Over Regulation

In its paper to the Royal Commission, the Australian Government Treasury stated: “a key challenge in regulating the financial services sector is to find the right balance between consumer protection and ensuring that consumers have access to affordable financial advice”. After a decade of relentless change in the regulatory landscape, it is time to assess whether the policymakers have been successful.

The decade of reform was kicked off with the future of financial advice (FOFA) reforms which came into play in 2012. The main components of this legislation included a Best Interests obligation, a ban on conflicted remuneration, an increase in transparency through a requirement that providers of financial advice obtain client agreement to and disclosure of ongoing advice fees. Whilst the best interests duty was probably the most contentious given the fiduciary duty that was previously established by law in a relationship between adviser and client it probably shouldn’t have been. To me to stand out inefficiency was the FDS and opt-in regime which ridiculously excluded grandfathered commission.

If in fact there was already a fiduciary duty obligation by advisers than the reality is was the existing law not being enforced as opposed to the existing law being not sufficient?

Before any review of the very substantive FOFA reforms were undertaken there were reports produced by ASIC and John Trowbridge which saw the rise of the life insurance remuneration reforms (LIF) based in large part to pre FOFA advice. The main outcome of which was a reduction in the level of commissions paid to those that provide financial advice and were remunerated through life insurance products commission.

The trend which has continued unabated over the last 10 years is that advisers are seeing their compliance requirements hence costs increase dramatically whilst the remuneration they have been able to receive through regulation and market forces has decreased.

We have now seen the establishment of the financial adviser’s register and the development of professional standards for financial advisers. This provides further imposition on the advisers time and the costs that are required for them to be able to provide their advisory service. This cost ultimately needs to be paid for by the consumer. In the last couple of years, we have seen thousands of financial advisers leave the industry and by 2026 we will see a raft of additional advisers leave as they will have failed to satisfy the educational requirements.

The other side of the same coin is that people that wish to become a financial adviser now need to have a degree and undertake a professional year. Given the publicity surrounding financial advice over the last decade, I don’t think there would be too many twentysomethings willing to invest in education to become a “dirty” financial planner. I hope I am wrong.

Given the demand and the supply equation that will unravel up until 2026 and beyond the regulatory environment has basically created an “advice supply crunch” that will not be met. Even during the recent Covid-19 crisis, Senator Hume decided that non-licensed accountants could provide advice around early access to superannuation as a means of keeping the advice affordable and accessible. Besides making the FASEA Code of Ethics regarding competence looking like a bad joke this was a concession that the reforms are not having a positive impact on the affordability and provision of financial advice to Australian consumers.

More recently the FASEA code of ethics has been implemented and notwithstanding you would struggle to find a more disjointed process in Australian political and commercial history it is hoped that this will bring more trust to the industry. In saying this there does need to be changed as currently, the Code of Ethics conflicts with the underlying legislation. Where the Code of Ethics could come in to solve the problem of affordability and regulation is that notions like “informed consent” could replace a very prescriptive and convoluted approach as currently legislated regarding the FDS and opt-in. If these measures were left to the market it would produce a more efficient outcome and that would be beneficial for consumer, industry and our country.

The standout reason that I think there has been a lot of wasted time and energy regarding the changes over the regulation landscape over the last decade has been as a direct result from a low level of involvement from practitioners. Unfortunately, financial advisors have been grossly let down by their professional associations who have failed time and time again to present the message to those at the political table on behalf of their members. The most obvious example of this is where both the FPA and the AFA endorsed the LIF reforms as presented by the FSC. As soon as the politicians receive this endorsement from “the industry” along with other groups representing the consumer they are presented with a slam dunk for policy changes given all parties have agreed.

Whilst difficult to see any dramatic change in the regulatory regime in the short term from where we are in my opinion it is inevitable that over time this will happen. To deprive a large number of Australian consumers of accessing affordable financial advice is a situation that is unreconcilable and will be extremely detrimental to our country’s future prosperity.