The arrival of the Financial Services Reform (FSR) Act in March last year engendered mixed feelings among those working in the financial services industry. At the corporate end of town, there was little to do other than apply for the new FSR licence to cover all operations. At the other end of town, small dealer groups and individual planners struggled with their licence applications and all the conditions that had to be put in place.
One year on, and opinions are still divided about whether the new FSR licences have achieved all the goals set for them by the Australian Securities and Investments Commission (ASIC).
Financial Planning Association (FPA) manager policy and government relations John Anning says FSR has set the right policy directions for the financial services industry.
“In terms of bedding it down, there are still a few issues to get right. But with such a fundamental change there were always going to be details that needed looking at again,” he says.
Industry consultant Wes McMaster says there are three particular areas of FSR that have impacted on advisers and dealer groups.
“The first is that FSR has improved the management of small practices and it has also improved the competency skills,” he says.
“Small practice people are now focused on the management principles in FSR, which brings benefits to them.
“Another effect was that a number of smaller practices moved to larger dealer groups because of the increased compliance requirements,” McMaster says.
“It has also meant those advisers who have moved recognised they didn’t have the skills to run a business.”
However, McMaster says the increased level of compliance was not as dramatic as everyone thought and people have been able to cope with it.
AMP Financial Services advice and services director Steve Helmich says the whole FSR concept of lifting the standards of advice was correct. But he says it is the execution of the licence requirements that have caused some concern.
Investment and Financial Services Association (IFSA) chief executive Richard Gilbert agrees that FSR is a good thing.
“FSR is now well-entrenched and all the systems are in place and having an impact on the market,” he says.
“It has also put the industry in a better position to deliver its fiduciary obligations.”
Financial Investment Services consultant Geoff Moore says not all the changes required by FSR have been put in place by the dealer groups, although this will happen.
“There seems to be acceptance by advisers as to how they do written advice, but even now some of the paperwork is overkill,” he says.
Moore says there is too much detail in the statements of advice (SOAs) and the fees could be presented in a simplified form.
Helmich agrees that SOAs have swung too far on the amount of information they contain.
“We have got the lawyers worried about how to handle the letter of the law,” he says.
“But there are instances where the complexity of the SOA can be made to fit the advice — and FSR does allow you to have scalable levels of advice.”
Helmich says that while the compliance pendulum has swung too far towards over-regulation, once people realise the opportunities, things will settle down to an equilibrium.
“With new legislation there is always early pain and the lawyers tend to lead the charge,” he says.
But the burden of compliance is seen as particularly difficult, especially in risk advice.
The Association of Financial Advisers (AFA) president, Michael Murphy, says his organisation is getting reports that advisers are being discouraged from dealing with smaller clients due to the paperwork.
“Compliance is too onerous.” he says. “A lot of the complexity has been brought in by the dealer groups in fear of litigation.”
Murphy argues the compliance burden might be acceptable for the accumulation market, but if people haven’t got risk insurance in place then the investment strategy is flawed.
“FSR has taken away the need to sell to the client. The returns aren’t there due to the overheads of compliance,” he says.
The level of compliance is also questionable when it is accepted that risk products have become a commodity. “All risk products are basically the same, so what is the benefit of FSR?”
Murphy adds: “The business regarding bias of product is overplayed as all you need is the cover.”
FPA manager professional standards Paul Shevtzoff says there are always people who claim new rules never work, but FSR is bedding down well.
“Two to three years ago the Jeremiahs of the industry were complaining about many things which are now accepted,” he says.
“The only outstanding item needing attention is the SOA. We have put our views on that to ASIC and we are in dialogue with Treasury.”
Compliance and Risk Services director Murray Jones says a lot of compliance functions were restructured as a result of FSR. But this has created some problems as well.
“A lot of the old guard in compliance moved on and lots of new people came in, but the question is whether they have the skill sets,” he says.
Jones says that prior to FSR many executives in the financial services industry didn’t really understand the concept of compliance.
An example was the Financial Wisdom mis-selling court case where the compliance officers hadn’t considered this as an issue.
Jones says the Commonwealth Bank now includes acquisition risk compliance in the due diligence process when looking at buying other businesses.
“You have to commit resources to compliance and it has to work across the organisation,” he says. “But there are less experienced compliance officers who are over-engineering and spending a lot of time and money on unnecessary processes largely to hide that they have to be seen doing something.”
Macquarie Funds Management head of distribution Bruce Murphy says the bank did have to increase its compliance resources post-FSR, but it wasn’t a major problem.
“FSR didn’t cause a lot of problems as we were at the bigger end of funds management. It might have caused problems if we had pure retail processes and a tied distribution network.”
In the run up to FSR, greater accountability and transparency were promised under the new regime.
McMaster says FSR has improved accountability as advisers now need a licence to run a business to the same prudential requirements of all segments of the industry.
“The adviser now has to manage the office of a business on a week-to-week basis,” he says.
“Advisers must have proper cash flow records that were neglected by smaller businesses and it has improved the way people manage their practice.”
Moore says that while FSR has made some areas of financial planning more accountable, other issues are still unclear.
“Where it has muddied the waters is where ASIC has not prescribed guidelines and let the adviser come up with their own interpretations on what is the right thing to do,” he says.
Murphy says the fund management operation had already been tightly regulated before FSR, so the transition didn’t create much additional work.
“The exception was our custodial business, which had to get a licence for the first time, but we were comfortable with that,” he says.
“However, the bank switched to more onerous conditions as all their product had to have PDSs, but funds management was used to this because we had an unrestricted dealer’s licence regulated by APRA, which then switched to ASIC.”
Helmich says accountability for advisers has always been there because they were always seen to be protecting their licences.
“FSR has increased the focus on accountability,” he says.
Anning says advisers know they are being watched by ASIC, but the evidence suggests they are meeting all the requirements of FSR.
“ASIC will be coming out to visit them in the future. Having the regulator banging on the door is ensuring the financial planning process is being seen to be transparent.”
Shevtzoff says the new rules on disclosure have also made the profession accountable to the consumer, who can now see what they are getting from the service provided by the adviser. But he argues the level of financial literacy achieved by consumers has to improve.
Shevtzoff says this will help ease some of the problems of clients’ understanding the paperwork with their plans.
The consensus of opinion is FSR has brought benefits to the industry, although the devil is in the detail.
Shevtzoff says there are still some problems on how parts of the Act are interpreted, but Treasury is looking into that.
“The FPA will continue to look at the proposals, but we accept there are still some adjustments to be made to FSR to satisfy all parties.”
