Australia’s newest profession is at a crossroads

An article published in The Australian last week suggested that the entire financial planning industry “looked the other way” while these schemes thrived.

In fact, the financial planning profession has been at the forefront of exposing these failures and is currently engaged in supporting the victims. Under current laws, financial planners who had nothing to do the with these failures will most likely be the ones who ensure consumers receive compensation.

Financial planning has become a profession fairly recently – in the last six years. “Financial adviser”, “financial planner” and like terms can only be used by those who’ve met the stringent requirements of the profession.

To become a financial adviser, you now need to complete an approved financial planning degree, then complete a professional year, comprising 1,600 hours of structured work experience and training, and pass a national exam.

You must be appointed and registered by a licensee, meeting all their requirements to practise. Thereafter, you must complete 40 hours of regulated Continuing Professional Development each year (lawyers only need to do 10 hours per year).

Depending on where you are employed and your areas of practice, you might need to comply with the requirements of a long list of regulators (including ASIC, APRA, the ACCC, the ATO, the Tax Practitioners Board, the OAIC, AUSTRAC, Treasury) and be a member of the external dispute resolution body (AFCA).

You must exhaustively document every piece of advice you give and your interactions with clients and fully disclose every fee you receive. And you must, at all times, adhere to a legislated code of ethics, which not only requires you to put your clients’ interests first at all times but also to report any business or colleague that you suspect is not doing so.

You must maintain adequate professional indemnity insurance, and you must also pay significant levies each year to ASIC and the Compensation Scheme of Last Resort (CSLR) – more on this one later.

So, what on earth is going on? How is it possible for massive failures like Shield and First Guardian to happen, given all this regulation and oversight?

The first point to make is that while the scale of the failures is large, the number of those involved is relatively small. ASIC has recently published information about the financial advice licensees it believes have been involved in the distribution of these products (summarised in the table below).

If ASIC is correct, four advice licensees were involved with Shield, and three with First Guardian – and of these, two were involved with both – five in total.

Of course, five licensees is five too many. The sorts of behaviour that have been alleged are reprehensible and include accepting illegal marketing payments, trying to evade anti-hawking laws by engaging third parties to cold call investors, recommending investors place a majority or all of their portfolio in a single relatively high-risk product, and making untrue claims about the past performance of the product, as well as unfounded promises about future performance. If true this is disgraceful, illegal and should be appropriately and swiftly punished.

But to suggest that the financial planning profession is responsible for the failures of Shield and First Guardian, or allowed them to happen, is clearly incorrect.

Apart from the obvious point that it’s the arrangers and operators of these products who are the most to blame, financial advisers were among the first to blow the whistle on these schemes. In cases that we are aware of, advisers saw and were horrified by advice they had been asked to review as a second opinion – and reported the entities involved to ASIC (which has, to its credit, acted swiftly and devoted substantial resources to these investigations). And many advisers are currently working with the victims, doing everything they can to help them recover as much as possible and get their financial plans back on track.

There are currently 1,700 advice licensees in Australia, and 15,300 advisers. The vast majority run excellent, compliant small businesses that are doing difficult and important work every day, helping their clients to make and implement good financial decisions and achieve their goals and dreams. Great financial advice has become an essential service in our highly complex financial system, one that’s become almost impossible to navigate for anyone who isn’t an expert.

It’s incredibly disheartening for these capable professionals to be tarred with the same brush as the tiny minority who have broken the law.

I promised earlier to touch on the CSLR. This newly-established scheme exists to support consumers who have suffered a loss associated with poor financial advice, when all other avenues have failed.

This important scheme is under threat, because the funding mechanism is deeply flawed. It is paid for by financial advisers who have done nothing wrong yet nevertheless must compensate the clients of those who’ve broken the law. Wrongdoers who have in many cases avoided their responsibilities by embezzling money, phoenixing subsidiary entities and siphoning money offshore.

In most cases we've seen so far, product failure is the root cause of the consumer losses, but product issuers currently make no contribution at all to this consumer compensation.

There aren’t many financial advisers left, and our numbers are falling – at 15,300 we are down 47 per cent on the peak numbers in 2019. This means, among other things, that each year there are fewer advisers left to fund consumer compensation.

There’s another failure on the horizon – called Brite Advisors. It’s still under investigation, but the collapse of this multinational firm could be associated with consumer losses of up to $1 billion. Coupled with Shield and First Guardian, that’s the potential for almost $2 billion in compensation required. It doesn’t take a financial expert to figure out that with only 15,300 advisers available to pay it, either the scheme or the financial advice profession (conceivably both) cannot be sustained.

Treasury has been working on a review of the CSLR, and its report is expected imminently. We can only hope that government will act swiftly and decisively on its recommendations.

Sarah Abood is the CEO of the Financial Advice Association Australia.