Running a listed life insurance and wealth management company in an environment of extended, record low investment returns, interest rates and relatively flat sales growth is challenging, but I am glad I am not a regulator. There is no question that ASIC has a hard job.
As part of a much broader remit, it is responsible for the surveillance and regulation of around 164 authorised deposit takers; 5779 Australian credit licensees; 33,736 credit reps; 124 insurance companies; 3443 Australian Financial Services licensees (AFSLs); and 3642 registered management investment schemes. It does all that with 1530 staff nationally, and it is dealing with a financial services industry riddled with historical problems and a tendency to sweep things under the carpet. It is clear that in order for ASIC to be as effective as possible it needs the industry’s support and assistance.
The financial services industry must get better at self regulation and I still believe it can. In other words, we should work collaboratively with ASIC and follow a path of supporting good public policy as it is, in the end, in the interests of both consumers and the industry. I have a number of suggestions.
Practically, I think it requires all advisers to be members of a professional body and adhere to strict codes of conduct. If they do not, harsh penalties must be enforced. Under that scenario, any adviser who is banned by an association would be unable to provide advice for the period of the ban. They would not be able to move to another association or apply for an AFSL.
At the AFSL level, there should be a professional body that represents the interests of licensees but also ensures they are profitable; comply with ethical standards; effectively audit and monitor their advisers; and continuously support them by providing education and training, and valuable practice management tools. Cut price “licensees for hire” should not be allowed to operate. But that is the easy part.
Go backwards to go forwards
Self-regulation will also require the industry to go backwards and proactively fix up historical problems in order to move forward.
There is a reason why the cost of providing financial services and advice is not coming down, despite the advantages of scale, technology and greater efficiency. It is because billions of dollars are being spent every year maintaining legacy systems and processes, and patching up broken business models.
Many product manufacturers are still paying hefty shelf space fees to dealer groups for a spot on their approved product list. Institutions continue to recruit and acquire advice businesses for exorbitant, unjustifiable prices in a bid to “buy” distribution. They continue to provide dealer services at a loss and prop up unprofitable licensees. That is why, for example, a strong code of conduct is needed for the life insurance industry. Furthermore, the cartel-like behaviour that is reflected in shelf-space fees and rebates fundamentally inhibits competition and clearly is not in the interests of the consumer. Those costs are passed onto consumers in the form of higher fees. Instead, the industry must deal with its issues once and for all, and embrace a new and improved way.
Vested interests supporting the status quo
A trademark of every financial services inquiry has been organisations with vested interests lobbying and fighting to maintain the status quo, even though the status quo is the root cause of the industry’s woes. ASIC faces an uphill battle trying to regulate an industry desperately clinging to the old world and only prepared to change when slapped with an enforceable undertaking or legislative reform. If the industry is serious about self-regulation, it must admit that the vertically-integrated model leads to inherent conflicts of interest and an unhealthy sales culture. It must be dismantled by having robust processes in place to manage the inherent conflict of interest so as to ensure clients receive quality, professional advice in their best interest.
Heavily restricted approved product lists, volume-based sales bonuses, shelf space fees and subsidised licensing fees, which are the calling card of the vertically-integrated institutions, are vestiges from the industry’s tied agency days. They are sales strategies designed to influence advice and channel flows into related party products and platforms, and lift the profitability of product manufacturers. All this highlights the “agency dilemma” which is the fundamental conflict of interest between a company’s duty to the client and duty to shareholders. It is why there must be a genuine separation of product and advice.
As an industry, we have to get serious about reference checking and upholding standards. Advisers who have had serious compliance issues should not be able to float around the industry from dealer group to dealer group.
Toughen up
Beyond that, I believe there are a couple of key ways ASIC can be a more effective financial services regulator. For starters, it needs to be much harder to get an AFSL. It is too common in financial services that a poor adviser fails a dealer group audit, fails to clean up their act and ultimately gets kicked out of the group only to pop up at another licensee or gain their own AFSL. There is effectively nothing stopping a rogue adviser from applying for an AFSL. The AFSL application process largely involves filling out a form, choosing responsible managers, agreeing to meet a number of obligations and paying a nominal application fee.
A crude way to raise barriers to entry may be to introduce tough conditions for AFSLs that provide personal advice and general advice, including robo-advisers. An effective way of ensuring standards are appropriate is to require audits of advice by the professional associations with appropriate penalties. This works well for accountants and actuaries. In addition, any unfavourable actions at the Financial Ombudsman Service would be considered “actionable conduct” and would lead to sanctions from the professional association.
Secondly, if ASIC wants to know what is really going on, it needs to talk to the right people. It needs to engage with licensees and dealer heads who are at the coalface of advice, not executives and heads of distribution at the institutional level.
Lastly, there needs to be harsher penalties for people who do the wrong thing. Professional bodies that represent advisers must have the ability to prosecute transgressors of professional standards in a meaningful way, including banning from the industry
An impossibly large job?
Does ASIC need more power? Yes. Does ASIC need more funding and resources? Yes, but even with more power and more funding, ASIC’s job is impossibly large, given people who are hell-bent on doing the wrong thing will find a way to do the wrong thing.
Ultimately, ASIC’s mandate is to protect consumers by ensuring companies operate efficiently, honestly and fairly; and licensees and their authorised reps provide quality advice in the client’s best interests but I do not believe ASIC can do it alone. The financial services industry has a duty to all stakeholders, including clients, employees and the government, to better self-regulate.
A healthy, client-centric financial services industry is one that is committed to dealing with legacy problems and delivering improved client outcomes, which includes reducing costs. It is also the only way for the industry to stop being the subject of endless parliamentary inquiries, reforms and legislative changes, and potentially avoid a royal commission.
This is an edited version of remarks made to the Financial Services Council Leaders Summit 2016 in Melbourne on July 20.
