How leadership and accountability can win back consumer trust

Next time you’re in the car, look out the window and imagine no one on the road has their own driver’s licence. Instead, they’re authorised to drive by a third party under a group licence.

If there’s an accident, the third party bears the bulk of responsibility, rather than the individual.

Would you trust them?

That’s what currently happens with financial advice. Most advisers are licensed under a dealer group, which holds an Australian Financial Services Licence (AFSL). The advisers that work for the group are its authorised representatives.

The result is a breakdown in trust. The adviser’s fiduciary duty to their client may be legislated, but it is undermined when the financial adviser is beholden to their AFSL holder.

Personal accountability can revive the industry

The problem was highlighted by the royal commission into financial services misconduct, which recommended a move to individual licensing as part of a suite of actions to raise standards.

"Introducing a system of mandatory individual registration may also assist in impressing upon financial advisers that they occupy a position of trust, and that their entitlement to continue to occupy that position of trust depends on their obeying the law and other standards applicable to them," the final report said.

It pointed to professions such as doctors, nurses, architects, teachers, accountants and lawyers, who must be individually registered to practise.

Yet two years since the report was released, the shift has yet to happen and trust in the advice industry remains in short supply.

The combination of ongoing regulatory pressure, rising costs, and higher education requirements is now forcing thousands of advisers out of the industry. Adviser Ratings estimates a further 5,000 are set to leave the industry over the next year.

Yet Australians desperately need quality financial advice after the COVID-19 pandemic plunged the economy into recession last year and sent unemployment to its highest level in decades.

Unfortunately, many regulations aimed at improving the quality of advice simply make it more expensive. The median cost of advice rose 22 per cent to about $3,256 over the two years to 2020, according to a recent study.

These factors mean consumers don't trust the advice they receive or see the value in paying for it.

A shift to personal accountability can change that by raising transparency and accountability. Individuals become responsible for their ongoing training, conduct and complaints, even if an adviser leaves their current business.

Financial planning dealer groups would still play a vital role providing the wide range of support services that advisers need. But ultimate accountability still rests with the individual giving advice.

Dual licences: Simple and complex advice

Many of the scandals that have plagued financial advice businesses have arisen from product pushing and mis-selling. Individual licensing can help tackle this issue, but clarifying the limits of what products can be sold is equally important.

The corporate regulator's new product design and distribution obligations (DDO) are one attempt to stop mis-selling. It places a higher standard on product providers to ensure their products are aimed at consumers who can understand what they're buying.

However, bringing product providers into the advice licensing regime would strike a better balance between an individual's freedom to invest and the need to protect investors from inappropriate products.

The way to do this is to split advice licences into two categories – simple and complex. Simple products are easy to understand. They can't breach basic risk criteria such as a 5 per cent threshold for illiquidity, derivatives, fixed interest, agricultural assets, shorting, and gearing or 15 per cent in total i.e. all the type of assets that have caused issues in the past.

Any fund manager licensed under a simple AFSL could freely sell their products, just as fund managers who list a simple exchange-traded fund on the ASX do today.

But fund managers selling complicated products would need to be licensed under a complex AFSL. This would require higher insurance levels, capital and, most important, ongoing educational requirements.

These products would require an investor to see an adviser who is licensed to provide complex advice. (Sophisticated investors would still be able to invest in complex products.)

This stops unnecessary complex products flowing into the market and puts the onus on the advice community to stand up and help investors who need it.

High-quality advice plays a crucial role in helping Australians make sound decisions and achieve their personal goals. An advice licensing regime that combines personal accountability from advisers with a greater focus on straightforward products can help lift standards.

Harvey Kalman, director, Menzies Foundation

The views expressed here are personal views and do not represent the views of the organisation.