ROBERT BROWN. Financial advice reform – when will the journey end?

Jan 27, 2017

The financial advice industry is on a journey towards professionalism”. While I can’t say exactly what this tired assertion means, I can say that it is invariably offered as an impatient response to pesky commentators who dare to suggest that the latest round of reforms (responding to the latest round of financial services industry scandals) may not achieve the results that consumers deserve.  

The attraction of the assertion (at least in so far as the industry is concerned) lies in its very uncertainty. No one knows how long the journey will take, nor its ultimate destination, nor the cost of getting there. But we can be certain about one thing. The cost of the journey will be considerable, both in lost reputation and dollars.

Take, for example, the current proposed reforms mandating a university degree, a professional year, an exam, continuing professional development and the adoption of a Code of Ethics for all licensed financial advisers. Surely, no sensible person could object to these reforms in principle; but their (so far disclosed) cost to the industry is noteworthy, particularly where the declared objective of the government proposing them is to cut regulation and red tape. According to the Explanatory Memorandum attached to the Corporations Amendment (Professional Standards of Financial Advisers) Bill 2015 “a draft regulatory costing for the reform package has been prepared, consistent with the government’s Regulatory Burden Measurement Framework… is estimated that the increase in annual compliance costs for the industry as a whole will amount to $165,089,720”. I’m impressed, if only by the precision of this costing!

So presumably, just as financial advisers talk about “good debt” and “bad debt”, this new regime is an example of “good regulation”. As a result, consumers, who are likely to end up paying for most of the increase in costs (one way or the other), should expect that the proposals will make a significant and positive difference to their experiences in dealing with financial advisers. Will that happen? Perhaps. However, it won’t happen just because financial advisers will be required to lift their academic standards. This was demonstrated not long ago in the accounting profession when large numbers of its grey-suited university-educated “professionals” were transformed overnight into enthusiastic sellers of agri-business schemes in return for monetary rewards that were so substantial that timeless ethical principles around conflict avoidance were temporarily set aside.

This doesn’t mean that university degrees should not be mandated. They should be, but government and the industry should not overstate their benefits to consumers of financial advisory services. Of course, it is reasonable to assume that as a general rule a financial adviser with a relevant university degree will be more technically competent than a financial adviser without one, although there will be many exceptions to this rule.

However, mandatory education misses the point. The key to genuine consumer-friendly reform lies not in academic achievements, as desirable as they are, but in the adoption of ethical principles that remove or avoid (and don’t just disclose) remuneration conflicts. The fact is that the only thing separating a profession from a conventional occupation is its ethics. A profession must always serve the public interest above the commercial interests of its members. Therefore, it will be the principles adopted in the mandated Code of Ethics that will determine how directly and how soon the industry completes its tortuous journey to true professionalism.

Ironically, most of the regulatory red tape about which financial advisers have complained for decades, including the controversial Future of Financial Advice (FOFA) reforms of 2013, could have been avoided if only the industry had adopted and enforced its own self-regulated code of ethics which eliminated all forms of conflicted remuneration and product sales incentives. Instead, the industry has obfuscated and deflected throughout the “journey” in the futile hope of achieving the best of both worlds. This has created and sustained a hypocritical and conflicted product sales culture that has caused widespread mistrust of the industry’s participants. And in the worst cases, it has led to highly publicised scandals, some of which have been so tragic and widespread that governments have been forced to act in the only way they know how, that is, through the imposition of intrusive, complex and costly regulations.

Sadly, every legislative attempt to solve the problem has proved to be inadequate because it has failed to comprehensively address the remuneration issues, principally due to political pressures on legislators to compromise them (FOFA is a good example). However, in 2017, with the advent of a legislatively-endorsed Standards body with the responsibility to create a mandatory Code of Ethics for financial advisers, it’s hard to see how the point can be missed or avoided any longer.

The risk here is that the Standards body will not prove to be independent of the industry’s culture and influence, a problem that was amply demonstrated in 2013 in the failed attempt by the accounting profession’s independent standard setter to mandate conflict-free remuneration principles for accountants offering financial planning services. I trust that the new Standards body will take heed of this case study in flawed and ineffective self-regulation.

Whether we like the idea or not, the proposed Standards body presents an opportunity to achieve genuine and permanent cultural change in the interests of consumers. However, if the industry chooses to pay lip service to meaningful reform by (inter alia) seeking to control or improperly influence appointments to the Standards body, then the conflicted status quo will remain substantially unaltered, the industry’s flawed culture will continue and these expensive reforms will achieve very little, other than imposing an estimated $165 million of additional compliance costs on the industry and its clients.

Furthermore, future governments, in response to continuing scandals and mistrust, will eventually be forced to act to remove the final vestiges of self-regulation on an already heavily regulated industry. However, if the industry were to show genuine leadership by supporting both the spirit and substance of the proposed Standards body, especially in the creation of a code of ethics that removes all forms of conflicted remuneration (not just some of them), it would be collaborating in the creation of a profession whose interests would be truly aligned with the public interest. This must always be the sole and uncompromised objective of any true profession. Is such an outcome likely? I would like to be optimistic, but the industry’s long and successful history of resisting necessary reforms suggests otherwise.

Robert M. C. Brown AM BEc FCA.  Robert Brown is a chartered accountant, Chair of the Australian Defence Force Financial Services Consumer Centre, a member of the Australian government’s Financial Literacy Board, a member of ASIC’s Consumer Advisory Panel and a Director of Financial Literacy Australia Limited.

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