Reflection: The disturbing question of licensing’s legitimacy

Simon Hoyle


November 17, 2017

Next week at the Financial Planning Academics Forum (FPAF) in Hobart, a lecturer in the school of accounting and business at Central Queensland University, Angelique McInnes, will deliver a paper that should, by rights, rock the financial planning industry to its core.

It won’t of course, because the financial planning industry has a proven capacity for ignoring inconvenient truths. But McInnes will set out, in a rigorous analysis, why the current licensing regime in financial planning “can … be termed illegitimate”. That’s strong language for academics.

“Illegitimate” is not a word that necessarily packs much of a punch. But it’s like an iceberg – there’s a lot more to it than meets the eye. To say the system for licensing financial planners is illegitimate is actually saying the whole financial planning edifice is built on something that lacks credibility, does not achieve objectives that are required of it both legally and as a way of winning the trust and confidence of the public, and that it’s irredeemably broken.

But that’s all that’s wrong with it. Otherwise, everything is fine, folks. Carry on.

The paper should also cause regulators and legislators to sit up and take notice, because it sets out how the system as it’s currently structured actually works against efforts to raise standards in financial planning. And after untold tens or hundreds of millions of dollars spent on the legislative process, regulatory reform and industry compliance, it’s a deeply discomfiting idea to think that all those efforts might really have done is liberally apply (very expensive) lipstick to a pig.

Professional Planner has reported on an earlier iteration of the paper, Australian Financial Services Licensee-authorised Representative Licensing Model: Current practice, issues and empirical analysis, co-authored by McInnes and her colleague Abdullahi D. Ahmed and presented to an earlier meeting of FPAF, in November last year.

Since then, however, the language in the analysis has become less cautious and the authors are far more sure of their ground. McInnes says the main reason she and Ahmed embarked on their study was “to see whether it’s a legitimate system that we are currently running, and if not, let’s replace it with something else”.

“The evidence is fairly strong that it is illegitimate,” McInnes says. “And we all know it’s not legitimate. It’s not doing the job it’s meant to do. What is the job it’s meant to do? Achieve the objectives of the [Corporations] Act. In fact, it’s doing the opposite; therefore, we have to change it, as hard as that is to do. It has got to be changed.”

Empirical evidence

The legitimacy paper states that licensing financial advisers through “third-party, often commercially driven, product-conflicted, institutional licensees is a threat to independence and raises conflicts of interest”.

It states that empirical evidence reveals that “advisers are dual agents facing conflicts of interest from association to product-conflicted licensees”.

“We highlight [that] licensing advisers via third-party licensees is inconsistent with four objectives of the Commonwealth Corporations Act 2001,” it reads.

McInnes and Ahmed apply a recognised methodology for assessing the legitimacy of a construct or a set of rules, known as Suchman’s theoretical legitimacy framework, and find that in financial planning the licensee-adviser set-up doesn’t come up to scratch.

It fails to meet the objectives of the Corporations Act for three main reasons:

  • The current system facilitates unintentional breaches of the statutory best-interest duty
  • It allows practices that result in misalignment of adviser and client interests
  • It enables situations where licensees’ commercial interests compromise the best-interest duty.

There’s also a fourth reason, McInnes says, which has been downplayed in the paper, and it is that the current model fails to encourage competition between financial services providers effectively. Vertical integration is a culprit, though not the only one. She says while the model definitely fails the Act on the first three counts, its failure on the fourth count is less clear.

The earlier version of the paper was a central element in the cover story in Professional Planner in April this year, because it crystallised, and provided additional dimensions to, issues that had already been the subject of considerable discussion between Professional Planner and Tom Reddacliff, a former managing director of the NAB-owned Godfrey Pembroke advice business.

Reddacliff, a member of the Professional Planner advisory board, had authored a discussion paper outlining the structural shortcomings of the licensing regime and the practical issues that these shortcomings present for financial planners’ claims to both objectivity and professionalism. McInnes presented a paper to FPAF, Professional Planner, joined the dots and away we went.

It helped that each party brought a different perspective to the issues. McInnes and Ahmed brought academic discipline and an evidence-based approach. Reddacliff brought to bear a deep working knowledge of the industry, and some practical solutions.

And Professional Planner had finally twigged that something needed to change after what had become a torrent of articles about licensees being forced to make good losses caused by financial planners who, either unsupervised or actively egged-on, systematically dispensed poor and often destructive financial ‘advice’ to clients (or as they’re possibly more accurately described, victims).

The latest legitimacy paper states that its findings strengthen the case for individual licensing of advisers, “through a single independent professional body, like other professionals”.

Self-interest in the way

“Survey respondents make known preference for licensing via a single independent body,” it states. But even here, self-interest can get in the way of embracing a way of doing things that is, according to McInnes’s and Ahmed’s research, empirically better.

“Advisers fear losing the subsidised support services licensees offered them, such as inter alia software, training, professional indemnity, research, compliance, legal and back-office support,” the paper reads. “Furthermore, for some advisers, licensing costs are another major concern.”

Reddacliff’s discussion paper, available on the Professional Planner website, addresses some of the solutions to these concerns. Some issues are more complicated and intractable than others. However, none is insurmountable, given the will (or appropriate encouragement).

McInnes contrasts advisers with other professionals, for whom creating genuinely adverse outcomes for clients generally requires operating outside accepted boundaries or breaking the law. Advisers can operate within the rules of the system yet still often produce adverse outcomes.

“On the grounds of this research’s findings,” the paper states, “it is apparent that all financial planning stakeholders should work together towards individual licensing, like other professions.”

TOPICS:   Angelique McInnes,  Australian Financial Services Licensee-authorised Representative Licensing Model: Current practice,  Central Queensland University,  Financial Planning Academics Forum,  issues and empirical analysis,  legitimacy,  licensing

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