moment it is not friend, crutch or protector – it is foe. To fight foe we have to unite, we have to innovative and we have to stand on ourowntwo feet. Let’s kick, not butt, but the crutches away.
