Declarations late last year that the administration of US President Donald Trump would start winding back consumer protections in financial advice sent shivers through millions of American consumers.
Introduced in 2010, two years after the global financial crisis, the Dodd-Frank regulations were supposed to signal the end of the bad old days of Wall Street.
Dodd-Frank introduced new capital and liquidity requirements to limit risk-taking. But most importantly for America’s mum and dad investors, it authorised US regulators to introduce a fiduciary duty for brokers to act
in the best interest of their clients.
These new regulations, of course, were strongly opposed by most of the finance sector and Wall Street, which characterised them as limiting consumer choice and adding red tape, a drag on growth and efficiency.
Upon taking office, Trump put a freeze on a fiduciary rule that applied to brokers selling retirement investments known as 401(k) plans, and non the rule might never become effective.
The US parallels with the Australian experience, in both timing and story, are rather surprising.
Australia has a conflict-ridden finance sector of its own, and the Future of Financial Advice (FoFA) reforms were devised, also over several years, to deal with some of it.
FoFA emerged in response to a string of high-profile corporate collapses that decimated the retirement savings of tens of thousands of Australians. Think Great Southern, Westpoint, Opes Prime, Trio and Storm Financial.
Examining the factors behind these collapses, multiple parliamentary committees found conflicted remuneration structures and the absence of any requirement for advisers to put client interest first were key.
Announced as a package in 2011, FoFA banned conflicted remuneration, required financial advisers to act in the best interest of their clients, stipulated an opt-in provision for ongoing advice, and provided for limited-scope personal or scaled advice.
As with Dodd-Frank, an incoming conservative government, the Coalition’s, under pressure from vested interests and on a drive to ‘cut red tape’, set out to unwind FoFA’s consumer protections in 2013.
The uproar was spectacular, as was the political manoeuvring amongst crossbench senators who controlled the balance of power.
The consumers won out; and, in 2015, the reforms were retained as the big banks and the financial advice industry limped away, reputation in tatters. The rest, as they say, is history.
This year in June, the key players had the chance to take stock and report on how the reforms are operating through a Post Implementation Review.
Do the reforms, which sought to put client interest first, still have a place in Australia’s financial landscape, asked Treasury. The answer, of course, is ‘yes’. In fact, some would argue the consumer protections in financial advice still don’t go far enough. For example, the opt-in for people receiving financial advice could be annual, rather than every two years.
Bans on upfront and trailing commissions for insurance, whether it is within superannuation or not, and on all remaining soft-dollar benefits over the value of $300 would certainly be welcome as well. As would the extension of the best-interest duty to basic retail banking products.
In terms of success, the introduction of scaled advice is a standout. One superannuation administrator reports an increase of 46,000 statements of advice per year since 2012.
However, the financial advice industry still has a long way to go in winning back public trust.
New education and standards requirements, an ASIC register of financial advisers, and the growing shift to fee-for-service are positive developments. But more can be done to lower fees, and ensure that consumers are being connected to high-quality providers with products that deliver the right benefits to them.
Unfortunately, scandals such as the thousands of Commonwealth Bank customers charged for financial advice they didn’t receive still play out.
A sales-driven culture will simply undermine trust, and it will take only one particularly nasty scandal to set public perceptions of the entire industry back 10 years.
Meanwhile, in the US, the Financial Choice Act passed in the House of Representatives in June, moving the Republicans a step closer to unwinding some of the vital Dodd-Frank protections.
Under threat is the requirement for financial advisers to act in the best interest of clients.
That’s where the parallels between Australia and the Unites States need to end.
Any attempt to weaken rather than strengthen FoFA would be a big mistake.
