FPA's adviser registration proposal resonates but what will it cost?

12 June 2020

When the Financial Planning Association (FPA) sought to take control of the debate on the future status of financial advisers proposing that formal adviser registration have primacy over their status under an Australian Financial Services License (AFSL) it was pointing a way to the future without paying enough heed to the past.

It took less than 24 hours for six significant licensee chief executives (dealer group heads), five of whom had paid for the privilege of being FPA ‘Premium Partners’ to challenge the FPA’s position noting, amongst other things, that they had not even been consulted about the FPA’s policy push.

A further 24 hours later, and with their initial surprise and consequent anger having dissipated, a number of those licensees had acknowledged that the FPA’s proposal, while much more complicated than most advisers seemed to believe, was worthy of further discussion and debate within the sector.

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The complexity with respect to the FPA’s proposal comes with the reality that it would require close cooperation with the Federal Government to achieve key changes to those elements of the Corporations Act which have given shape and form to the financial planning industry for most of the past 40 years.

And the most important part of the Corporations Act for financial advisers when it comes to understanding how they arrived at where they are today is Part 7.7 which provides that “entities that provide financial product advice to retail clients must prepare and provide a Financial Services Guide (FSG), give a general advice warning when giving general advice, and prepare and provide a Statement of Advice (SOA) when giving personal advice”. 

The Australian Securities and Investments Commission (ASIC) when discussing Part 7.7 goes further stating: “To determine your obligations under the licensing provisions you first need to consider whether you provide a ‘financial service’.”

“You provide a financial service if (among other things) you:

  • ‘Provide financial product advice’; or
  • ‘Deal in a financial product’.”

The keyword in the Corporations Act is “PRODUCT”. The financial planning industry has been built up around the sale of and advice around product. A look at the histories of companies such as AMP Limited will serve to validate to the degree to which product sales were central and it was only later that advice took a seat at the table.

Almost incredibly, given the amount of money which was expended on the services of Kenneth Hayne, the Royal Commission into Misconduct in the Banking,

Superannuation and Financial Services Industry barely glanced at the reality that the vast majority of the issues which gave rise to misconduct evolved out of the confusion and conflation of product and advice.

And therein lies both the victory target and the challenge for the FPA – achieving amendments to the Corporations Act which will be necessary to appropriately eliminate the focus on “product” with respect to advice structures.

Then, too, any move towards adviser registration holding primacy over an AFSL will require the Government to address issues such as the requirement to hold professional indemnity insurance, the scale of any compensation scheme of last resort and who will actually have the job of funding that scheme.

The chief executive of CountPlus and former chair of the FPA, Matthew Rowe, is one of those licensees who, after joining the five other licensees to express his concern about the FPA’s proposed policy move later reflected that it was worthy of further exploration in the context of the broad future of the industry.

However, Rowe makes no bones about the value which the licensee/dealer group model has delivered to advisers in the context of continuing professional development, regulatory compliance and the all-important PI insurance.

He said that while he had always been a supporter of separating product and advice, he understood only too well the underlying expenses and obligations which went with running a financial planning business in a tightly-regulated environment.

For former dealer group head and current planning group board member, Paul Harding-Davis, the greatest attraction of adviser registration would be the removal of advisers’ reliance on a licensee for their planner status.

“Putting aside the questions of what dealer groups deliver to advisers, which is often quite a lot, I cannot help but think it is inappropriate that it is licensees which determine the status of advisers when they themselves might not hold an advice qualification,” he said.

Harding-Davis said he believed that this was something which should be front and centre in the development of adviser registration.

He noted that individual adviser registration might have obviated the problems which confronted advisers who had been impacted by the closure of dealer groups, forced or otherwise.

Harding-Davis’s views were reflected in comments to the Money Management website following publication of the objections expressed by the six licensees, with readers claiming that out of the six licensee chief executives only one of them, Rowe, actually held a financial planning qualification.

Notwithstanding their acknowledgement of the need to separate product from advice and the value of removing licensee control of adviser status, Rowe and Harding-Davis admitted that any changes would have a significant impact on dealer group structures which had already faced multiple adjustments to their commercial models over the past decade as a result of the Future of Financial Advice (FOFA) and other changes.

For his part, the chief executive of the FPA, Dante De Gori, was late last week seeking to mollify the dealer group heads by clarifying the approach being proposed by the FPA.

He insisted that the licensees would continue to play a vital role.

“The FPA acknowledges that licensees continue to play a crucial role in developing, training, educating, and supporting licensed financial planners,” he said. “Licensees will continue to be needed to provide business development services, technology, education and many other services that give value to financial planning practices.”

“Removing the AFSL requirement for financial planners won’t change this,” De Gori said.  

“The AFSL does not make the planner, just as the hospital does not make the doctor, nor the law firm the lawyer. Individual financial planners are the ones who provide financial advice and the regulatory system should focus directly on their professional qualifications and behaviour.

“The FPA welcomes the ongoing debate and discussion of its five-year roadmap and policy platform, which has been supported by members and sparked constructive dialogue with industry stakeholders.”

De Gori reinforced that the adviser registration policy proposal was part of a five year plan but others in the industry are suggesting that it change may well occur faster than that as the Government seeks to implement a range of measures including its compensation scheme of last resort, the imposition of a single disciplinary body and to determine the future funding of the Financial Adviser Standards and Ethics Authority (FASEA).

The original FASEA funding arrangements were underwritten by the four major banks but with the substantial exit of those banks from wealth management the Government is going to have to come up with a new funding formula, with the easiest and most expedient formula likely to be yet another levy on the industry.

Then, too, is the question of whether the Government will look to address the perception of broad industry dissatisfaction with the performance of FASEA and the perception of regulatory proliferation by consolidating its functions within that of the single disciplinary body.

What the Government has made clear via the Assistant Minister for Superannuation, Financial Services and Financial Technology is that it wants to turn financial planning into a profession and that it is not, in general terms, opposed to the changes being canvassed by the FPA.

But one thing has also been made certain by this Government. It prefers a user-pays model so whatever costs are associated with the development of a profession will be carried by the industry, not the taxpayer and that includes a compensation scheme of last resort, a single disciplinary body and FASEA, if it remains as a standalone body.

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If the Government want any form of cooperation or support from industry on proposed future structures, the first thing it can do is to terminate FASEA come 30/6/21 and absorb its remaining administrative functions into a single disciplinary body. Given ASIC's proposed supervisory levy fee hike of 38%, CSLR and PI insurance premium increases, the industry simply cannot afford this cost of doing business, most of which is regulatory red tape. We haven't yet seen the full knock on effects of the FASEA reforms, nor of the Royal Commission proposals yet to be implemented. Why do you think the large institutions are getting out of advice? It is simply too costly to provide advice given the fixed costs and risks of doing so. Low value/low fee clients are being abandoned because licensees cannot continue to provide advice that is below the fixed costs of doing so, especially with clients no longer being subsidized via commissions structures. Red tape is killing the industry but moreover is limiting access to affordable advice by the very consumers who need it most.

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