In the UK, it’s clear that the financial services authority over there has moved away from principles-based, relatively light-touch regulation. They have [proposals] which will be implemented from the end of 2012, so six months behind our proposed timeframe, at this stage.
The first initiative is that financial advisers would be required to clearly describe their services as either “independent” or “restricted”. In order to be “independent”, a financial adviser has to consider all potentially appropriate products within the range of products that they’re advising on. That’s a very high standard to meet, as a practical matter, and the other challenge is, even if you are able to meet it, how do you show that you achieved that standard?
The second main issue is to increase professional standards, which includes higher entry-level requirements, higher ongoing CPD requirements; there’s also going to be increased ability for the FSA to impose penalties and sanctions on advisers who don’t meet these requirements.
The conflicted adviser remuneration issues are similar to Australia, a ban on commission based charging – advisers must agree their fees upfront [as part of] removing potentially conflicted remuneration structures that could distort outcomes.
“Overall, in terms of the proposed statutory duty, I see it as a positive development for the industry”
It’s interesting in the UK that they already have a “best interest” obligation in place. The FSA has stated that they believe “best interest” means attaining the best recommendation for the client, but that’s not what the conduct of business rules say, and having spoken to UK practitioners, it’s not what the general understanding is, as a matter of law. The general understanding, as a matter of law, is that it is about process and not about outcome.
But you can see that the differing views show the challenges that we have, and something that I think we should focus on here to try to avoid that same lack of certainty.
Implications in the UK, again, similar to some issues I see here: potential increase in costs, to the extent that access to advice is diminished; the increase in compliance burden also potentially leading some financial planners to exit the market.
So onto the US. The Dodd Frank Wall Street Reform and Consumer Protection Act was passed on 21 July this year. It largely focuses on regulation of banks and their investment banks to really ensure prudential requirements are properly managed.
What’s interesting from a financial adviser perspective is that the Act also commissioned the SEC to conduct a study into the appropriate standards that apply to financial advisers in the US. The US has two models: the investment adviser, and the broker-dealer. They don’t fit neatly with our concepts of financial advice: investment advisers, in the main, exercise discretion on behalf their clients; brokers might be execution-only services, but in some cases, might also give recommendations to clients.
Investment advisers in the US are already subject to a fiduciary duty; brokers are not. So the study’s really to say…should this be corrected, and if so, what is the appropriate standard?
What’s interesting to me is that, initially, there was a proposal that brokers absolutely should be subject to a fiduciary duty, and that should apply to all clients, whether wholesale or retail. Given the pushback, and I guess, the questions that were raised from that, it was scaled back to say, “Okay, we’ll just apply it to retail clients.”
There were questions raised again…so it was further scaled back; at the moment, the study that’s going to continue for the next six months, and then report back. So again, we’ll see similar debates, similar issues and time being taken to ensure that appropriate outcomes are met.
We can see similar themes here; there’s some tricky issues that Australia needs to work through that we see other jurisdictions are working through, but overall, in terms of the proposed statutory duty, I see it as a positive development for the industry.
I think it can help to formalise the professionalism by giving additional consumer trust, ensuring that conflicts are appropriately managed and giving that certainty. But the real key is working through the detail and making sure that we do have the clarity that’s required.
This is an edited transcript of a presentation given by Jade Harkness to the Financial Services Council 2010 National Conference.
If a client has access to wholesale insurance rates via their Industry fund – BUT we the adviser know from personal experience that their admin and underwriting are slow and cumbersome at best – are we neglecting our fiduciary duty by recommending retail insurance where we have immediate access to underwriters and speedy online processing.
The points of difference are that client gets a much better service – BUT at a retail price. I have had an industry fund lose paperwork twice on the same case!!
Where does fiduciary duty fit into such “everyday” scenarios??
I am a Chartered Accountant and have my own AFSL.
I am a member of a profession already. I have always acted as if I had a fiduciary duty to my clients.
If raising advice to a profession and fiduciary duty are an issue for you or even a discussion point then you are correctly described as a shark, shonk and a spiv.
I think you have hit the nail on the head. If we can come up with a way to enforce and legislate the fiduciary duty, we as advisers will be protected from the sharks and the government will be satisfied that they have acted to right the wrongs. The clients will continue to get great advice from the majority of planners and choose how they pay. For mine fiduciary duty is the key.
If you have to talk about fiduciary duty then you have lost the plot. Fiduciary duty should be present at all times and planners should not have to be reminded about it.