As a society, I think there’s a growing awareness and tolerance for human error. How often have we heard things like, ‘we all make mistakes’, ‘we learn from our mistakes’, ‘the greatest mistake you can make is being afraid to make a mistake’? All very sage, all very true, and all very tolerant. Unless, of course, you are a financial adviser.
If you are a financial adviser, there is currently zero tolerance for error.
Until very recently, government and regulators appeared to have climbed onboard an anti-adviser bandwagon. This was fuelled by the Banking Royal Commission – a commission which, if we needed reminding, was supposed to be about misconduct in the Banking, Superannuation and Financial Services Industry, not about scapegoating financial advisers.
Over the last 20 years, we have ended up with a highly-regulated environment that operates on black letter law, multiple legislative instruments, and regulatory guidelines, leading to a complex, inconsistent, contradictory, costly and difficult environment for consumers, advisers, and licensees.
Advisers and licensees fear making even the most minor of errors and the tolerance for regulatory risk is extremely low, if not zero, for some advisers and licensees. Meanwhile, consumers find it hard to access affordable advice when and how they want to.
No safe harbour
Of course, there have been some attempts to mitigate risk for advisers, most notably the Safe Harbour provisions, which appear in the Corporations Act and the Financial Planners and Financial Advisers Code of Ethics.
Unfortunately, these provisions are failing in their intent because they have become a box-ticking compliance exercise. Due to the wording in Standard 6 and Sect 961B(g) of the Corporations Act and multiple ‘clarifying’ guidelines, many advisers are concerned about the ability to provide scoped advice and feel that the harbour is anything but safe.
No regulatory tolerance
The ‘zero error’ and ‘fail one aspect and the file fails’, and inconsistent approach by regulators and AFCA mean much time, effort and cost is spent by advisers on obtaining detailed and up-to-date information on the client’s current products; researching, considering, and documenting recommended and alternate products and solutions; retaining records and making copious advice documents, working documents and file notes for compliance e.g., BID worksheets, safe harbour documentation, etc.
The ability of AFCA to open up and review the whole file is an impediment to scoping advice, as advisers try to avoid both current issues and the future risks of advice. There are also concerns about a lack of regulatory certainty – i.e. that the advice provided today may be reviewed at some future date, using some future date standards, rather than the standards applicable when the advice was provided.
As a result, the cost of a client review is often 60 to 80 per cent of the cost of new advice even if there are only minor changes. In any other industry or profession, a review would be 1/10th to 1/5th of the initial cost. The fear of getting it wrong means that it is safer to do the whole process each year, even when most client circumstances don’t change that much every year.
The cost of fear
The fear of making a compliance error and the avoidance of compliance risk, impacts costs significantly as everything is double and triple checked. Costs include adviser and staff time, other staff costs, licensee fees, technology, office space, training and CPD, etc.
The legal and regulatory imposts result in duplication, overlap and regulatory inconsistency.
From an industry perspective, there is a lack of standardisation for the same or similar processes – every financial service organisation has its own forms and processes rather than standard forms and standard processes for standard matters. There is data inconsistency, poor data quality, out-of-date data, and a lack of access to available data.
The fear of getting something wrong is compounded by multiple overlays of the same data and information being required by the client, the adviser, the licensee, product and service providers, trustees, ASIC, APRA, etc., at different times and in different and often unique ways.
The harder to quantify longer-term cost, is the loss of adviser experience with the huge exodus of financial advisers over the last five years, as for many advisers it all just got too hard.
The real cost of this situation is that access to affordable quality advice has become virtually impossible for everyday Australians. The cost for advised clients has also had to increase, even though the need for advice, the demand for advice and the number of consumers seeking advice are increasing.
Removing the fear factor
The good news is that the Australian Law Reform Commission (ALRC) Review and the Quality of Advice Review (QAR) created the opportunity to collaborate and move to a more contemporary legislative and regulatory environment that recognises the shift from ‘financial product advice’ of 20+ years ago to the professionalisation of financial advice and, importantly, a one-size-fits-all approach does not recognise that just as there are different types of adviser, there are different types of consumers with different advice needs.
If it’s one thing the QAR must do, it is to remove adviser and licensee fear. If it doesn’t, the profession will be hamstrung, and a hamstrung profession cannot help consumers.
The question is how?
By having better, more consistent regulation, by streamlining that regulation, along with advice policies and processes, by increasing the use of scoped advice, by using already available data better, and by moving to a more principles-based approach over time.
The government and regulators need to recognise that access to affordable and quality advice is not mutually exclusive to other desired outcomes, i.e., to maintain appropriate consumer protection and have a viable and thriving financial services industry and advice profession.
However, balancing expectations of cost to quality and consumer protection currently can result in a cost that is 10 to 16 times higher than consumers are prepared to pay, so there is a lot to do.
A once-in-a-generation opportunity
Regulators, licensees, professional associations, and professional advisers have a once in a generation opportunity to collaborate and recalibrate the way personal advice is provided, to ensure appropriate consumer protections are not lost, quality advice becomes more accessible and affordable; advisers, their firms and licensees can run sustainable and profitable businesses and operate without fear. It is encouraging to see that the industry is now collaborating in a meaningful and productive way.
The new Assistant Treasurer and Financial Services Minister, Stephen Jones, MP was recently quoted as saying he wants to fix the ‘hot mess’ that financial advising has become in this country, and quickly. He said he wants to stem the flow of advisers exiting the industry and stop advisers from having to jump through ‘crazy hoops’ in order to deliver advice, so that more Australians have access to high-quality, affordable financial advice.
Mr Jones… we’re going to help you do that.
Neil Macdonald, CEO The Advisers Association
No mistake I ever make in the future will be larger than the mistake I made in being licensed through AMPFP and trusting The Advisers Association.
“Regulators, licensees, professional associations, and professional advisers” collaboration is listed above. However, what is missing in this list is the Australian consumer of financial advice. I would recommend they are included in the collaboration, because it is these individuals who needs the advice.
There is a very strong focus on consumers in the collaboration. Access to affordable quality advice is at the core of the Quality of Advice Review and the Australian Law Reform Commission. The challenge is there is not one homogenous consumer group. They range from people who have never had advice through to those only experiencing intrafund and episodic advice to clients with an on-going advice relationship. Understanding, their experience, personal needs and where and how they want to seek advice can also change over time. There has been a lot of research already done on this topic, and more is being carried out now. Happy to have a chat @Dr.AngeliqueMcInnes.
Fair point Angelique, but what is the best way to capture a representative cross section of consumer needs? Historically it was via “consumer associations” such as Choice and CALC, but they have been hijacked by ideological
zealots and no longer represent the interests of most consumers. They are now nothing more than fringe political parties.
Ultimately it is up to the govt to determine and represent consumer needs. At the end of the day that is the primary role of government in a democracy. Frydenberg, O’Dwyer and Hume completely failed to represent consumers’ needs in relation to affordable professional advice. It wasn’t the only reason they were kicked out, but it was certainly a contributing factor. The new govt needs to take heed of that.
Now is the time indeed, and might I suggest, also the last chance to get it right. Insightfully constructed and well articulated position on where it’s at.