Do what needs to be done

Robert MC Brown


May 17, 2018

“We have been talking about the trust deficit in finance for far too long. It is time to move beyond the rhetoric to real solutions. The community will welcome this; they have been waiting for a long time. Let’s get on with it.”

Senior public servants and politicians are often accused of using weasel words to soften or obscure their messages. Such an accusation could hardly be levelled against James Shipton, chairman of the Australian Securities and Investments Commission, whose plain words above, published in The Australian Financial Review in April, are both appropriate and timely. They signal unequivocally the regulator’s expectation of the industry and (I suggest) reflect a widely held view in the Australian community.

In response to this kind of commentary, leaders in the financial planning industry regularly claim they have carefully built the self-regulated structures, safeguards, compliance processes, professional rules, ethical standards and incentives that act to minimise poor behaviour. These leaders tell us they have struck an “appropriate balance” between the commercial interests of the industry and the best interests of consumers. They claim that the industry’s problems are not structural or systemic; rather, they are caused by a few bad apples, which regulators should work harder to remove. Therefore, it is argued, the industry should be trusted and the public should be assured the profession of financial planning is looking after the best interests of consumers.

That sounds like a compelling argument; however, it is contradicted by a considerable amount of observable evidence showing contrast between what the financial planning industry claims to do and what many of its participants do in practice. As a result, governments have been forced to respond to irresistible political pressure by regularly intervening in the so-called free market with a view to repairing its failures.

The Future of Financial Advice (FoFA) legislation is a prominent example from the litany of well-meaning interventions over the last 40 years, none of which has comprehensively addressed the conflicted remuneration practices that are the principal cause of the trust deficit to which the ASIC chairman referred. FoFA came close to solving the problem, which explains why the industry opposed aspects of it so strongly. Unfortunately, lobbying, followed inevitably by political compromises, has created a regulatory and compliance nightmare about which the industry incessantly complains (which is a bit rich since the industry’s poor behaviour and its lobbying against genuine, permanent and comprehensive reform caused the problem in the first place).

So why is the financial planning industry not trusted to behave in the way traditional professions have been trusted to behave (more or less) since their inception? Could it be that much of the industry prefers to be regulated by government because existing regulations don’t work? Could it be that the boards of large financial institutions don’t want to change the product-selling culture and conflicted remuneration that are so deeply embedded through the industry’s structure?

Could it be that many financial planners want the right to call themselves professionals without accepting the public interest and ethical obligations that must accompany that descriptor?

I am under no illusions about the power and influence of the industry’s dominant product-selling culture and the conflicted remuneration arrangements that drive it. The situation was amply demonstrated in an abject failure of self-regulation that occurred in my own profession, accounting, in 2012. Initially, the profession’s independent standard-setter, the Accounting Professional & Ethical Standards Board (APESB), showed the courage to defend the profession’s fundamental ethical principles set for members offering financial planning services, by publicly stating after a five-year consultation that all conflicted payments, including commissions, asset fees, product/platform bonuses, rebates and any similar sales incentives, are inconsistent with membership in the accounting profession.

Given the profession’s time-honoured principles of independence, objectivity and conflict avoidance, this conclusion should have been uncontroversial; however, a storm of criticism followed. Why? Simply because, for the first time, self-regulated ethical rules were to be introduced that would undoubtedly transform the culture of financial planning from product selling to advice. This was a truly horrifying prospect for many industry participants. Relentless pressure was brought to bear from the financial services industry on the professional accounting bodies, which subsequently prevailed upon the APESB to ‘adjust’ the principles publicly announced in 2012.

By early 2013, the standard (APES 230) had been watered down to become an uncomfortably embarrassing set of rules that might be described as optional ethics. This allows accountants who offer financial planning services to adopt either a high standard based on the avoidance and removal of conflicted remuneration, or a low standard of ethical practice based on the discredited concept of disclosure of conflicted remuneration.

This flawed standard and the process by which it was developed is a case study in how not to do self-regulation and how to remove the trust on which a profession should build and sustain the value of its designation. Is it any wonder that some commentators are so skeptical about the willingness and ability of any profession to regulate itself in the public interest?

Nevertheless, I have always clung to the hope that the financial planning industry would eventually become a conflict-free profession by a process of self-regulation. That is the essence of any true profession and is its fundamental responsibility to the public it claims to serve.

Governments can have an important role in articulating community expectations of behaviour and foundational ethical principles. The proposed mandatory code of ethics the Financial Adviser Standards and Ethics Authority (FASEA) issued in March 2018 does just that. The exposure draft accompanying the proposed code states: “The code is essentially a set of principles and core values. A principles-based model provides a powerful framework to shape and reinforce ethical conduct and encourages a deeper engagement by the individual with their duties to their client as well as wider society…These ethical obligations go above the legal requirements in the law and are designed to encourage higher standards of behaviour and professionalism in the financial services industry.”

The industry’s immediate challenge is to voluntarily build upon the principles and values in the code. It should do that by voluntarily removing all of its conflicted remuneration arrangements as the APESB proposed in 2012 (not just some of them). Whether the industry’s leaders like it or not, they know these arrangements are the principal cause of the trust deficit and they must be removed if the industry is to become a profession.

If that were to happen, several positive things would occur, almost immediately: many more Australians would seek financial advice; they would happily accept product recommendations; they would willingly pay fees for service, confident that the advice is being offered in their best interests; the need for complex regulation, about which the industry loudly complains, would be removed; the cost of doing business would drop substantially; young people would happily join and remain in the financial planning industry, satisfied that they were making a positive difference in the lives of their clients; financial planners would be trusted and accepted as true professionals; and the industry would confidently and profitably grow without the distractions and impediments of a tarnished reputation.

Could this be the industry’s final opportunity to transform itself into a true and trusted profession? I believe so, failing which, financial planners will experience a whole new world of regulatory pain imposed by frustrated future governments that will have lost patience with the rhetoric, obfuscations and deflections and will be unwilling to allow unethical behaviour to continue unchecked.

At least for now, the future lies in our hands. So why don’t we just get on with it?


TOPICS:   Best Practice,  Financial Adviser Standards and Ethics Authority (FASEA),  Future of Financial Advice (FoFA) legislation,  trust deficit

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