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Financial advice quality a ‘market failure’

The chair of the FPA’s professional disciplinary panel has described the “variable quality of Australian financial advice” as a “market failure”, calling for mandated additional adviser education.

In a submission to the Financial System Inquiry (FSI), UNSW professor of law Dimity Kingsford Smith drew attention to what she sees as a “market failure” in the Australian financial planning market, arguing the FOFA legislation is not sufficient to weed out systemic conflicts.

The academic, who also heads the Financial Planning Association’s internal Conduct Review Commission, said her assessment of the financial advice sector stems largely from the “shadow shopping” exercises conducted by ASIC and the fact that “enforceable undertakings” have been entered into by major players within the industry.

“These market failures clearly require regulatory responses other than disclosure: mandated improvement in training and conduct standards and a national examination would bring Australia into line with comparable countries,” Professor Kingsford Smith wrote.

“The Future of Financial Advice (FOFA) reforms have gone some way to dealing with concentration and conflicts of interest: the ‘best interests’ and ‘client first’ tests and curbs on conflicted remuneration, give grounds for optimism.

“However, unless the values embedded in these rules are internalised by individual advisers through greater professionalisation (higher standards for entry, training, supervision, discipline and exit) they will remain ‘regulation on the page’ and not ‘regulation in action’.”

Echoing a number of other submissions to the FSI – including an explosive letter from AMP-linked planner Rhys Wood – Professor Kingsford Smith also drew attention to the “remuneration incentives” existing within some licensees “driving a distribution culture” which is undermining individual adviser responsibility.

In addition, the submission suggests the “market failures” also stem from “under-investment in training and supervision”, particularly in terms of licensee recruitment.

At the outset of the submission, Professor Kingsford Smith makes clear the views in the submission are reflective of her “personal professional capacity” and do not stem from her capacity as chair of the Conduct Review Commission of the FPA or as a member of the New Zealand Financial Markets Authority Code Committee.