A year in review

2021 has not been an easy year. Least so for professionals across Sydney and Melbourne who endured over 100 days of lockdown. But not only was the year littered with COVID-related challenges, it was generally a tough one for the industry and brought about a record exodus of advisers, plunging numbers to record lows.

As we bid farewell to 2021 and prepare to welcome 2022 with open arms, we take a look at some of the top events that rocked the financial advice industry over the course of the last 12 months.

Annual renewals bill passes Parliament

The government’s second tranche of royal commission legislation dealing with annual renewals, disclosure of lack of independence and restrictions on deducting advice fees from super passed the Parliament in February.

The Financial Sector Reform (Hayne Royal Commission Response No. 2) Bill 2020 was listed as non-controversial legislation, but ifa understands that following advocacy from the advice sector, crossbench senator Rex Patrick had proposed some last-minute amendments to the bill. However, Mr Patrick’s amendments were eventually withdrawn and the bill passed the upper house without issue.

Commenting on the passage of the legislation, Minister for Superannuation, Financial Services and the Digital Economy Jane Hume said the changes were “an important step in restoring trust and confidence in Australia’s financial system”.

The laws, it was said earlier this year, could cost the industry $28 million in terms of upfront and annual compliance expenses.

Melissa Caddick found dead

In sombre news that further complicated the mystery of a missing, allegedly fraudulent businesswoman, in February, the body of Melissa Caddick was found at a beach along the NSW South Coast.

Ms Caddick, while posing as an adviser, allegedly defrauded investors out of more than $20 million, according to law firm Bridges Lawyers.

ASIC had raised concerns that her firm Maliver might have been providing financial services without an AFSL, or with the AFSL of another company without authorisation, to unlawfully deal with investor funds.

The Federal Court made interim orders against Ms Caddick and Maliver in November 2020, including a prohibition against her leaving Australia and removing assets held in Australia.

But Ms Caddick had not shown at the first case management hearing of the matter, having vanished.

In August, the corporate regulator came under fire for taking almost a year to act in freezing Ms Caddick’s assets after the first complaint against her was made.

During a parliamentary committee, it was revealed that although ASIC was first made aware of a complaint against Ms Caddick in November 2019, it did not freeze her assets until late 2020.  

Hume concedes FASEA strangling industry

In April, Ms Hume said what all advisers had been waiting to hear, that FASEA was strangling the industry.

Ms Hume conceded the implementation of the FASEA reforms had a devastating effect on the business environment for the advice industry, suggesting the government will aim for “a balanced approach” when it assumes the authority’s standards-setting responsibilities.

“FASEA was established in order to implement standards including education requirements, a code of ethics and a program of continuing professional development, including an exam that represents a common benchmark across the industry,” Ms Hume said.

“But FASEA only focused on one piece of the puzzle, that was creating standards and maximising the quality of advisers. They didn’t focus on keeping the costs of doing business low or making advice readily accessible to consumers.”

Not long after Ms Hume’s surprising admission, the federal opposition had urged the advice industry to push for a parliamentary inquiry into the failings of FASEA.

Addressing the Stockbrokers and Financial Advisers Association 2021 Conference in May, Labor financial services spokesman Stephen Jones said he believed it would be appropriate for the parliamentary joint committee on corporations and financial services to conduct an inquiry into the standards body, which is due to be scrapped at the end of this year.

FASEA to amend Standard 3

In June, the FASEA debate continued as the standards authority committed to consulting on the contentious Standard 3 of its code of ethics before it is wound up at the end of 2021.

FASEA’s comments came in response to questions on notice from Liberal senator Slade Brockman, who blasted Standard 3 of the code for amounting to “a complete ban on all conflicts of interest”.

“Will FASEA seek to amend Standard 3 before you cease operations?” Senator Brockman asked.

While the standards authority took issue with Senator Brockman’s interpretation of Standard 3, it said that “FASEA has plans to consult on Standard 3 of the code this year”.

“[FASEA] will continue to work on enhancing and refining it before operations cease,” the body said.

FASEA referred to 37 submissions it had received around its latest code of ethics guidance, many of which had pointed to the urgent need to refine the wording of Standard 3.

Government announces ‘limited’ FASEA exam changes

A few weeks later, FASEA announced some welcome exam changes, noting that advisers who had previously failed the FASEA exam twice would be offered a “one-time, limited extension into next year”.

“There will be at least one further opportunity to pass the exam offered in 2022 for those who qualify for the exemption,” Ms Hume said.

“Costs, and timings, for the 2022 period have yet to be confirmed.

“If advisers have not sat the exam twice prior to the end of this year, no extension will be granted.

“Please do not delay — these exemptions will be very limited. Sit the exam as soon possible. And thank you to the thousands of advisers who have successfully sat the exam — you are part of a high-quality, professional industry of which we can all be proud.”

And when it comes to costs, in September, news surfaced that the FASEA exam fee would be increasing as part of government’s Better Advice Bill draft regulations.

The bill, set to expand the role of ASIC’s existing Financial Services and Credit Panel to operate as the single disciplinary body for financial advisers, would also hike the exam fee to $948 (currently $540) while an additional $218 fee would apply for the corporate regulator to “review the marking of one or more answers to the written-style responses (non-multiple-choice questions) in an exam”.

Speaking to ifa, AFA general manager Phil Anderson said that the industry body has been concerned about a potential fee increase.

“We had feared that there would be an increase in the cost of the exam in 2022, as a result of the reduction in the number of advisers who will be sitting it,” Mr Anderson said.

“We are, however, concerned by the scale of this increase from $540 (plus GST) to $948. That is a very significant increase.”

New year, new super changes

The new financial year kicked off with a lift in super guarantee to 10 per cent of workers’ base salary. 

Moreover, the Your Future, Your Super reforms were enacted and implemented this year, causing much commotion among super funds.

Namely, in August, the results of the first annual super performance test were made public, revealing that Australia’s worst 13 funds hold $56.2 billion in investments and almost 1.1 million accounts.

As part of the Your Future, Your Super reforms, the government had mandated a performance test to ensure members are aware of how their fund measures up on key performance metrics.

APRA’s inaugural results showed 76 MySuper products have been assessed, with at least five years of performance history against the objective benchmark. A total of 13 products failed to meet this benchmark.

Among the 13 funds deemed failures are AMG Super, ASGARD Independence Plan Division Two, Australian Catholic Superannuation and Retirement Fund, AvSuper, BOC Gases Superannuation Fund, Christian Super, Colonial First State FirstChoice Superannuation Trust, Commonwealth Bank Group Super, Energy Industries Superannuation Scheme-Pool A, Labour Union Co-Operative Retirement Fund, Maritime Super, Retirement Wrap, and The Victorian Independent Schools Superannuation Fund.

As well as scrutinising the plans of the 13 funds that failed the test, APRA noted at the time that it was engaging with trustees at risk of failing the performance test next year, to ensure they take the steps necessary to improve performance, and to understand their contingency plans. 

The Your Future, Your Super reforms are estimated to save Australian workers $17.9 billion over 10 years.

ASIC releases results of affordable advice consultation

And on the second day of the new financial year, ASIC released the much-anticipated feedback from the financial advice industry on how best to promote access to quality advice after consulting with over 450 financial advisers, licensees, industry associations and stakeholders.

Respondents identified overheads and fixed costs, SOA preparation, and rising regulatory and governance costs as contributing factors to the cost of advice, while the biggest obstacles in providing limited advice were identified as:

• Too costly to provide
• Regulatory requirements for comprehensive and limited advice are the same
• Concerns about meeting the FASEA Code of Ethics
• Some advisers unclear about regulatory requirements for limited advice
• Advisers restricted from providing limited advice by licensee or other party.

Meanwhile, of 215 respondents, 148 said they don’t provide digital advice and have no intention to due to lack of demand, consumer preference for human adviser and compliance concerns.

Government releases further royal commission legislation

A few weeks later and following pressure to act, the government released new legislation to implement a further seven recommendations of the royal commission, including the establishment of a compensation scheme of last resort.

The CSLR laws were originally slated for release in December last year but were pushed back to June this year due to the COVID crisis, to the disappointment of consumer advocacy groups.

The CSLR have been at the centre of much discussion since July. In August, eight of Australia’s biggest financial advice industry associations united to oppose the design of the CSLR, noting their concern that the scheme may not be used purely as a last resort.

“The federal government made a commitment to reducing red tape to cut the cost of doing business. The proposed scheme will add significant cost and complexity, which is at odds with this commitment,” Chartered Accountants Australia and New Zealand, CPA Australia, Financial Planning Association of Australia, Institute of Public Accountants, SMSF Association, Association of Financial Advisers, Stockbrokers and Financial Advisers Association, and the Boutique Financial Planning Principals Association said at the time.

“ASIC fees for financial advisers have increased by more than 230 per cent over the past three years. Most financial advisers are sole traders or small businesses who cannot afford the rising costs associated with increased regulation. Others are authorised representatives of groups who participate in other compensation schemes, which adds duplication.

“COVID impacts and Australia’s ageing population mean the nation’s advice needs are growing, yet escalating regulatory costs have already caused a mass exodus of advisers from the industry. The total number of financial advisers has fallen below 20,000 and will not be enough to meet this increasing demand. We anticipate the proposed scheme will further reduce adviser numbers.”

In September, the Association of Independently Owned Financial Professionals asked the government for urgent clarification of the exclusion of banks from the CSLR, a move perceived as an attempt to abrogate their past and future obligations. And a month later, 15 organisations including the Association of Financial Advisers, CHOICE, SMSF Association and the Financial Planning Association of Australia joined forces to push for the expanded scheme.

“Consumers purchase financial services and products from a broad range of product providers, manufacturers and professionals,” FPA CEO Dante De Gori said.

“They deserve the same protections and access to compensation, regardless of where they make their purchase. A last resort compensation scheme must operate equally and fairly across the entire sector to ensure consumers have faith in the system.

“The government must ensure that those product manufacturers who profit from consumers’ investments also contribute to compensation.”

Treasurer announces ASIC levy relief

We said goodbye to winter with very welcome news from the government.

Namely, on 30 August, Treasurer Josh Frydenberg announced that the cost of levies charged by ASIC would be reduced.

The relief saw ASIC levies charged per licensee remain at $1,500 — a substantial reduction relative to the level estimated in ASIC’s 2020–21 Cost Recovery Implementation Statement of $3,138 per adviser.

This ultimately saw ASIC levies charged for personal advice to retail clients restored to their 2018–19 level of $1,142 per adviser for the next two years (relating to 2020–21 and 2021–22).

“The sub-sector as a whole will pay an estimated $46 million less in ASIC levies in 2020–21 alone, with further savings flowing in 2021–22,” the Treasurer said at the time.

Moreover, the Treasurer also confirmed his office would kick off a review of the ASIC industry funding model in 2022 to ensure “it remains fit for purpose”.

Onerous October dawns for red tape-laden sector

But the good news did not warm the industry for too long.

As the October sun dawned, a raft of new Hayne-made regulations commenced for life insurers, fund managers and financial advisers.

These include new rules for individual disability income insurance; new reference checking and information-sharing guidelines; new breach reporting requirements; new “duty to take reasonable care not to make a misrepresentation” instructions; anti-hawking reforms; deferred sales for add-on insurance; and internal dispute resolution.

Slated to improve consumer and business outcomes, the new changes were described as the most significant and wide-ranging set of reforms, ever, for a sector already laden with layers of red tape.

And while all are considered disruptive in their own regard, none more so than the breach reporting requirements, the design and distribution obligations (DDO) were said to be among the most onerous.

In a bid to stall their introduction, the AIOFP launched a petition asking the government to press pause on DDO until mid‑next year.

“The latest consent forms and DDO legislation have been introduced during the worst of COVID where implementation confusion is widespread among product providers, regulators, advisers, and expensive for consumers. This has been well documented in recent times,” the AIOFP’s petition justification read.

And while the Financial Services Council wasn’t as forward in its messaging, it did refer to DDO as a “red-tape burden”.

“The red-tape burden from this raft of reforms is significant and can add to the cost of delivering products and services,” FSC CEO Sally Loane.

Conclusion

These were just some of the big news items that rocked the industry this year. As we head towards 2022, ifa would like to take this opportunity to wish the entire industry a merry Christmas and a happy New Year!