The Financial Planning Association of Australia (FPA) says financial planners should be required to fund an independent compliance supervisory body that monitors their adherence to an ethical code if they choose not to become members of professional associations under proposed new laws.
The FPA’s stance comes after the government chose not to mandate membership of a professional association as part of its draft legislation in response to the Financial Services Inquiry (FSI).
Under the draft laws “individual financial planners have to take responsibility for being part of a professional association,” says the chief executive officer of the FPA, Mark Rantall.
“If they choose not to do that, maybe they need to be monitored by an independent compliance supervisory body and incur that cost in their own right,” Rantall says.
An explanatory memorandum for draft legislation released last week reveals that Treasury estimates the compliance cost of new and higher professional, ethical and education standards at more than $165 million. The EM does not reveal how the figure was calculated, nor what proportion of the burden is expected to be borne by individual financial planners or advice businesses.
Assistant Treasurer Kelly O’Dwyer announced a number of reforms to raise education, professional and ethical standards across the financial planning industry, including prescribing higher education and professional standards in legislation, and enshrining the terms “financial planner” and “financial adviser”.
An independent compliance supervisory body will be created from 1 July next year to set education standards for planners, and to also develop a comprehensive code of ethics.
Under the FPA’s suggestion, such a body would be separate from the government’s proposed education and ethics body.
A good starting point
Rantall says the legislation was a good starting point, but the FPA is concerned about the proposal to require planners to sign up to a code of ethics without having to do so as members of a professional body.
“This would create an inherent unworkable conflict for planners as they would be required to follow the code at the same time as sanctioning themselves for any breaches,” he says.
“This change would also not improve on the model we have today.”
Rantall says FPA data proves financial planners who are not subject to a professional framework through membership of a professional body are 90 times more likely to be involved in ASIC banning and enforcement action.
The FPA’s stance has received industry support. In a blog post, the chairman of Hewison Private Wealth, John Hewison, said the responsibility for the development of a suitable and enforced code of ethics must be actively administered by an independent body.
“In our opinion, that naturally is the role of a professional association like the FPA which has had these structures in place for over two decades,” Hewison says. “However, the government has chosen not to enshrine compulsory membership of a professional body similar to other professions.”
The government gave two reasons for not mandating professional association membership, including not wanting to inappropriately benefit growth of professional associations.
“That seems a little hard to comprehend,” Rantall says.
Professional associations are not unions
It also outlined a policy against compulsory unionism or membership of industry associations. But “professional associations are different from unions and different from industry associations,” Rantall says.
He says the FPA would not push to become the government-nominated “independent body” to be created from 1 July next year.
“No we wouldn’t advocate that,” he says.
“It’s a good thing to have independence when setting standards.”
He says the FPA will continue to push forward with its case for professional membership of an association.
“We don’t believe the licensing solution is the appropriate solution,” he says.
“Associations create a professional framework and professional norms that lift advice standards and hold people to account.
“If that can’t be mandated we think individuals need to be responsible to fund the cost of independent oversight.”