Spirit and substance in financial planning reforms
Robert Brown FCA on the challenges of the recently proposed education and ethical standards body for Australia’s financial planning industry
- The latest challenge for the financial planning industry in Australia is the newly-proposed education and ethical standards body
- The key to the success and credibility of this body will be the independence of its board
- The removal of conflicts, not just their disclosure, is fundamental to winning trust.
The default position of all human beings is to resist change, particularly when we sense it will disturb the financial certainties in our lives and diminish our comfortable power structures. This resistance is perfectly demonstrated in the tortuous process of transformation of the financial planning industry into a trusted profession.
Such a transformation requires leadership by people who understand and support the ethical principles that must underpin any occupational group claiming to be a profession. These people must never compromise those principles (the way the political process does) and they must not be afraid to disturb the status quo.
Governments and industry lobby groups should not be expected to do this. It is best achieved through individuals and their professional bodies who are willing to stay the course in the knowledge that they are doing the right thing by the public interest.
Professional standards for financial planning
The latest challenge for the industry in Australia is the education and ethical standards body proposed by Revenue and Financial Services Minister Kelly O’Dwyer in the Corporations Amendment (Professional Standards of Financial Advisers) Act 2016. Most of the industry’s leaders have given qualified support to this legislation, which includes the prescription of higher educational standards and, more controversially, the development by the new body of a mandatory code of ethics.
The key to the success and credibility of this body will be the independence of its board. Therefore, it is of concern to observe that some industry participants appear to believe they will be playing a large part in deciding its appointments.
One industry leader was reported as saying: “The [members of the board] will be appointed by a consensus group of associations and relevant bodies”. Surely not. Perhaps this was incorrectly reported, although it’s likely that many of this individual’s constituency would have approved enthusiastically.
If nothing else, the reporting of such a statement serves to remind us that the process of appointment to the board should be transparent and fair. If it were to be indirectly controlled by a faceless “consensus group” of financial services industry and consumer lobbyists meeting in the proverbial “smoke-filled room”, the standards body would have little credibility in the wider Australian community.
It’s impossible to refute the need for more professional education for advisers.
Furthermore, its likely appointments would be people who were safe, reliable, and most of all, controllable. In short, there would be an unacceptable risk that the appointees would be people expected by their supporters and sponsors to take positions that favour certain commercial, vested and sectional interests. That would be a sad result for legislation that holds such promise.
On the matter of education, it’s impossible to refute the need for more professional education for advisers. As far as I know, no-one is seriously opposed to that idea in principle. However, the lifting of education standards has proved to be a useful diversion from a much more important issue – the mandatory Code of Ethics that this new body is required to develop for the industry.
Going beyond FOFA laws
Presumably, the new code will be built on the principles contained
in the Future
of Financial Advice laws (FOFA). But it must go
further than FOFA and remove all forms
of conflicted remuneration, not just commissions paid by third parties
on investment products.
The new code is likely to be merely “principles-based”, giving ample scope for the industry to avoid its intention.
If the code doesn’t do that, the industry will simply use alternative remuneration arrangements to avoid it, as it has done with FOFA. Included in the code must be a ban on asset fees (ie commissions paid by customers and misleadingly referred to in the industry as “fees for service”), life insurance commissions and other creative methods designed to incentivise and drive product sales (including sales targets/budgets).
The concern is that the new code is likely to be merely “principles-based”, giving ample scope for the industry to avoid its intention. If that is the case, all consumers will get is an additional burden of regulatory cost (estimated at A$165m), accompanied by little or no improvement in the industry’s poor behaviour and conflicted product sales culture.
The fundamentals of trust
In the end, the issue comes down to what the Australian public should reasonably expect of financial planners. That must be to trust planners and advisers to act in their clients’ best interests. Sadly, even post-FOFA, we can’t trust the industry to do that, principally because of the ongoing existence of conflicted remuneration arrangements that are designed to keep the product sales flowing.
Much of the industry continues to insist that this problem can be solved by the mere disclosure of conflicts, whereas any professional person understands that the removal of conflicts, not just their disclosure, is fundamental to the winning of trust and the creation of proper behaviour. It’s “ethics 101”, but not yet, it appears, in much of the world of financial planning.
That being so, future governments, in response to continuing scandals and mistrust, will eventually be forced to act to remove the final vestiges of self-regulation on an already heavily regulated industry.
However, if the industry were to show genuine leadership by supporting both the spirit and substance of the new standards board, it would be collaborating in the creation of a self-regulated profession whose interests would be truly aligned with the public interest. This must always be the sole and uncompromised objective of any true profession.Read Australia’s Minister for Revenue and Financial Services Kelly O’Dwyer's views on financial advisers.