Every now and again an issue that’s being hotly discussed within an industry jumps the fence and goes mainstream. It happened in financial planning with the Future of Financial Advice (FoFA) reforms, and specifically with the best interest duty. The public reaction to that was: What do you mean – why haven’t financial planners always been required to act in our best interests?
Something of the same thing is happening right now with the standards body that will be established to set and monitor educational, professional and ethical standards for financial planners. What do you mean – why haven’t financial planners always had to be degree-qualified, comply with a code of ethics and undergo rigorous ongoing professional development?
The simple if unpalatable truth is that they haven’t ever been compelled, and it’s still not compulsory. That’s why this news was picked up so enthusiastically and why it jumped the fence.
It’s good news that the mainstream media picked up on the concept of a standards body, because an expectation has now been created in the public mind that this body will actually make a difference to the education and professional standards of financial planners.
But with that expectation comes the risk that if the minister responsible for setting up the standards body, the Minister for Revenue and Financial Services Kelly O’Dwyer, flubs it, a significant opportunity will be lost.
To recap: the standards body will be set up as a Commonwealth company, with nine directors, all of whom will be appointed by the minister.
Early drafts of legislation have given varying accounts of who will and won’t be eligible to be appointed. One draft said that some directors must specifically have “experience in representing the interests of consumers”; some must have “experience in the field of ethics”; and some must have “experience in carrying on a financial services business or providing a financial service”. None can be in a managerial or executive role in an association or consumer-representative body; and one draft said that none could be from an entity that provides education services.
Last week O’Dwyer said the board would be comprised of “three people from the industry, from bigger players; three people from smaller players; an ethicist; somebody who is an educational expert; and then someone who will be the chair of the particular body”. No mention of consumer representatives in all of that.
It would still be a good idea to have the consumer’s voice represented in some way. It would also be a good idea to insist on an acceptable minimum period of time required between an executive of an association resigning and being eligible to serve as a director of the standards body.
What the directors bring to the table
But in addition to these requirements, the personal attributes of each director will be critical. Ideally, all directors will possess four core characteristics: knowledge, experience, desire, and independence.
Those are four simple words, but their importance cannot be understated. And the minister must make sure that all directors are empowered and encouraged to act in accordance with those characteristics.
While in the initial stages the standards body will be funded by the banks, it was reassuring to hear O’Dwyer say that it is “very important that it be an independent standards body, independent of the industry”.
Each director of the standards body will bring a specific set of skills and experience to the role, but as a fundamental requirement they must possess a deep enough knowledge of financial planning to ensure they at least know what they’re talking about. They must operate from an understanding of what financial planning is, and the role it plays not only in the lives of individuals but in a broader economic and government policy context.
They must have the experience to understand the issues that are actually important, to avoid being subject to the influence of vested interests or deflected by issues that really are just sideshows or distractions.
They must have a genuine desire to make a meaningful difference to financial planning standards, and not be happy just to serve time and collect directors’ fees. Rubber-stamping existing codes of ethics or education requirements, for example, is not necessarily enough. To actually make a difference, the standards body must, by definition, go further than standards that currently exist.
Independent in thoughts and actions
And each director absolutely must be independent of any entity that has a commercial, financial or other vested interest in the board’s decisions and determinations.
A board that serves or is seen to serve the interests of big financial institutions is clearly not acceptable. These institutions are, after all, a very large part of the reason the need for higher standards has become so pressing in the first place. As it is, the body will initially be funded by big institutions – it is to be hoped that more detail emerges quickly on long-term funding arrangements – and that’s enough (and probably more than) already.
However, a board that bows to demands of industry associations is likewise useless.
Serving on the board of this body should be a challenging task. It should take talent and foresight, and the courage to act in ways they may be unpopular with the financial planning community.
But its actions must come from a desire to make financial planning better suited to serve the public interest, and the interests of consumers.
These requirements, along with restrictions already set out in the professional standards draft legislation, narrow down the pool of acceptable candidates, and make the minister’s job of appointing nine appropriate directors not only more difficult, but immeasurably more important.
