It is not difficult to establish the case for the importance of financial advice.
With an ageing population, increasing longevity, higher expectations of post retirement living standards, the complexity of financial products and services, more scams and spruikers, financial illiteracy and money stress… getting quality financial advice has never been more important. Indeed, wealth management is seen as a key area of future growth for the economy.
Given this, one has to wonder how financial planning in Australia finds itself mired in regulatory uncertainty and persistent distrust by the community. This is fuelled by high profile failures such as Storm Financial, Commonwealth Financial Planning and Opes Prime.
These failures led (under the previous Labor government) to the Future of Financial Advice (FoFA) reforms which aim to improve the trust and confidence in financial advice while improving availability, accessibility and affordability.
Central elements of this included the banning of conflicted remuneration, a duty for advisers to act in the best interests of clients, an obligation to renew ongoing fee agreements with clients, and further powers to the regulator (ASIC).
A long path to change
The Abbott government has since moved on pre-election views that the laws were too restrictive and would unreasonably increase the cost (and therefore limit access to) advice.
After the replacement of the relevant minister, Arthur Sinodinos, a Senate inquiry, a move to regulate rather than legislate, Labor’s disallowance motion and finally a government deal with the minor parties in the Senate to vote down said motion, this is still not finalised.
The government now has a further 90 days to produce the revised regulations. And do not forget the ongoing Financial System Inquiry (FSI) and the newly established Parliamentary Joint Committee Inquiry into proposals to lift professional, ethical and education standards in the financial services industry.
It appears however that the best interest duty, the ban on conflicted remuneration (including on general advice) and increased transparency will also be maintained. And a register of financial advisers will be created.
So, what does all this mean? Will the amended FoFA deliver on the stated aims?
First, it must be noted that there are many planners in Australia that have been and will continue to provide outstanding service to assist all manner of clients in all manner of situations. This is often lost in this debate and we would be well served to learn from how they operate.
Second, the inherent conflict in FoFA must also be acknowledged. The difficulty of achieving both an increase in quality and an increase in access/affordability is almost impossible through a political process. FoFA was always going to be a difficult balancing act.
FoFA will not fix the trust problem
Third, the limited scope of FoFA means it will not in and of itself deliver quality advice and consumer trust. Critical issues not dealt with include the financial capability of consumers, the training requirements (both entry level and ongoing) for financial planners and remedies for aggrieved clients.
The management of vertically integrated business models, the different forms of advice (product advice vs personal advice), codes of professional/ethical conduct for advisers, and the role of the regulator are also not addressed.
Finally, when considering these issues the fragmented nature of the industry becomes apparent.
On one hand a financial planner may sign up to an enforceable code of conduct, have tertiary and professional qualifications in financial planning, undertake ongoing professional education, have professional indemnity insurance and experience gained within a professional practice environment. Another planner may meet ASIC requirements to give advice with only a few weeks of training, no adherence to a code of conduct and no related experience. FoFA does not deal with these issues.
So who wins and losses from the Senate deal? No one that matters – FoFA is a step in the right direction but the details of the regulations have not been produced. The key elements of FoFA appear to remain, yet it still ignores key issues, and the regulatory uncertainty remains.
Ironically, some sections of the industry have enhanced professional standards by addressing many of these issues without the long running political and regulatory intervention. This is a lesson for all.
The government might consider an alternative approach that partners with the industry to develop and foster professional behaviour, culture and standards. A more facilitative approach would pick up where FoFA fails to deliver and build upon the great work done in some sections of the industry already. If the revised FoFA, the new PJC Inquiry and the FSI start to support and cooperate in this regard, the future for Australians may be brighter.
Mark Brimble receives funding from the Financial Planning Education Council research grants scheme. He is Chair of the Financial Planning Education Council, Co-Chair of the Financial Planning Academics Forum and a member of CPA Australia, FINSIA and FPA Australia.
Image credit: Flickr/Imosaad