Looking busy doesn't solve problems
It continually amazes me how people are content to come up with solutions that allow them to look busy in the face of problems, and the Life Insurance Framework is a classic example of this.
Growing up as a child I was always encouraged to take responsibility for my own actions and address the issues at hand. This was a message that was conveyed consistently through family, schooling and friends.
As I have aged, it continually amazes me how people are content to come up with solutions that allow them to look busy. I use this term to describe such people who hope the appearance of any action will be seen as a credible effort to deal with a situation that they either don’t understand or can’t be bothered allocating the appropriate energy or effort to solving the problem.
A common example is the behaviour of our politicians but currently there is a more interesting example playing out. Jose Mourinho is the most successful football (soccer) manager of the last decade. He is arrogant but probably no more so than would be expected from someone nicknamed “the special one”, a name he gave himself. His star studded Chelsea side has had an abysmal start to the season and so those that advocate the art of “looking busy” are calling for his sacking. As if what has made him successful over the last decade has within 10 weeks completely left his capability. If they sack him I am sure his skills will be quickly sought by a rival.
The current Life Insurance Framework (LIF) proposals are again a classic case of the art of looking busy along with a classic case of vested interest groups capturing a political process that you don’t need to be Noam Chomsky to see.
The FOFA changes were compulsory from 1 July 2013. The ink on these laws had hardly dried on the paper and there were calls for further reforms. There was no extensive review undertaken on how the impact of FOFA had impacted the provision of advice before these additional reforms were considered.
Indeed, the ASIC report released in October 2014 that was used as a base for the need for the additional reforms actually admits that around 37 per cent of advice in the survey failed the test for the current legislation at the time the advice was given. This is particularly scary given roughly half the files reviewed were from advice given pre-FOFA, thus less onerous for advisers. Given these results, I would have thought the logical conclusion would be to take action against the advisers and licensees responsible for the advice that failed the legal requirements. Instead, we look to bring in even more reforms notwithstanding the laws that we already have in place are not being followed or enforced.
These LIF reforms are designed to penalise the good advisers because of the action of the bad ones. I also believe that this will ultimately lead to consumers being considerably worse off because of a range of unintended consequences. This includes not having access to a range of mechanisms to pay for advice but also the real probability that the talent pool for advisers will reduce as they are attracted to other areas where they can command a better economic outcome for their skills. I will now refer to this as the 'Mourinho effect'.
The question that I believe has been largely unanswered is why the current law is not being followed in the examples of advice in the ASIC report and elsewhere?
Firstly, the licensees involved need to accept that they have supported advice that is outside the requirements of the law. This being the case, what actions have they taken to remedy the position of the client, investigate the suitability of the adviser to continue to provide advice and finally ensure this “systematic” risk is managed in further instances of advice from their representatives? As a licensee, we took on board the ASIC recommendations, including to ensure remuneration structures supported good quality advice and immediately banned up-front commissions and encouraged a hybrid model that included an ongoing service function. More importantly, we issued a policy on life insurance advice that dealt with how to achieve best interests and included strategic advice as part of the insurance advice process. If all licensees took such measures what message would that have sent?
The same questions then apply to the professional organisations and their influence on licensees and advisers through memberships. I find it incredible that notwithstanding they have overseen the turmoils that have happened within the financial advice industry, it appears they have managed to secure compulsory membership as part of the FSI reforms.
Finally, what has the regulator done in regard to this report which has showed large deficiencies in the provision of advice? What action has it taken with the licensees involved and what programs are they initiating to ensure these licensees' future compliance with the law? Indeed, in the case of advisers that have continually or consistently breached the law, what action has been taken to remove them so as not to exacerbate the problems their disregard for the law has when they provide advice.
Put simply, if the current laws are followed, the advice provided would avoid situations such as churning, over insurance and anything else you want to throw in. The reason is that the advice needs to be in the client’s best interest and this includes prioritising the client’s interest above the advisers. If the law is not being followed surely the answer to fix the problem is to make sure it is. This is where licensees, professional organisations and regulators need to ante up and do their jobs.
As a footnote, we stop speeding drivers on our roads by fines, suspending licences and jail time, not by making cars unable to go above the speed limit.
Robert Coyte is the chief executive of dealer group Shartru Wealth
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