Public discussion over the last few months has taken the financial planning sector back to a well worn debate about moving to a system where anyone who wants to provide financial advice is registered or licensed individually. In this two-part editorial Lifespan Financial Planning Chief Executive Eugene Ardino argues that instead of moving to a more costly self-registration model, the advice sector should focus on reducing costs and red tape relating to advice delivery to make its services accessible to more Australians.
The regulation governing financial advice delivery and disclosure has become more and more onerous over the past 10 years. The removal and reduction of advice funding mechanisms and an increase in compliance requirements for ongoing fee arrangements has further exacerbated the problem.
All of this has led to a situation where advice is fast becoming a luxury only accessible to the wealthiest 5% of Australians.
If it is true that all we care about is growing our businesses, advisers should celebrate these changes. The pool of potential clients will shrink drastically, however, professionalisation will cause trust in financial advisers to rise, encouraging more consumers with the capacity to pay high fees to seek advice.
Combined with an ever-increasing compliance burden, plummeting adviser numbers will create an environment where businesses can charge much higher fees, and therefore service a smaller number of higher fee-paying clients.
However, this will have adverse ramifications for most Australians. After all, the complexity of tax, superannuation, Centrelink, aged care and estate planning laws applies to everyone, not just the top 5%.
So too does the problem of navigating one's way amongst thousands of potential investment and insurance options. It is imperative that as many Australians as possible receive quality financial advice. Naturally this should positively impact the cost of social welfare in the long term.
Now that the Royal Commission has identified the misconduct in our industry and ASIC is taking action against the perpetrators, it is simply a no-brainer that the first and most important task of future financial advice reform should be to make advice less expensive and therefore more accessible to Australians, so long as consumer safeguards are not compromised.
This was one of the goals of FOFA, and under its terms of reference the recommendations of the Royal Commission were required to be assessed with regard to their potential impact on advice costs and other aspects of accessibility.
However, in my view, it is clear that we are starting in the wrong place by focusing on licensing structures. I believe the government must turn to common sense ideas to rebuild this crucial advice sector to make it much easier for clients to receive any financial advice they need and for advisers to be able to deliver it at a significantly lower cost.
Recommendation 2.3 of the Royal Commission suggested the Safe Harbour provision be repealed if after a review there is found to be no clear justification to retain it. This is unintended deregulation because the recommendation was made in order to remove a box-ticking process advisers can go through to demonstrate the Best Interest Duty (BID).
However, its repeal would actually remove a process auditors use to demonstrate that BID has not been followed, even in situations where there is no conflict of interest issue and the client is better off as a result of the advice.
Apart from this recommendation - which will accidentally result in deregulation - I challenge anyone to find just one recommendation from the Royal Commission, or one new piece of legislation introduced by or since FOFA that has increased the accessibility of advice. The dramatic increase in cost and decrease in accessibility of advice over the last 10 years is a real failure of both processes.
We are all searching for ways to increase the accessibility of advice to Australians, and perhaps even to simplify the sector's regulatory framework. The question is, how do we reduce the cost of delivering advice without causing detriment to consumers?
Could this largely be achieved by forcing all financial advisers to be registered or licensed individually? Or should we look at the advice delivery process first? If we do decide to deregulate the advice delivery process, would it make sense to reduce the level of oversight at the same time?
Under the current regulatory regime self-licensing would drive up costs, because having an AFSL is a high fixed cost. I do not think many are advocating for this approach, precisely because of the higher cost factor.
Therefore, what is really being suggested by those who want self-registration or licensing is to abolish the entire AFSL regime and transform it into something much softer and simpler.
To achieve this the government must either pick up all the rules that exist under the Corporations Act and move them to another body (which seems redundant), or simply create a licensing system (regardless of the name it is given, that's what it is) with fewer rules.
By killing a system where advisers can join an AFSL which is responsible for supervising, monitoring and being accountable to clients for the actions of their advisers, a very important extra (not duplicate) layer of oversight, and source of training, resources, dispute resolution and compensation is removed.
There is very little duplication in what ASIC and AFSLs do. If the government removes either and wants the same level of oversight for the profession, it will need to replicate it, which is unlikely to reduce costs or increase access to advice.
Furthermore, any costs saved by restructuring the licensing regime in this way (assuming the new regime is softer) will be offset by cost increases, with advisers to feel the pinch when they lose access to the aggregated pricing of essential things like PI insurance, software, financial products and investment research to name a few which they benefited from as part of an AFSL.
The reality is that the major changes to the Corporations Act which have driven up the cost of advice are those that relate to disclosure obligations, the advice delivery process, and the loss of future revenue certainty for the delivery of ongoing advice. They are not related to the licensing structure.
The government will not balance any of these drivers by forcing advisers to self-register or selflicense. The licensing regime has not been impacted by these forces apart from the increase in training, supervision and monitoring costs that licensees incur to ensure its advisers are meeting the requirements. In fact, by reducing red tape around advice delivery, you will also reduce the cost to licensees.
The most important and urgent challenge our quickly contracting industry faces is not that of overhauling the licensing regime. Rather, it is the need to simplify the advice process and lower its cost whilst maintaining appropriate consumer protections. Not only should this attract more clients, but it will make the industry more attractive to new entrants, a serious problem which we've barely started to deal with.
In my next article, I will outline how I think we can reform advice to make it accessible to the majority of Australians.