If you were given $200 million and a brief to raise the image and the public standing of financial planning, how would you spend it? One thing is for sure: paying back consumers for what they’ve lost due to bad advice is not a great way to do it.
But that’s roughly now much compensation, in the 2015-16 financial year alone, that has been secured for clients by the corporate watchdog, the Australian Securities and Investments Commission (ASIC). It’s a waste of money – it would never have been necessary to compensate clients if the advice had been sound in the first place. A notional $200 million could have been spent far more effectively in other ways to promote the benefits of advice.
Admittedly, the figure covers all the areas that ASIC regulates, but nevertheless, poor financial advice constituted a significant part of the compensation figure. Who knows what the figure will be next year. There seems to be no limit.
It may be tempting to think that unless you’ve personally been the subject of a remediation action or a compensation claim that the issue is not yours to worry about. But the $200 million has to come from somewhere. It isn’t necessarily all funded directly from the banks’ balance sheets. Some of it comes from professional indemnity (PI) and other forms of insurance. PI insurance is expensive enough as it is without unnecessarily forcing premiums higher still by shelling out $200 million a year to clean up behind the clowns and cowboys that continue to pollute the industry.
Poll: Do you think a professional standards scheme, and limited liability, would be good for financial planning?
Retiring with financial security
This figure was revealed at the same time ASIC issued a new guidance note on client review and remediation conduct by advice licensees. It’s designed to guide licensees on how to remediate clients who have “suffered loss or detriment as a result of misconduct or other compliance failure by an advice licensee (or its representatives) in giving personal advice.”
The essence of ASIC’s argument is: you stuff it up, you fix it. Or, in regulator-speak: “Advice firms that take effective and timely steps to fix problems if something goes wrong will be much better placed to retain the trust and confidence of their clients.” And, by extension, the trust and confidence of the broader community.
There are untold benefits to be had from widespread acceptance of financial planning as a valuable and trusted profession – and not only for practitioners themselves. The more people who receive good, sound, professional advice, the more people stand the best possible chance of retiring with dignity and financial security. That’s a cause everyone can get behind, surely?
Licensees are already required to have adequate PI insurance to cover likely compensation claims. But PI insurance can only go so far, and in extreme cases it can be exhausted without adequately compensating all consumers, leaving them unable to recoup losses.
Limited liability for lawyers
If you’ve read the footnotes on the letters you get from lawyers you’ll have seen a statement something like the following: “Liability limited under a scheme approved under Professional Standards Legislation.” And perhaps you’ve wondered: how can a lawyer’s liability be limited? It’s a good question, and there’s a really important answer.
Basically, if a profession signs up to – that is, each and every one of its members agrees to abide by – rules and requirements of specific legislation, they are in return allowed to practice with limited liability.
In NSW, the legislation is the Professional Standards Act 1994; in Victoria it’s the Professional Standards Act 2003; in Queensland it’s the Professional Standards Act 2003. Broadly equivalent legislation exists in each state and territory. The legislation governs the operation of professional standards schemes. And the legislation is administered by the Professional Standards Councils (PSC).
A limited liability scheme ensures that if a a client makes a claim that is upheld by a court, the professional can meet any damages awarded, up to certain limit – with the limit set high enough to “cover the vast majority of claims”.
Commitment to improving standards
Individuals have to be represented by some sort of professional body or association, as much for monitoring and compliance purposes as for anything else, but also so it is clear who is and who is not part of the professional community that may be subject to a limited liability scheme.
A professional standards scheme provides three main benefits for consumers: increased protection; confidence in compensation; and professional commitment. The PSC website says the main objective of a professional standards scheme is to make sure associations and their members deliver ongoing improvements in consumer protection.
It says that by limiting civil liability, professional standards schemes ensure that, if anything goes wrong, professionals have insurance or assets available to meet damages awarded.
And it says that by working with professionals subject to a professional standards scheme, consumers are dealing with people who, through their association, have committed to improving professional standards and upholding their obligations as professionals.
Sending the right message
Not every profession operates a limited liability scheme – but the list that does is impressive: Engineers Australia; the Association of Taxation and Management Accountant; the Professional Surveyors Occupational Association; the Australian Computer Society; Australian Property Institute Valuers; the College of Investigative and Remedial Consulting Engineers of Australia; the law societies of NSW, SA, Queensland and WA; the bar associations of SA, NSW, WA, Queensland and Victoria; the Law Institute of Victoria; and the Institute of Public Accountants, CPA Australia and Chartered Accountants Australia and New Zealand.
A professional standards scheme isn’t a get-out-of-jail-free card for professionals. If you commit fraud, act dishonestly or commit a serious breach of trust, you’re on your own. But if you commit to a professional association, actively and consciously adhere to all of the professional and ethical standards set out by your association (and in law) and generally conduct yourself in a conscientious and professional manner, in accordance with your state’s relevant professional standards legislation, you can enjoy the protections of the limited civil liability scheme.
Who wouldn’t want to be part of something that sends such clear signals to consumers about the ethics, standards and trustworthiness of the professionals they’re dealing with?
So why isn’t there a professional standards scheme for financial planning? Part of the answer is the 200 million reasons set out above. But otherwise it’s a good question – and maybe it’s one you could ask your own association.
Poll: Do you think a professional standards scheme, and limited liability, would be good for financial planning?
