As I come to the end of my time as managing editor of Money Management, it is worth reflecting that it has traversed a period coinciding with the implementation of the Financial Services Reform Act (FSR), through the introduction of the Future of Financial Advice (FoFA) and then the Hayne Royal Commission.
What is interesting in that span of around 18 years is that, while the legislation and the regulations have changed, the number of complaints lodged against financial advisers did not rise and, what is more, did not appear to be particularly higher than those against many other participants in the financial services industry.
But what has always stood out amid the seemingly interminable debate about commissions and the separation of product and advice is that, under the Corporations Act, financial advice is only financial advice when it involves the recommendation of a product.
What has also stood out is that, without FSR, the major banks might have seen less benefit in fully entering the financial advice industry.
It therefore came as no surprise to me to hear that there are those in the Federal Treasury who have lately acknowledged that if they had their time over again, they would have done things differently back in 2001 when the Financial Services Reform Bill was introduced to the Parliament and that, for a start, they might have taken a different approach to the licensing and general status of financial advisers.
Some of those who were part of the industry consultation processes around FSR, including my friend and industry veteran, Paul Harding-Davis, agree with those in Treasury who believe, with 20/20 hindsight, that mistakes were made in that legislation the consequences of which have given rise to the problems which continue to bedevil the industry today.
Harding-Davis, asked to reflect upon what FSR generated, said that it gave rise to an industry structure that created systemic conflicts that were rarely understood, and were never likely to be aligned to the way that professions evolved or operated.
“To start with, it was obvious that a great many product manufacturers would create and acquire advice licensees and/or seek to influence them with product revenue,” he said.
“In addition, it had a negative impact on the development of a profession, which is about individual professionals.
“I also believe it forced the industry associations to work around this and inhibited their development to something more akin to the Law Societies or the accounting bodies,”
Harding-Davis said. “Not to say that the organisations currently known as licensees don’t provide valuable services but being the arbiter – even now to an extent – of who is able to be an adviser is not an effective role.”
According to Harding-Davis, FSR entrenched a gap in the understanding of how advice as a profession works and how the policy makers and regulators who are understandably looking through the lens of the Corporations Act try to make it work.
“Holistic advice is largely delivered by a person working with another person. The relationship with the client is and always has been there,” he said. “However, the law says that I, as a licensee, provide the advice and own the client data if not the relationship. Financial advice has never worked that way and any licensee will tell you that.
“Even if they try to keep the clients, most follow the individual adviser. That is where the trust must be earned and maintained, as per professions. Inevitably when legs and regs are put out they are disconnected from how the profession actually works on the ground. A square peg trying to be hammered into a round hole created by FSRA.”
So, as I end my time with Money Management to continue my writing elsewhere, I agree with Harding-Davis and other veterans that many of the ills of the financial planning industry were perpetrated by good intentions in 2001 and that 20 years later the industry is still struggling to find the answers.
Perhaps those answers reside in a thorough legislative and regulatory rewrite.