The Australian Bankers’ Association and Financial Services Council announced last week plans to establish an industry-led regulatory body for financial planners. However, whether such a body will be effective in lifting the beleaguered reputation of the industry remains questionable.
It is already facing numerous challenges.
Australian real estate agency Ray White recently said it would establish a wealth management arm to extend its existing mortgage broking business. This announcement, along with the news that several other players are considering moving into financial planning, raises concerns about the quality and independence of the financial advice provided under such an arrangement.
These concerns are hardly surprising given the recent scandals at the wealth management arms of large and respected Australian financial institutions, the Commonwealth Bank and Macquarie Bank. Indeed, a Senate Committee in 2014 described the behaviour of some advisers at Commonwealth Financial Planning Limited, part of the Commonwealth Bank Group, as “unethical, dishonest, well below professional standards and a grievous breach of their duties”.
If the Commonwealth Bank and Macquarie Bank can’t manage to provide good quality financial planning advice then what can the public expect from a sales-based organisation like Ray White?
When reviewing the recent government-driven changes to the financial planning industry, it seems likely Ray White is just the first of many new industry entrants.
Ongoing reforms to the industry
Successive governments have tinkered with the financial planning industry. The stated goal has been to improve access and affordability of financial advice to retail clients.
Reforms started with the Financial Services Reform Act 2004 and have continued through to the recently implemented Future of Financial Advice (FoFA). Regulators have enshrined the term “financial planner” in law, established a “best interests” duty for planners to their clients and banned conflicted remuneration for financial advice to retail investors.
One key change introduced post-FoFA has been the concept of “scaled advice”. Scaled advice is advice that is limited in scope. It emerged as a response to the historically high costs of financial advice. Individuals were also wanting to obtain advice on specific issues and didn’t want to be forced to pay for a comprehensive financial plan.
Subject to a number of disclosures and with client agreement, a financial adviser can now provide advice on a single issue such as retirement planning.
Scaled advice is subject to the same best interests duty as comprehensive advice and ASIC has issued a number of regulatory guides on the topic.
A report prepared for the Industry Super Network predicts financial advice costs will fall as a result of these reforms. There will be a shift towards less costly scaled advice and fees for complex advice will be more transparent.
More changes, more market players
These reforms are also responsible for encouraging new market entrants. Now that advice can be given on specific issues, wealth management divisions of organisations like Ray White can find synergies with their business to provide advice on property investment.
Again the conflicts are still obvious. However, though the extent and price of the financial advice may fall, it shouldn’t mean that quality does too. As the Australian Securities and Investments Commission RG244 points out, all financial advice is scaled in scope - it’s just a question of how the scaling is achieved.
To ensure that advice quality does not fall further with the influx of new entrants to the market, higher educational and professional training standards for planners must be established. Currently, the low RG146 standard required means that in some cases new financial planners receive less education and training than hairdressers.
Continuing professional development requirements have also fallen short. Recent revelations of exam cheat sheets used for in-house professional development exams at Macquarie Wealth suggest these requirements are far from stringent.
Consumer confidence has already been shaken and the financial planning industry needs to lift its game if it is to expand as predicted.
An initial step has already been made with the industry recognising it has a problem.
The Australian Bankers’ Association and Financial Services Council initially lobbied for the establishment of an independent statutory body to regulate the industry. Both argued that self-regulation is no longer a credible option.
Finance Minister Mathias Cormann rejected the idea. The banks are now left to pursue the establishment of an industry-led body to set and monitor professional standards for the financial advice industry.
It seems at least there will be some improvement in oversight of the industry’s professional standards. However, there are plenty of uncertainties.
New market entrants facing similar conflicts between remuneration and advice will add further pressure on the industry. An industry-led regulatory body may also not have the same incentives to increase training requirements for planners. What is certain is the level of education and ethical training required for planners needs to increase in order for the industry to avoid further scandal.
Julie Walker has received funding from the Institute of Chartered Accountants in Australia. She is affiliated with the Chartered Accountants Australia and New Zealnd.