The Financial Planning Association (FPA) has found itself in the box seat to become a code-monitoring body under new professional standards for financial planners and has taken its first steps on the path to co-regulation after receiving Australian Securities and Investments Commission (ASIC) approval for its opt-in code.
The approval was formally announced at the opening of the 2016 FPA Professionals Congress in Perth by the association’s chief executive officer, Dante de Gori.
Approval by ASIC is the first time any financial planning association has been approved in a co-regulatory capacity. It paves the way for the FPA to play an equivalent role in monitoring its members’ compliance with new education, professional and ethical standards, due to come into effect from July 1, 2019.
Legislation mandating the new professional standards was introduced into parliament last week by the Turnbull government. The legislation will create a new independent body to set the new standards, and to delegate compliance monitoring to approved bodies.
The FPA has won ASIC approval to monitor its members’ compliance with a new professional ongoing fees code, which will remove FPA members from compliance with the opt-in provisions of the Future of Financial Advice (FoFA) legislation.
The objective of the FPA code is to achieve the same result as the legislative requirement – in essence that no financial planner can receive payment from a client without providing a service, and clients must actively sign-up to ongoing service and fee arrangements.
Avoiding the blunt instrument of the law
But approaching the issue through a code instead of the blunt instrument of the law means that opt-in objectives can be achieved in a way that fits in better with the way financial planners and financial planning businesses work in practice.
Compliance with the code will be monitored by the FPA itself, and the association will have the power and the obligation to report breaches of the code to ASIC. Because a breach of the code will effectively mean that an FPA member has failed to meet the opt-in obligations of the law, a breach of the code will be treated as seriously by the as a breach of the law itself.
“It’s the first time ASIC has ever approved a code,” says the FPA’s chief executive, Dante de Gori.
“It’s called the Professional Ongoing Fees Code, and effectively, the technicality of it all is that what they’ve approved what the code says someone will do, but also what effectively they’ve approved is that the FPA has the structure and the resources to administer and monitor the code.
“We’ve got a structure and a framework that they’re already happy with; it may just be a matter of beefing it up in terms of scale rather than the actual structure itself.”
De Gori says FPA practitioner members – Certified Financial Planners (CFPs) and Associate Financial Planners (AFPs) – will be able to apply to be subject to the code from July 1, 2017. Members who do not sign up will continue to have to comply with the FoFA legislative requirements concerning opt-in.
“ASIC, as part of this process, has to release a class order which allows our code to be allowed instead of the law,” de Gori says.
He says being permitted to comply with the code is not automatic for FPA members “because you have to agree to comply with these standards of the code”.
“So we have the [full] FPA code, and the code talks about ongoing advice and the fact that it’s an obligation on a member to provide a service for which they’re paid for,” he says.
“Every member has to abide by the code. If you want to obviate the need to comply with opt-in [under FoFA] you need to sign up to the ongoing-fee code that we’ve produced.
“It’s not a separate code. Within the [full] code there’s a standard that applies to everybody, but subject to you saying ‘no, I don’t want comply with opt-in, I want to comply with the FPA code’ … there’s a subsection of the code that will only apply to people who sign up to it.
“If you do not sign up to it, then you’re subject to the normal standard in the code.
“You have to sign up to it, because ASIC need to know who’s complying with the law versus complying with the code. And part of that will mean we have a public register of those people, so the public knows, ASIC knows, industry knows, the media knows that Joe Bloggs, financial planner, is signed up to the FPA code versus having to comply with opt-in under the law.”
Consultation and education
De Gori says there will be a period of consultation with members and education by the FPA about the process of compliance before July next year. He says members who sign up to comply with the code will be monitored and regularly audited by the FPA. He says the issues of signing up and the consequences of compliance with the code will be a central part of the FPA’s national roadshow next year.
“There’s some of the practicalities that we have to sort through, and some groups will not be ready [by July 1],” de Gori says.
“There will be a signing up to terms and conditions. When we say they have to register, they will actually sign up to terms and conditions of how this will work. We’ll have copies of that which we’ll have to provide to ASIC if they ask for them. Their ongoing service agreement or ongoing fee arrangement will have to be approved by us, so you can’t have one practice that has a half-page ongoing service agreement and another practice that has a 20-page one. There’s going to have to be some consistency and we’re going to have to approve them.
“In fact we will probably end up having a standard template around that.”
Achieving ASIC approval for the FPA code has been several years in the making. The association began the process of seeking exemption for its members from the opt-in provisions of FoFA shortly after the legislation as passed.
However, its efforts were put on hold when it seemed likely that the then-Abbott government would water down FoFA by, among other things, scrapping the opt-in requirement. Once those proposed amendments were shelved, however, the exemption push was back on.
A first time for many
“It’s fair to say it’s been a long process – and I want to be fair, this is the first time ASIC has done it, and it’s the first time we’ve gone through the process,” he says.
“There’s been a lot of learning on both sides. We’re both better equipped, coming out of this process, in terms of understanding – on both sides – the process and the structure.”
De Gori says it is important to “dispel the myth that it is easier” to comply with the code than to comply with the opt-in provisions of the law.
“You’re not arbitraging … your obligation,” he says. “The overall obligation objective is the same. That is, a client agrees to sign up to pay you a fee for a service that you will deliver; and you’re going to renew that agreement. The objective of opt-in remains the same.
“The difference is, you’re not subject to the hardline law that says you’ve got to do it every two years, and you’ve got to do it this way. Under the FPA code you will still have to effectively sign up and put in place an ongoing fee arrangement; you’ll also have to review that ongoing fee arrangement with your clients. You’ll be able to do that within a period of no more than three years. So there will still be a time limit, but it will not be two; and the process by which you do it will not have to be as strict in terms of the 30-day rule and the 60-day rule.
“It will allow the practitioner and the business to put in a process that is more suitable for them and their clients but still complies with the objective, rather than having to do it the exact way the law tells you to do it.”
De Gori says the code approach fits in much more comfortably with the natural way financial planners interact with clients.
“That’s the benefit of this,” he says.
“It’s more accommodating for you to do it in a way that best suits your business. To be fair, some businesses may be operating under the opt-in model and say, ‘OK, we’ve made it work for us and we’re happy to keep doing it this way’, and that’s fine.
“Some may say ‘it’s too hard for us, it doesn’t really work for our client and we want to explore a different options’. They may look at the FPA option and say ‘there’s a bit more flexibility here that works for out client base’. That’s fine.
“But it doesn’t mean that you don’t have to have an agreement, obviously comply with the agreement, and review the agreement. You absolutely do. This is not putting the client in a worse-off position at all, and that’s very important.”
Audited by FPA, not ASIC
De Gori says FPA members who sign up to comply with the ongoing fee code will be monitored and audited on compliance with this aspect by the FPA, rather than being audited by ASIC for compliance with FoFA.
“You’ll be subjected to professional oversight and professional standards and professional discipline, rather than ASIC,” he says.
“That arguably could be seen as being a little bit less confronting. But the penalties are if you do not comply and you lose your right to be subject to the FPA option, then you go back under the law, and you’ll be reported to ASIC as someone who has not complied with opt-in, effectively.”
A further sanction will be removal from the FPA-maintained register of financial planners who comply with the ongoing fee code.
De Gori says the FPA is keen for the financial planning profession to undertake more co-regulation of its practitioners.
“This is the first time there has been a formal co-regulatory process,” he says.
“It’s significant. The success of this is what it represents more so than whether we get 1000 or 10,000 members sign up to it.
“People have had to comply with opt-in now for a few years, so they have had to find a way. Some of our members are going to say that now they have got systems in place, they may not bother changing. You’ve got licensees who spent the money and time to set up systems and processes who are going to say we don’t want anyone to change. It’s not necessarily going to result in a flood of people complying with the opt-in code
“But the bigger picture is what it represents with ASIC and the approval process through RG183: It can be done; it has been done; it’s the first time it ever has been done; and with what’s coming up in the future, it obviously means I think we’ve led the way in that respect. It puts us in a position to say maybe the FPA is in a position to do the code-monitoring activity going forward.
“We’d never say we’re a shoo-in. There is a lot to be worked out with the new independent body, and some of the process around this, but it means that we have satisfied ASIC to the extent that we have the capability and we have the resources and we have the infrastructure to do this.”
Restructured Conduct Review Commission
De Gori says the FPA’s disciplinary body, the Conduct Review Commission (CRC), will oversee compliance with the FPA code, and the commission has been restructured to underline its independence from the FPA itself.
“ASIC have asked us to improve the way in which the independent chair is appointed, and in fact the process itself has to be independent. So we have already changed that. We’ve set up an independent panel to approve the next chair of the CRC, which will adopt the oversight of this code approval process from July 1 next year.”
De Gori says the panel is made up of Neil Kendall, the current FPA chair; Bernie Ripoll, who chaired the Parliamentary Joint Committee (PJC) inquiry that produced the report that ultimately led to FoFA, and who will chair the panel; and Dimity Kingsford-Smith as a consumer advocate. Kingsford-Smith is herself a former chair of the CRC.
The FPA board will therefore not approve the appointment of the CRC chair. The position of chair was advertised about a month ago and the panel will review candidates and appoint the new chair early in 2017.
