The Corporations Amendment (Professional Standards of Financial Advisers) Act 2017 and the Corporations Amendment (Life Insurance Remuneration Arrangements) Act 2017 threaten to profoundly change our industry.
Whether you consider these to be "landmark reforms" or "ill-formed, illogical and untested” proposals (and there have been commentators in both camps) may simply be a matter of perspective and self-interest. Regardless of your position, it’s important to consider whether, and to what extent, these reforms will address the root causes of the advice failures they aspire to address.
Is professionalism the problem?
Unfortunately, neither of these acts will address the real challenges to the emergence of an advice profession – conflicts, capability and confidence. Neither act addresses the elephant in the room - vertical integration and the insidious impact it has on advice quality. The acts focus on agents, rather than principals, and their focus is deliberate. In fact, their emphasis on professional standards is an implicit acceptance of the "bad apples" theory too often used to normalise cultural failures.
The Professional Standards Body
The Professional Standards Act is transformative. It outlines restrictions on entry, new requirements for formal tertiary qualifications and imposes a period of supervised practice on new advisers. These are laudable initiatives, modelled on existing professions, but will they really address and improve adviser capability or will they simply entrench existing interests? From my perspective, this is the real challenge.
The act requires the creation of a new delegated authority to do the heavy lifting and fill in the spaces left by the broad brush strokes of the legislation. This new Standards Body must (after consultation):
- approve bachelor or higher degrees (equivalent and relevant qualifications);
- approve the exam;
- set the requirements for work and training;
- set the CPD requirements;
- specify a word or expression to refer to a provisional relevant provider; and
- make a Code of Ethics.
The scope of the Standards Body's work, and the compressed time frame in which they need to deliver on these objectives, should concern industry participants. The main reasons are threefold.
First, the compressed timeframe and ambitious agenda increases the likelihood that their decisions will be driven by their timetable and not allow for adequate consideration and analysis. Change does not occur without consequences and the Standards Body requires sufficient time to anticipate, and appreciate, the real cost and impact of their decisions. David Chaplin's analysis of New Zealand's investment adviser market identified that between 2013 and 2016, over 16 per cent of Authorised Financial Advisers left the industry as a result of regulatory change. Given that the Professional Standards Act is a more significant change, we might realise an even greater impact on our adviser numbers in the lead up to 2024.
Second, the obligation to consult with the industry on the proposed changes is undermined by the act's recognition that a failure to consult does not invalidate any legislative instruments made by the Standards Body. It's a perverse but not unusual approach. I once attended an Industry Working Group function where the regulator's representative angrily declared that she was there to consult, not to listen. Unfortunately, this may quickly become the norm for the body's engagement process.
This leads us to the composition of the body itself. As you may also be aware, the new Standards Body will have nine directors appointed by the minister with:
- at least three directors with experience in financial services;
- at least three directors with experience “representing consumers of financial services”;
- at least one director with experience in ethics; and
- at least one director with “experience in designing, or the requirements of, education courses or qualifications.
This raises the third potential risk. It's likely that the Standards Body will, for a variety of reasons, be stacked with the "usual suspects"; predictable players with entirely predictable views and entrenched partisan positions. Although current employees and officers of the Associations are precluded from consideration, it seems likely that former employees and experienced advocates will be appointed. While it makes a degree of sense to nominate known qualities with well-defined positions, this safe and pragmatic approach sacrifices the real opportunity for innovation and effective change.
Unfortunately, we may have limited capacity to influence the Standards Body but we do have both the opportunity and obligation to shape the future of continuing professional development. Don't miss your chance to help guide the future of our industry. Lobby the minister. Write to your local member. Talk with your association. Argue with your peers.
As we, as an industry, struggle to respond to poorly-conceived legislative reforms, I hope those appointed as the midwives of change take an inclusive approach and remember that the appearance of professionalism is a poor substitute for actual professionalism.
Sean Graham is a lawyer, director of OpenAFSL and principal at Assured Support
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