Expect more regulation and oversight

Matthew Smith


May 18, 2018

ASIC chair James Shipton

The financial advice and the wealth management industry should brace for a fresh round of rules and enforcement in wake of revelations from the Royal Commission into Misconduct in the Banking and Financial Services Industry.

If the UK experience is anything to go by, professionals in the advice industry should expect more regulation and oversight designed by policy makers to bring confidence back to the system, Paul Resnik, founder of risk profiling tool, FinaMetrica, told Professional Planner.

From his London-based head-quarters, Resnik sounded a warning for players within the banking and financial services system to expect regulation to make individuals more culpable for advice.

“After the hearings into mismatched financial advice and vertically integrated product sales structures subsided, what followed was a dismantling of the bank owned sales forces, more regulation and oversight designed by policy makers to bring confidence back to the system,” Resnik said.

The industry got a peek into what’s likely to be coming down the pipeline when the Australian Securities and Investment Commission’s (ASIC) new chairman, James Shipton, addressed the Australian Council of Superannuation Investors Annual Conference last night.

Paul Resnik: Expect more regulation and oversight

‘First line’ has failed

Shipton told an audience of senior superannuation industry participants and policy makers he believes many people in finance have lost sight of the ultimate purpose of the financial system; they have forgotten that this system is about managing other people’s money.

“Instead of focusing on these functions [managing other peoples’ money] I worry that many financial services companies have become insular by focusing only on how they can maximise earnings,” he said.

Shipton noted that firms have failed in their “first line” responsibilities, which require licensed firms to take reasonable steps to ensure that representatives comply with financial services laws.

In light of the first round of the royal commission hearings relating to financial advice, Shipton said ASIC will “accelerate and expand” its existing projects relating to wealth management.

This could mean “significantly stronger and clearer rules about the obligation of licensees to report breaches to ASIC honestly and in a timely manner” and a stronger ability for ASIC to take regulatory action against senior managers or controllers of financial services businesses.

In parallel to the regulator’s increased scrutiny on licensees, individuals will likely be required to take on more responsibility for advice.

Currently the Financial Planning Association is exploring a framework for individual advisors to be licensed to give product related advice, a possibility outlined in this recent article.

“It’s not surprising that people don’t trust the large end of the industry because it is unworthy of being trusted. It gives bad advice. It refuses to accept responsibility for its actions. Left alone it will sacrifice clients to its own self-interests,” Resnik said.

Resnik founded FinaMetrica in Australia in the late 1999s and has since taken the risk profiling tool to more than 20 countries. He said FinaMetrica has now been used in over one million financial plans globally.

More to come

Resnik’s takeaway from watching the royal commission to date is that it hasn’t dug deep enough into suitability of advice.

“The real money-for-jam is made by pushing customers through advice systems that ignore who they are, so that the sale of a standardised product can be closed quickly and cheaply. Little thought is attached to what impact that product might have on the client’s life,” Resnik said.

“So what does ‘suitable’ advice look like? To be suitable, the advice must properly take into account their goals, current financial situation and financial risk tolerance. Investors need financial advice and products that suit their circumstances, needs and personalities,” he said.

It’s not just advisers who are on the hook, Resnik continued. Fund managers and financial product providers are to be held equally culpable for misselling.

“In Europe product providers must now design products for specific market segments, know who is buying the product and have methods to ensure it is, indeed, suitable for that specific buyer,” Resnik points out. “It’s a good exemplar for Australian politicians.”

Vertically integrated advice models will struggle to remain compliant in a post royal commission world, Resnik said.

“Knowing clients can’t be done by proxy through an adviser. The product issuer and customer must now have direct, independent relationships,” he said.

The Australian Treasury circulated a draft of regulations similar to the UK’s, which are modelled on the European Union rules, Resnik pointed out, highlighting Australian advice and financial service providers could be about to go down a similar path to their northern hemisphere contemporaries.

“Should the political will be there, new rules could be in place quickly, hopefully enforced by an inspired regulator,” he says.



TOPICS:   financial planning,  financial services,  regulation,  Royal Commission,  royal commission into banking and financial services

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