I’d venture to say that 100 per cent of licensed financial advisers would claim publicly that they advise and act at all times in their clients’ best interests. This begs an important question: If advisers are universally fastidious about their clients’ welfare, why is the industry in so much trouble over damaging revelations arising since the worst of the global financial crisis in 2008?
Faced with this embarrassing contradiction, the typical response from industry leaders has been to try to limit the damage by suggesting that it’s the fault of a few “bad apples” acting in the shadowy margins and that all will be well once these nasty people have been banned by the regulator (the Australian Securities and Investments Commission), which was asleep at the wheel. However, extensive evidence given
to several public inquiries has proved beyond reasonable doubt that the problem is not limited to a few marginal players. It’s structural. Industry leaders are now trying a different approach.
They are claiming that even if the problems were caused by more than just a few bad apples (which is not necessarily admitted), these unpleasant events happened in the dim dark past and won’t happen again.
They seek to sell this to the public by claiming to have put in place systems, compliance standards and disciplines that will guarantee good behaviour by all their licensed representatives.
Is that a credible response? Please excuse my cynicism and that of the parliamentary committees that have listened to these claims. I’ve heard it all before on countless occasions over the past 30 years, starting with the “whole of life” insurance sales frenzy and Agency Development Loans scandals of the 1980s.
Industry-standard response
Every time there’s a crisis, the industry’s standard responses are “it’s the fault of a few bad apples and ASIC” and “we’ve improved our internal processes”.
This is supported by disingenuous lobbying of governments, designed to ensure that regulatory initiatives are compromised and ineffective in changing the industry’s dominant culture of product selling. The Future of Financial Advice (FoFA) reforms are but the latest example of that.
The reality is that these responses are caused by the industry’s failure to understand and take seriously the professional and ethical obligations that must accompany any claim that advisers act in their clients’ “best interests”. This failure was amply demonstrated in 2013 when the so-called professional accounting bodies forced their own (formerly) independent Accounting Professional and Ethical Standards Board (APESB) to water down its proposed standard on financial planning (APES 230).
The publicly announced content of the standard did not suit the commercial interests of influential participants in the financial services industry who could see “writing on the wall” for the whole industry should the APESB succeed in its commendable desire to establish the highest professional and ethical standards for practising accountants – especially the comprehensive removal of all forms of conflicted remuneration.
The reputational damage to the accounting profession arising from this episode has been immense. That’s not to mention the regrettable fact that clients should no longer necessarily conclude that their “best interests” will be served by their accountant.
Latest challenge
The latest challenge to the financial advice industry’s culture may well prove to be the December 2014 report of the Parliamentary Joint Committee on Corporations and Financial Services. The Committee recommended the establishment of an independent Finance Professionals’ Education Council (FPEC), controlled and funded by associations that have been approved by the Professional Standards Councils.
Note the word “independent”. Also note the fate of the formerly independent APESB, which has been reminded in no uncertain terms that its independence is conditional upon its decisions being in alignment with the interests of its owners, the accounting bodies, whose views mirror the commercial interests of their most powerful members.
Anticipating this problem, the parliamentary committee wisely recommended that the board of the new education body should include academics, at least one consumer advocate (preferably two, representing different sectors) and
an ethicist.
Clearly, if anything at all can be learned from the APES 230 debacle, it is that the key to success for the FPEC will be its certainty and adequacy of funding and the genuine independence of its board – including, most importantly, the manner of appointment of its members.
I accept that the focus of the FPEC and the APESB may be somewhat different. However, it’s hard to see how a body whose principal role is the education of financial advisers could studiously avoid confronting “the elephant in the room”.
As always, the devil will be in the detail.
