With the implementation of the Financial Services Reform Bill (FSRB), I believe the Government is in danger of producing a debacle as catastrophic as the Business Activity Statements (BAS) and alienation of personal services income rules.
The Bill will make the Australian Securities and Investments Commission (ASIC) a very powerful agent. Under the proposals, ASIC can be law-maker, enforcer, prosecutor, jury and judge. Just look at the way the Australian Taxation Office (ATO) has exercised its regulatory and enforcement powers recently. Closer to home, remember what ASIC did to Chapel Road.
The Government promised us that the GST would be a simpler, more efficient tax system, where no one would be worse off. What are we promised with FSRB? We are promised a consistent and comprehensive framework for our industry. Are we going to get that? No! (Read my last article.) For those that didn’t read it — a sample of two examples; FSRB doesn’t cover debt products (eg gearing) and a different disclosure regime applies to declared professional bodies.
In many ways, FSRB is a cop-out by the Government. Treasury has defined advice as product advice and it has put the regulation of debt and real estate agents in the too hard basket. The Government is willing to continue reserving words like stock broker and insurance broker, but it is not willing to reserve words like financial planner or financial adviser. So we still have so-called “financial advisers” offering all sorts of get rich schemes with impunity.
Yet none of this comes out in the selling hype surrounding the FSRB. The consumer is told that FSRB provides a consistent and comprehensive framework for the financial services industry. How is the consumer to know that negative gearing isn’t a financial service? Consumers are being misled and mis-informed by the hype surrounding FSRB. No wonder the Government excluded financial services from the domain of the Australian Competition and Consumer Commission (ACCC).
As I have written many times before, ASIC has already created an atmosphere of false security in the minds of consumers. FSRB further compounds it. Consumers could believe that if they see a properly accredited adviser, who gives them advice on properly regulated products and that they are provided with the correct documentation with full disclosure, then that advice is proper and the investment is safe. And, if for some unforeseen reason, the advice or investment goes south, they have recourse to a complaints resolution scheme that will recover the situation for them.
We know the above is not true, but the consumer doesn’t. We don’t have to look further than the recent problems with tax effective products. Some consumers believed that because the products had an ASIC lodged prospectus, this meant that they were okay from a tax perspective. Why wouldn’t the consumer believe this — given that a less than scrupulous adviser may have helped them believe this?
It is reasonable for the Government to protect consumers from unscrupulous operators, but neither ASIC nor FSRB can protect a consumer from themselves. Nor should they. The consumer has to accept risk and has to understand what the risks are. But ASIC still confuses risk with volatility. The biggest risk by far, that a consumer faces, is in the selection of the adviser.
I predict that the FSRB will play into the hands of the unscrupulous operators. This is because it does not cover all financial services and is restricted to product advice. This will give the unscrupulous operator both the opportunity to structure their business to avoid the FSRB, yet give the impression that they are conducting a business that has the approval of ASIC.
When I have asked why the FSRB defines advice as product advice, the answer I get is that they had to draw the line somewhere and product advice was easily definable. I believe this definition is retrograde, as the industry has been working very hard to move away from a product focus to an advice-based focus. Now FSRB takes us forward to the past!
My solution to this is that ASIC should not authorise advisers at all, with certain exceptions, but register them and have their conduct subject to the ACCC. The exceptions are advisers who accept commissions. This structure is not unusual around the world — it is the current Australian structure that is unusual.
The solution I suggest is the US model. In the US, if you accept a commission, you must be licensed by the Securities and Exchange Commission (SEC). However, if you only charge fees, you only need to register with your state government. This is what a RIA is — a registered investment adviser. In Germany, all you need to do is register. In New Zealand, you don’t need to do anything. So why do we have our unique two-tiered structure? There are two reasons I know of: history and regulatory economy.
Over the past 30 years, there have been a series of incidents and the Government has responded with the two-tiered licensing structure. In 1995, dealers became responsible for authorising their own proper authority holders. This saved ASIC some work, as the dealer was now responsible for their advisers. As part of FSRB, employees will not need to be authorised, once again saving ASIC some work. This is known as regulatory economy. This suits the Government, as it has been starving ASIC of funds, but does it suit the industry? And does it suit the consumer?
In a funny sort of way, the FSRB attempts to carve the fee-based adviser out, via the declared professional body (DPB) mechanism. This allows for advice to be given without being authorised, but you cannot place business. Once you place business, or arrange to place business, even if you are not receiving any commissions, you have to be authorised. Once again, another example of the product focus of FSRB.
The other thing that is obvious is that the Government and ASIC want few larger dealers — once again regulatory economy. ASIC would argue a larger dealer has the capacity to have better infrastructure and has deeper pockets. But large doesn’t always make safe — take HIH for example. However, unfortunately for both the Government and ASIC, both worldwide trends and technology are against them.
US-based financial services research group Cerulli Associates sees a worldwide trend in fragmentation of distribution, not consolidation. Technology is facilitating this and back-office services providers are providing boutique dealers with as much infrastructure as is available for the larger dealers.
All parts of the financial services industry are fragmenting. There are more players in the distribution chain; a greater variety of product; new and different distribution channels; and different types of advice being provided. Very little of this will fit into the one size fits all FSRB straightjacket. All it will do is make life easier for the unscrupulous operators and harder for the honest operators.
Already we are seeing the corporate and industry superannuation funds, solicitors and company directors questioning the FSRB. If it does get up, with ASIC having the unfettered power I mentioned at the start of this article, many more people are going to be questioning it. Once again, Treasury, the architect of the FSRB, is getting the better of the Government.
