Financial planning at another crossroad

Mike Taylor writes that the creation of the Financial Adviser Standards and Ethics Authority has brought the financial planning industry to another crossroad on its journey to professionalism.

The Australian financial planning industry is again standing at a crossroad on it journey towards professionalism – the implementation of the regime which flows from the Government’s creation of the Financial Adviser Standards and Ethics Authority (FASEA).

Why is the creation of the FASEA so seminal to the future of the financial planning profession? Because, in the words of the Minister for Revenue and Financial Services, Kelly O’Dwyer, it is the body that will be “responsible for governing the conduct of professionals in the financial advice sector by setting mandatory educational and training requirements, developing and setting an industry exam, and creating a Code of Ethics that all advisers will be required to adhere to”.

The importance of the FASEA in shaping the financial planning industry over at least the next decade cannot be over-stated because it represents a Government-appointed body intended to be representative of the entire financial planning industry but which will sit athwart the major financial planning industry groups such as the Financial Planning Association (FPA) and the Association of Financial Advisers (AFA).

As much as anything, the creation of the FASEA will require the FPA and the AFA to redefine their roles and the services they offer to members in the context of being the conveyers of outcomes around ethics and education, rather than the authors.

That is because the FASEA will set the standards which the FPA, the AFA and others will then need to deliver.

Those advising O’Dwyer have clearly not been blind to the political sensitivities of the financial planning industry with appointees to the inaugural board of the FASEA reflecting the various segments of the financial planning industry as well as the educational gravitas that such a representative board will need.

The body is being chaired by the Reserve Bank board member and lawyer, Catherine Walter and will be made up of former AFA president and practicing financial planner, Deborah Kent, former FPA chairman and current chief executive of

Countplus, Matthew Rowe, former executive member of the Australian Prudential Regulation Authority (APRA), Stephen Somogyi, Financial Ombudsman Service director, Catriona Lowe, former National Seniors Australia chief executive,

Michael O’Neill, former Consumer Action Law Centre chief executive, Carolyn Bond, Griffith Business School professor, Mark Brimble, and the executive director of the Ethics Centre, Simon Longstaff.

According to O’Dwyer, the FASEA board will primarily be responsible for:

1. Ensuring the financial viability of the authority, and setting strategic objectives for the authority;
2. Approving the education standards for financial advisers, the exam and the model code of ethics; and
3. Appointing the CEO, and holding the CEO to account.

It is a measure of the balanced make-up of the FASEA board and its mandate, that it has gained the support of the FPA, AFA and other groups but much of the new regime remains a work in progress and while financial planners are aware of the time-table outlined by the Government for the new regime, they are yet to be fully apprised of much of the detail.

According to the Government, the new requirements will commence on 1 January 2019 and from this date, new advisers will be required to hold a relevant degree before they are eligible to commence a supervision year and to sit the exam.

It said existing advisers would have two years, until 1 January 2021, to pass the exam and five years, until 1 January 2024, to reach a standard equivalent to a degree.

The Government has said the Code of Ethics will commence on 1 January 2020, with all advisers being required to adhere to the code from that day forward.

Among the questions being asked by planners is the future status of the FPA’s Certified Financial Planner (CFP) designation in the context of the exam and other requirements set by the FASEA, with similar questions also being posed with respect to the AFA’s Chartered Financial Practitioner designation.

Future of Financial Advice five years on

It is now almost precisely five years since the first of the Future of Financial Advice (FOFA) bills was passed by the Parliament and the Treasury is currently conducting the scheduled post-implementation review.

The bottom line? The jury is out on whether FOFA has met all of its original objectives, but the financial planning industry is adamant that it has certainly served to drive up costs.

This much was evidenced in the Financial Planning Association’s submission to the Treasury post-implementation review which stated: “The objectives of the FOFA reforms were to ‘improve the trust and confidence of Australian retail investors in the financial services sector and ensure the availability, accessibility and affordability of high quality financial advice’.”

“However, the costs associated with the implementation and ongoing compliance with many of the FOFA measures have impacted the costs involved in providing advice and barriers to business growth resulting in higher advice fees for clients and restricted service offerings,” the FPA submission said.

In doing so, it recommended that the Government conduct research to measure and qualify if the FOFA reforms had met their objective of improving the quality of advice, stating this had to include “an analysis of pre-FOFA research against the post-FOFA research findings”.

It said such a review should examine the quality of advice, cost of advice to consumers, changes in types of advice available to consumers and incidences of compliance failures and regulator action.

The FPA submission is comprehensive in its critical assessment of the FOFA regime and is based on an FPA survey of its members.

What is particularly interesting about the FPA submission is that it tends to confirm some of the worst misgivings of financial planners when the FOFA debate was at its height, particularly those of life/risk advisers.

Dealing with the FOFA ban on up-front and trailing commissions for individual and group risk insurance within superannuation, the submission listed the business impacts as being:

• Significant reduction in income – some small businesses lost between 15-30 per cent of revenue;
• Significant increase in compliance costs;
• Ceased service offering as the cost to implement insurance advice is too high and clients are not prepared to pay a flat fee for this advice;
• Required changes to advice documentation, standards and policies, new training requirements for advisers and support staff, new IT systems and remuneration systems;
• Some large businesses hired additional staff to address specific issues related to the implementation of this measure; and
• Businesses had to decide whether to keep clients or archive them as no revenue was coming in to support the ongoing service needed to provide life insurance advice such as annual review of policy to ensure it meets clients’ needs.

It said the client impacts included:

• An increase in the price of insurance (concerns that providers have kept the margin that was previously paid in commissions to advisers rather than using it to reduce premiums);
• Anecdotal evidence suggests there has been a reduction in the number of consumers seeking and accessing advice on life insurance needs;
• Reduced availability of life/risk advice;
• Existing group clients have been cancelled leaving them with no life/risk advice service and having to deal directly with product providers; and
• Have found paying a flat fee too expensive for life/risk advice.

The submission said the compliance costs included:

• Training – on average approximately $5,000;
• New remuneration systems – on average for small businesses $5,000 - $10,000. Some small businesses experience costs in excess of $10,000.

The problem for the financial planning industry is that while the Treasury’s post-implementation review may identify some significant shortcomings in FOFA, the legislation is strongly supported by the Federal Opposition and the Government has indicated it has no strong interest in pursuing amendments in the life of the current Parliament.

ASIC product intervention powers

The Government has backed the Australian and Investments Commission (ASIC) being granted product intervention powers, with the regulator’s most senior executives already outlining how they would like such a regime to operate.

ASIC deputy chairman, Peter Kell late last month told Senate Estimates that the regulator was disappointed that the proposed product intervention power will not include an ability to deal with “problematic remuneration arrangements” within licensees and elsewhere.

He described this as a significant limitation.

Discussing the limitations, Kell said perhaps the most significant one from ASIC’s perspective was the fact the power “does not envisage that, as part of the scope of interventions that would be allowed, the regulator would be able to take action in regard to problematic remuneration arrangements”.

“We think that that is a significant limitation when you consider that many of the most damaging problems and market failures that have arisen in financial services have arisen because of conflicts of interest and other poorly designed and misaligned incentives that generate adverse outcomes,” the ASIC deputy chairman said.

He said including remuneration under the intervention power “would be something that would at times allow us to, if you like, approach the problem by way of changing the way a product is sold, rather than necessarily changing the product itself, to ensure that it actually gets to the people that understand it rather than being sold to people who do not have an understanding of what they are getting, because of the wrong sort of incentive”.

“That is probably the main area where we think the model that has been out there could be improved,” Kell said.

The ASIC deputy chairman noted that the regulator also had concerns about the need to include other products under the intervention power such as funeral insurance and small business loans.

“The other area where we think there is a reason to at least open the debate is around the time frame that is envisaged for the intervention,” he said. “It is 18 months without an ability to extend, and we think in some instances it would be useful to have an intervention extend beyond 18 months, or have the ability to do that.”

The major financial planning bodies have supported ASIC having product intervention powers, particularly noting that financial planners have often been blamed for what amounted to product failures in the market.