There is a good chance the Hayne royal commission’s interim report could lead to a secondary review of the legitimacy of the current licensing regime, Adviser Ratings chief executive Mark Hoven says.

When asked whether it was probable that Hayne would recommend such a review, Hoven said he “wouldn’t be surprised”, and that the idea was “completely legitimate”.

“I think that sounds like a very reasonable expectation of where the interim report has gone and where it might end up in February,” Hoven told Professional Planner.

Commissioner Kenneth Hayne formally questioned the role of licensees in the interim report from his Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Hayne asked whether an individual licensing system – with advisers reporting directly to ASIC – would provide a better framework for the industry. He used the subject of ASIC’s bans, and regulatory powers more broadly, to lead into a question about the current licensing arrangement.

“ASIC’s emphasis on the use of banning orders invited attention to a more basic issue about regulatory structure,” Hayne wrote. “Should advisers be individually licensed?”

Hayne’s comments in the interim report confirm that the validity of the current arrangement is under scrutiny and will be on the agenda for his final report. After noting that the licensee is currently “responsible for the conduct of an authorised representative”, which the myriad reports of misconduct in the report show is an ineffective deterrent, Hayne gives a strong indication that he struggles to see the benefit in the arrangement.

“What is gained by having this structure?” he asked. “Would there be advantage in providing for the licensing of authorised representatives, thus bringing them under the direct supervision of ASIC?”

A giant first step

Hayne’s questioning of the licensing system raises the possibility that a giant first step towards individual licensing may be on the near horizon. The commissioner has limited scope in what he can do with his findings, but recommending that ministers call for a review into the licensing system for advisers is within range. If that did transpire, it would provide fodder for political parties in the lead-up to a federal election in 2019.

In Hoven’s opinion, if the licensing system were to change, a commission-led review would be the type of research that would need to preceed it.

“Any firm recommendation would have to include such a request – a complete review of the current system – because the proposed changes would be a paradigm shift.”

Hoven is reluctant to predict that such a move would spell the death of licensee groups, however, and prefers to envisage a future in which dealer groups provide similar services to what they do now, without the licensing function.

“They can still provide benefits at scale for individual advisers,” he says. “I don’t think they’re going to go away. They may take a different form, [but] they also may not continue to hold a licence if the government [changes] the licensing regime comprehensively.”

He does warn that the new arrangement he foresees might present a whole new set of issues.

“If ASIC’s struggling to provide the appropriate level of observation and surveillance of current dealer groups, what would it look like if they were not officially licensed?” he asked.

Why do you need licensees?

Encore Advisory Group chief executive Tom Reddacliff says there is a further reason to believe Hayne will go after licensees in his February final report.

In confirming that both the Financial Planning Association and the Association of Financial Advisers intend to apply to ASIC to be code-monitoring bodies under the Corporations Act, Reddacliff believes Hayne signalled that the role licensees play in monitoring advisers is set to be further marginalised.

He makes the point that there is a crossover between the general obligations of licensees detailed in section 912A of the Corporations Act and ASIC’s proposed compliance schemes for the code of ethics, as both deal with monitoring the actions of advisers.

“If the FPA are picking up this [code-monitoring role] and are responsible for monitoring conduct, why do you need licensees?” Reddacliff asked.

Paul Tynan, chief executive of financial service brokers Connect, takes a similar view, and agrees that Hayne’s questioning of the licensing regime, combined with his announcement that the associations are applying for more in-depth monitoring roles, are indications that licensees may soon be stripped of their primary role.

“It looks like Hayne is opening the door for an individual licensing system,” Tynan says.

Recurring theme

Counsel assisting Rowena Orr broached the subject at the conclusion of the second round of the royal commission.

“Is it possible to implement a single system for professional discipline of financial advisers?” Orr asked. “Would a system of licensing at both an individual and an entity level be more appropriate than the existing system of licensing only at the entity level?”

Orr’s questions came after Louise Macaulay, senior executive leader of the advice team at ASIC, admitted on the stand that the current licensing system was a hindrance to effective monitoring in the advice industry. When asked if consideration should be given to individual licensing, Macaulay replied: “Speaking personally, yes, I think there should.”

Professional Planner took an in-depth look into the issue and weighed up the various responses and viewpoints of associations and advisers.

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning. Contact at [email protected]
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