Robert MC Brown AM says throwing out the Future of Financial Advice legislation altogether may produce a better result than piecemeal amendments.
Now that the tumult and shouting of the federal election has died down, attention will turn to what to do about FoFA. The Coalition has offered a 16-point plan to “improve” the law, which I suspect may be code language for emasculating it. At least that’s the hope of some people in the financial planning industry who have always seen FoFA as a socialist conspiracy driven by industry superannuation funds and adviser-haters.
It might surprise some readers to learn that my recommendation is to repeal FoFA altogether (yes, all of it) and to not replace it with any alternative legislation.
There’s no doubt that FoFA was a well-intentioned attempt to deal with widespread conflicts of interest, unethical practices, scandals and personal tragedies that were exposed during the early stages of the global financial crisis (GFC). However, as events unfolded during the 2011-12 FoFA consultations (in which I had the privilege of being involved) it became clear that the principles in the legislation would be substantially politically compromised, thanks to intense lobbying by sections of our industry – so much so that the intentions of the law could be (and would be) ignored by those who wished to ignore them. Meanwhile, well-intentioned advisers would be unnecessarily hobbled by such inefficient and complex rules as to make FoFA a costly (and ultimately ineffective) burden on advisers and clients alike. I suspect that a proposal to repeal FoFA would be positively received by the Coalition. That’s because it’s ideologically predisposed to anything that would be seen to be removing inefficient and unnecessary interference by government into the operation of a “free” market.
However, it’s not quite so simple in the case of financial planning. Planners do not operate in a conventional marketplace that exists in, say, the motor vehicle or fast food industries. In those industries, consumers don’t have any expectations that participants will offer them arm’s length advice in their best interests, such as “don’t buy this car, pay off your mortgage instead”. In fact, consumers expect to be sold a product, not offered advice as to why they don’t need one.
Financial planning services are supposed to be offered in a professional market in which advisers voluntarily act in their clients’ best interests (often contrary to their own best interests) and in which clients would reasonably expect their advisers to do just that. Trouble is that most of the market for financial planning services has been structured since inception in such a way that it is biased towards the sale of products rather than towards true professional advice (principally due to remuneration-based conflicts of interest).
Our industry has tried to hold back the rising tide of professionalism by resorting to the disclosure of conflicts, rather than their avoidance and/or removal. Sadly, we’ve persisted for decades with a regime that hasn’t worked, resulting in more and more self-induced, complex, compliance-based, box-ticking and politically compromised legislation. And we’ve done this while concurrently sheeting home the blame for our woes on governments for introducing laws that we caused in the first place by our actions and by our pig-headed avoidance of reality.
As an aspiring profession, the advent of a new government presents us with a great opportunity. Instead of stressing over which parts of FoFA should or should not be repealed or amended to suit our range of conflicting commercial interests, why don’t we propose to government the repeal of the whole of FoFA in return for a truly comprehensive and genuine regime of self-regulation?
That approach would suit a government which is predisposed to the removal of complexity. And it should suit an aspiring profession which truly believes in the idea of acting in the public interest, not just being forced by law to do so.
Robert MC Brown AM is independent chairman of the ADF Financial Services Council and a member of the government’s Financial Literacy Board.
