The government should resist attempts by institutions to create a system that allows them to drive the sale of product through their own networks without an obligation to investigate the needs of the consumer or to provide a solution that is in the consumer’s best interests. By Matthew Rowe.
I stand for the consumers of Australia. I also stand for a community of professional financial planners whose sole objective is to improve the lives of all Australians with client-centric advice.
I am a small part of the financial services eco-system. It is a very complex eco-system and it is responsible for almost 10 per cent of the value of goods and services produced in this country – according to the Australian Bureau of Statistics, that is more than mining and agriculture combined.
The financial services eco-system has many complex elements that both compete vigorously with each other and yet at the same time are interdependent. It is complicated, it is multi-faceted, has its own language of acronyms, a complicated set of rules and regulations, vast and ever-changing information flows and a set of “gate keepers”.
The gate keepers are there to protect the public and make sure our eco-system is not polluted from within by those that would do us all harm for their individual gain. These gate keepers are heavily regulated and in the main consist of auditors, financial planners, trustees and responsible officers.
There is, however, one thing without which this vast and complicated eco-system will not survive, and this one thing is the consumer. With this in mind you may think that the consumer would sit at the heart of every decision made within this eco-system, but history has shown this has not always been the case.
Further complicating what is already a complex situation is the uneven playing field of consumer financial literacy. Financial literacy is the ability to make informed judgements and to take effective decisions regarding the use and management of money. Financial literacy is a combination of a person’s skills, knowledge, attitudes and ultimately their behaviours in relation to money.
ANZ’s surveys of adult financial literacy in Australia show that there are some groups where lower levels of financial literacy are more likely to be encountered: people who are relatively young (under 25 years); people with no formal post-secondary education; people with relatively low levels of income and assets (such as those whose main source of income is a government benefit or allowance; those with annual household incomes below $25,000; those with less than $2,000 in savings and investments); and those working in lower blue collar occupations; and females.
Given this uneven playing field and the complexities involved in sound financial decisions it is imperative that consumers know they can trust those providing financial advice. It is also imperative that if commissions are banned on specific advice they should not be kept for general advice – this simply encourages some in the industry to keep advice general which is the exact opposite of what the Consumer needs.
The GFC saw product failures losing hundreds of millions in Australian savings. There are common themes in these failures – greed, tax minimisation, fraud, incompetence, conflicts of interest, flawed business models and risk taking behaviour driven by short-term incentives.
There have also been failures in advice by some of those I have previously listed as gate keepers. There are examples of auditors failing to recognise material errors in information relied upon by shareholders; responsible officers allowing short-term incentives to drive organisational culture with catastrophic results; and a minority of financial planners that have betrayed the trust of their clients.
On April 26, 2010, the then Labor government revealed the Future of Financial Advice (FoFA) reforms, an overhaul of financial advice in Australia. At the heart of these reforms the FPA acknowledges that there have been two overriding principles:
(1) Financial advice must be in the client’s best interest – distortions to remuneration, which misalign the best interests of the client and the adviser should be minimised.
(2) In minimising these distortions, financial advice should not be put out of reach of those who would benefit from it.
The most important change that came about in the FoFA reforms, for both consumers and for the financial planning profession has been the core legal principle of placing the clients best interest above all else.
This reform process has taken almost four years, has cost hundreds of millions of dollars to implement (that cost will inevitably be borne by consumers), and three ministers and a change of federal government later we are still working through details posed by some in the eco-system with significant vested interests.
The Abbott government is making some well-considered changes to the FoFA reforms in that they preserve the spirit and intention of the reforms while reducing compliance costs, improving access to advice and should help financial planners adjust to their new operating environment.
However, there appears to have been a change put forward by the Coalition government that was not clearly articulated to the advice profession previously.
This change is something that, fundamentally, the FPA cannot support. I refer to the re-introduction of commissions on investment and superannuation products.
This has been introduced through an exemption on what is called “general advice” whereby sales commissions can be paid for selling product when no advice is provided or when potentially there is no paper trail or consumer protection in a written statement of advice.
In my personal opinion, this is an attempt by some product manufacturers to drive the sale of their product through integrated distribution without the obligation to investigate the needs of the consumer or provide a solution that is in the consumers best interests.
In 2009, well before the FoFA reforms the FPA lead the financial planning profession by banning our members accepting these commissions. We believe now, as we did then, that commissions linked to the sale of an investment or superannuation product provides for a conflict of interest that cannot be managed so must be avoided.
The FPA has written formally to the Government voicing its strong opposition to commissions being paid under what is being called the “general advice” exemption. We do not believe this proposed change is in the public interest.
We hope that the Government will listen to the largest professional body representing professional financial planners in Australia, a professional body that produced the worlds’ first full suite of professional regulations incorporating a set of ethical principles, practice standards and professional conduct rules that explain and underpin professional financial planning practices. An Australian professional body that is exporting this suite of professional regulations to 24 countries and the 150,000 Certified Financial Planners that make up the global Financial Planning Standards Board.
There is a simple solution to this whole issue – go back to the use of the terms ‘agent’ and ‘broker’ and anyone who is paid anything from anyone other than the client is by definition one of them.
Yes, as Agent was a simple descriptive term that most people can understand. The current term Authorised Representative is convoluted and needs so much more explanation for the public to understand the differences.