The proposed Terms of Reference for much anticipated Quality of Advice Review was recently released by the Government. The financial advice community has reason to hope this marks the end of two decades of regulatory encroachment on the industry.
Over-regulation has caused the unprecedented attrition of advisers from the industry. The advice sector begins the year with an estimated 18,500 advisers, having experienced a 25% decline from over 25,000 advisers three years ago, in a market of 2.6 million consumers of financial services.
A good number of these consumers are approaching retirement with upwards of $300,000 in accumulated superannuation savings, but only now becoming aware of the benefits of receiving financial advice. Law and regulation, however, have made the cost of producing advice over $5,000, out of the reach of most Australians.
If a consumer wants bespoke advice (eg how best to invest your superannuation during retirement, rather than a full wealth plan) few businesses and advisers have confidence they can provide such advice without falling foul of the regulator.
Under the current rules, consumers must choose between either an expensive full advice plan that is unaffordable for most, or not get advice at all. We hope 2022 can be the year where policymakers and the industry agree on a more flexible approach.
While the Government’s draft terms of reference touches on nearly all the issues explored by the Financial Services Council (FSC’s) White Paper, it is pleasing to see the Government focus on ensuring financial advice is affordable and accessible, as well as maintaining robust consumer protections.
There is also recognition from both sides of politics that reform is necessary to make the advice industry sustainable. Labor’s timely announcement that advisers with a good track record and significant experience would be exempt for some education requirements is an example of this, as was the Government electing to freeze ASIC levies for financial advisers.
Building consensus around specific reforms, and when these should occur, is the next crucial step the in the redesign of financial advice.
Getting meaningful reform in 2022 will be the difference between achieving an efficient, simpler and less costly advice process for consumers, or one that continues on a course of structural decline.
Given the prevalence of small businesses in the advice industry there is a narrow window to relieve the cost pressures facing the sector and the time to act is now.
The FSC’s White Paper proposes additional reforms that are required, and when these should be implemented.
We want to expand consumer protections to 275,000 more Australians by increasing the wholesale asset threshold to $5 million from next year.
Next, we would eliminate nearly 40% of the cost of providing advice by removing red tape that straightjackets the advice process – abolish the safe harbour steps and simplifying documentation and definitions of advice.
Together, KPMG estimates these reforms will reduce the cost of providing advice by almost $2,000. For the first time in a decade, the regulatory framework would also respect the professional judgment of financial advisers and not impose pointless ‘tick box’ requirements.
Finally, work needs to begin on a self-regulatory framework for the advice industry that creates pathways for new advice professionals, recognises prior learning, and enables financial advice associations to take a leadership role in regulating and growing their profession.
The FSC’s hope is that 2022 is the year in which the advice sector strikes off in a new direction and that the Quality of Advice Review successfully charts that course.
Zach Castles is policy director for advice at the Financial Services Council.
