What has driven the exponential growth in regulatory costs?

In the nearly five years that the Federal Coalition Liberal National Party Government has been in office, the regulatory burden on the financial services industry has increased by close to 20 per cent, with the majority of that increase occurring post-2015.

As the industry seeks to come to terms with the likely fallout from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, it has also been required to find the resources and funding necessary to deal with the following legislative and regulatory changes and inquiry processes:

• The Financial Adviser Standards and Ethics Authority (FASEA)
• The Life Insurance Framework (LIF)
• Industry funding of the Australian Securities and Investment Commission (ASIC)
• The Australian Financial Complaints Authority (AFCA)
• The Bank Executive Accountability Regime (BEAR)
• The Productivity Commission inquiry into Competition in the Australian Financial System
• The Productivity Commission inquiry into Superannuation Competitiveness and Efficiency; and
• ASIC’s product intervention power.

Combined with all of the above is the reality that while the Future of Financial Advice (FOFA) changes were introduced under the former Labor Government, their implementation has been a work in progress which has had an ongoing impact on financial services companies.

Perhaps ironically, at least some of the legislative and regulatory initiatives which gave rise to added costs for the financial services industry were borne of the Government’s initial desire to avoid holding a Royal Commission – most obviously the BEAR regime, but also the establishment of AFCA and most certainly the further empowerment and funding of ASIC.

Indeed, on the very day in November last year that the Government acceded to calling the Royal Commission, the Treasurer, Scott Morrison, argued that such measures would not already have been in the process of being put in place if a Royal Commission had been called earlier.

“All these reforms and actions would not have occurred had the government agreed to undertake this action earlier, such actions would’ve been unnecessarily delayed,” Morrison said. “Nor would such action prior to this time have been in the national economic interest.”

Little wonder, then, that the major financial planning organisations – the Financial Planning Association (FPA) and the Association of Financial Advisers (AFA) – have frequently seen fit to use their responses to the Government and the Treasury to remind them that all the changes had come at a cost which must ultimately be passed through to clients.

Dealing with the Government’s move to legislate a fee-for-service funding model for ASIC, the AFA made the point that the increase in the cost of ASIC fees-for-service needed to be “viewed alongside the other important recent cost increases, all of which could serve to both reduce the number of participants in the sector and drive up the cost of providing advice so that it is only affordable to the most wealthy”.

“Financial advisers are also facing a significant cost in undertaking additional education as part of complying with the new Professional Standards legislation,” the AFA said. “The cost of the education reforms, when viewed alongside the cost of taking out their own licence, may significantly impact upon the decisions that some advisers choose to make.”

“There is a high probability that faced with the choices that they are at the moment that many older advisers will decide to exit the financial advice sector rather than invest in their education and obtaining an AFS licence.”

The FPA has been even more definitive in its warnings about the cost impacts of the Government’s various legislative and regulatory changes, using a submission responding to the establishment of AFCA to detail precisely how many imposts were now confronting financial planning firms.

“We’re concerned about the effect that increasing limits will have on professional indemnity insurance. Increased premiums will be passed onto advisers at a time when a large number of additional costs of regulation, each substantial, are being, or proposed to be, imposed on advisers.

For example,

• ASIC Supervisory Cost Recovery model – approximately $4,000 to $5,000 per adviser in 2018 for small licensees
• ASIC fee-for-service costs – currently unknown; significant increases previously proposed
• Funding the new Financial Advice Standards and Ethics Authority (FASEA) – unknown
• Financial advice registration exam – unknown
• Adviser Code Monitoring Scheme – unknown
• Compensation Scheme of Last Resort – unknown
• Tax Practitioners Board (TPB) - $400 per business plus $400 per adviser
• ASIC Financial Adviser Register – currently $0 to $46 per adviser; and
• Cost of meeting new education requirements – varies depending on current qualifications.

“It seems likely that industry will need to absorb at least a substantial part of these costs, which given the scale of increases will make running a business particularly challenging. This challenge is especially large for small providers,” the FPA submission said.

But if the financial services industry has been faced with a 20 per cent increase in regulatory and compliance costs then it is ASIC which has been the destination for much of the consequent revenue collected by the Government.

ASIC lobbied hard for the Government to adopt a fee-for-service funding model for the regulator and it has been more than accepting of the raft of additional powers granted to it over the past five years.

The Minister for Revenue and Financial Services, Kelly O’Dwyer, has not been shy in detailing the degree to which the Government has seen fit to both fund and empower ASIC, and at the time of the Parliament passing the fee for service legislation, noted what the Government had done.

“This legislation builds on other actions the Turnbull Government has taken to boost the resources and capability of ASIC, including: providing $121.3 million in additional funding to bolster ASIC’s investigative and surveillance capabilities; establishing and committing to implementing the recommendations of the ASIC Enforcement Review Taskforce; consulting on a new product intervention power for ASIC; and appointing a new Chairman and creating a new second Deputy Chairman role which will have focus on enforcement,” she said.

ASIC deputy chairman, Peter Kell, has been equally upfront about the regulator’s willingness to not only embrace the extra powers and resources handed to it by the Government but to canvass ASIC being handed additional capabilities.

Speaking in mid-July, Kell noted that in the 2017/18 financial year, ASIC’s enforcement outcomes included 21 criminal convictions, 27 civil proceedings completed, and 27 court enforceable undertakings.

“We obtained almost $350 million for consumers in compensation. We banned 127 financial advisers or credit providers, and disqualified 49 directors,” he said. “In other words, enforcement is very much a focus for ASIC.

“But what has also been clear is that ASIC’s powers and penalties have needed an upgrade, which was a point we made in clear terms to the Financial System Inquiry.  

“ASIC is therefore pleased by the recent joint announcement from the Treasurer and Minister for Revenue and Financial Services that the Government will significantly upgrade ASIC’s penalties and powers, following the recommendations of the Enforcement Review Taskforce. As this announcement noted, some of the penalties have not been increased for more than 20 years.

“These reforms include:

• significantly stronger and clearer rules about the obligation of licensees to report breaches to ASIC honestly and in a timely manner.
• a stronger ability for ASIC to take regulatory action against senior managers or controllers of financial services businesses.
• a ‘directions power’, that will enable ASIC to direct licensees to take particular remedial actions such as consumer compensation programs.
• stronger penalties for licensees. For example, a breach of section 912A, the ‘efficiently, honestly and fairly’ obligation for licensees currently does not incur a penalty, but would under proposed reforms.”

Policy-making on hold

While the Government has signalled continuing firm policy intentions with respect to superannuation fund governance and changes to the default regime, serious change will not occur until after the Royal Commission into Misconduct in Banking, Superannuation and Financial Services Industry delivers its findings and recommendations.

What is more, the Royal Commission’s findings will then have to be weighed against the recommendations contained in the final reports emanating from two Productivity Commission inquiry findings – Competition in the Financial Services sector and the Superannuation Competitiveness and Efficiency.

The Royal Commission’s initial findings and recommendations are not expected until late September or early October and the Productivity Commission’s superannuation-focused inquiry is still on foot.

All of the above suggests that the Government is unlikely to be in a position to turn the recommendations flowing from the Royal Commission and the PC inquiries into legislation much before the second half of 2019 when it is likely to be election mode.

The key question for the financial services industry is therefore whether it will be a Labor Government which ultimately sets the tone of future legislation.

What will life look like after FASEA?

There are three key policy questions to be answered in detail flowing from the establishment of the Financial Adviser Standards and Ethics regime.

The first is the final shape of the education pathways which advisers will need to follow and how this will translate into their registration as financial advisers and their consequent status in terms of licensing.

The second question relates to the ultimate shape of the code of ethics drawn up by the Financial Adviser Standards and Ethics Authority and which particular bodies or companies are then empowered to police that code as code-monitoring bodies.

The third question relates to FASEA’s long-term role and costs to the industry following establishment of the detailed educational framework and the code of ethics, in circumstances where over-arching regulatory oversight will remain in the hands of ASIC and policing will be in the hands of the code-monitoring bodies.

According to FASEA’s own interpretation, it is responsible for:

• approving degrees or higher or equivalent qualifications and determining the bridging course requirements for existing advisers
• approving foreign qualifications
• approving and/or administering the exam
• selecting an appropriate common term for provisional relevant providers
• determining the continuous professional development requirements in relation to licensees’ CPD years
• determining the requirements for the professional year; and
• setting the code of ethics.

On the face of it, FASEA’s future would seem to be similar to that of the Australian Accounting Standards Board (AASB) which, like FASEA, is a Government standards agency established under a Commonwealth Act.

While FASEA will continue to set or approve standards, planner interactions are more likely to be with code-monitoring bodies.