A convoluted, excessively layered regulatory framework is preventing accountants from being able to replace waves of financial advisers leaving the industry according to Keddie Waller, financial planning policy adviser for CPA Australia.
The peak accounting body released a report this morning, ‘The impact of complex regulatory reform’, which details the role of accountants in financial planning and the struggles they have operating in an expensive, often-overlapping regulatory framework.
Central to the problem, Waller tells Professional Planner, is that new regulation is being bolted onto the profession without proper regard for the existing framework.
“An incremental accumulation of regulations not only increases compliance costs but also increases the risk of new regulations conflicting with existing rules or interacting with them in unintended or unexpected ways,” the report states.
Waller says policy-makers aren’t stepping back and looking at regulation holistically. “They’re not looking at how systems interact, or how they can be harmonised,” she adds.
The issue is set to be exacerbated by the promised implementation of all Hayne’s royal commission recommendations, Waller believes.
“What we don’t want is more complex regulation, but effectively we’re going to get that because the government is going to implement the recommendations.”
CPA Australia is the largest accounting body in the country with around 164,000 members.
The report highlights the estimated 30 per cent of financial advisers that will leave the industry in the wake of the royal commission, and says the accounting profession “has an opportunity to supply new financial planning advice capacity” to a growing unmet advice need.
“However, professional accountants find themselves restricted by the current regulatory framework from providing such services,” the report continues. “If they wish to provide a full suite of services to their clients, professional accountants must acquire multiple licences and registrations, attain numerous qualifications and designations, and adhere to myriad regulatory requirements, overlapping ethics standards, education requirements and CPD obligations imposed by a number of different regulatory bodies.”
Waller quotes figures in the study showing that 90 per cent of consumers trust their accountant to “always service their needs in the best way possible”, and roughly 70 per cent “preferred their professional accountant to meet all their advice needs, if only their accountants had the necessary licenses or registrations.”
The cost of providing advice services under an Australian Financial Services (AFS) Licence, however, is too much for accountants when added onto their primary expenses, Waller says. The report estimates the cost to provide a full suite of “holistic financial planning advisory services” at $112,414; this includes $44,878 for accounting and auditing services, $22,846 for tax advice, $19,489 for mortgage/finance broking and $46,125 for financial advice.
“If that’s the sort of money you’ve got to give up before turning the lights on, you can see why the cost of giving advice is so high,” Waller says.
A loss leader
Accountants currently have three options pertaining to the provision of financial advice. They can provide SMSF-related (and ‘class of product’) advice under a limited license provision, become a fully authorised representative operating under a full AFS licence, or simply avoid it altogether.
While the limited license option is cheaper than operating under a full licence, Waller says it “hasn’t been the success it could have been” because the time and cost to provide the advice is still too prohibitive.
“Accountants feel like they can’t actually charge what it costs for them to give advice,” she explains. “It ends up becoming a loss leader for them.”
Further, there is no distinction made between limited license providers and fully licensed providers in the eyes of the Financial Adviser Standards and Ethics Authority (FASEA), which means accountants acting as part-time advisers need to meet the same educational requirements as full-time financial advisers.
This means limited-license operators need to an extra 40 hours of FASEA-prescribed continuing professional development and adhere to FASEA’s code of ethics, the report states, on top of the meeting the CPD requirements of CPA Australia and adhering to its own ethics charter.
Bolting on a new set of rules
The report comes less than a week after Pamela Hanrahan, a professor of commercial law and regulation at UNSW, spoke out at the Professional Planner Risk Advice Summit on how non-holistic policy is undermining advice business models and putting advice out of reach for consumers.
‘Where we’ve had difficulty implementing policy change… was that we tried to bolt a new set of rules and a new set of economic imperatives onto the existing business models,” Hanrahan explained.
Like Waller, Hanrahan voiced concern that in their eagerness to address systemic issues in the industry by implementing all of Hayne’s recommendations, the government is losing sight of the overall regulatory framework.
“Sometimes you can get dragged along by perhaps a mistaken belief that policy reform and regulatory reform is something that you can take and try and shape to the existing business model,” Hanrahan said.
According to Waller, the report gives CPA Australia a foundation to start lobbying to simplify this framework.
“Unless you actually stop and take stock of what is impacting one person it’s very hard to appreciate the compliance obligation they’re under,” she says. “Putting that on a page is very powerful.”
I’m an accountant and I manage and audit SMSF. The CPA article seems to presume that accountants want to give financial advice. Most of us don’t want to. We produce financial statements and tax returns, we provide factual advice about contribution limits, trustee’s responsibilities, pensions minimums and tax outcomes. We can perform all these roles without providing any financial advice. There is a significant portion of the SMSF trustee community who are happy with this service; SMSF’s containing the trustee’s business property; SMSF’s with residential real estate; even SMSF with term deposits only. These are trustee’s who would never set foot in a FP’s office, and consider the share market to be some sort of ponzi scheme! Accountants who deal with these SMSF do not want, or need, to be covered by the financial services legislative regime because they don’t give financial advice. Of course there are many trustees who do want financial advice, and I am happy to refer them to a full service advisor. We need to recognise that there are separate roles here; SMSF administration, and, financial advice. The current legislation and regulations are trying to push us all into the same group, but our roles are chalk and cheese, and we should be treated as different professions with separate legislation. The original accountants exemption recognised this.
One hundred percentage agree with Waller and Professor Hanrahan, knowing their long-term contributions and expertise in the area of Personal Financial Planning.
The overlapping, complex and expensive regulatory regime hurts the consumers, the professional advisers and the whole country.
Let’s join force and tell it what it is to the policy makers – we are going down to a rabbit hole here! For the benefits of the country, with the accumulated experience (and failures) of the implementation of Chapter 7 of the Corporations Act since March 2002, and the RC’s recommendations, it is high time for all professional bodies to join force with one voice for a comprehensive legislative overhaul and simplifications to cover all areas in the provision of Personal Financial Planning advice, from accounting,tax and audit to loans and investments, and super to aged care.
If not, the rest of us, including the consumers whom we try to serve and protect, suffers eventually.
It is extremely disappointing that CPA is taking this approach and, particularly on the back of the association starting a financial advice division only to collapse it due to a lack of take-up. Their credibility has been damaged.
And then, the figures used in the article indicate, of the $112k required ‘to turn on the lights’, 50% is for the standard accounting services provided by a public practitioner. Presumably that side is profitable so, if you are to invest a similar level of capital for another stream, then you need to make that as profitable?
The fact is, the robot will gouge some of the traditional fee sources for accounting and tax, but will find it harder to make ground on the soft skill services that financial advice is full of.
And, where was CPA in having the CPA financial planning specialist designation approved by FASEA? Sure the CPA designation got a couple of exemptions but we will never know if those who underwent the FPS journey compress even more of the FASEA educational uplift requirement.
And whilst on the FASEA educational uplift, having now completed my required bridging course and the industry exam, I think it is a good thing.
I think practitioners think they act ethically and are beyond improvement however, being challenged by the ethical application to what is a commercial operation does give you the opportunity to apply a different lens.
For example, is is the right approach to move heaven and earth to ensure someone retains eligibility to a government pension or, should the focus be on enabling self-funding and the freedom associated with that?
I will agree however, a SMSF is a structure, not an investment and it is silly that it is tied into the Corps Act as a product. However, how does that structure get capitalised?
Accountants are best at providing appropriate structuring advice for business people as they do the tax and asset protection consideration and the client does the inner workings – both parts to the relationship play to their strengths.
However, a SMSF does not have such a convenient shared responsibility. As much as people purport to want to “DIY” their investment strategy (good luck with that), the machinations of super law make it a mine-field for the unwitting and uninformed to get the strategy correct. This is why, if Accountants want to be in this space, they have to get out of their comfort zone and upskill and then upskill again when the landscape iterates again…
I have however come to a position that I think could work:
Make it acceptable for unlicensed, or some form of limited licensed Accountants to advise on SMSFs if the membership has no one under 55. A bit like a QROP SMSF. There is a lot less risk in advice to those in the pre-retirement/retirement phase. However, this carve out should not include investment advice.
And, no, those dodgy end of financial year tax driven ‘investment schemes’ can’t slip out of the side of the mouth and, no cozy property bed-fellows in sight.
It is about time there was some recognition of the real value of financial advice that is pro-active, (not the sifting through the embers of the previous financial years that could be said of traditional accounting services) and, the Code of Ethics compels Advisers to consider the longer term impacts of their advice and not just play to the instant gratification syndrome.
Financial Advisers also enjoy relationships of trust and longevity and, I will again prosecute my case that the best client outcomes are delivered when their is a partnership approach – Accountants, Advisers and legal specialist. Each participants playing to their strengths with a common goal.
(And finally, there is a great little book “Who moved my cheese” – I commend it to everyone to read, and consider their own approach to change as this disrupted world we now occupy is not about to settle down any time soon.)
The push by Accounting bodies for reform is blatantly self serving. We agree, regulation and compliance burden is making advice unaffordable. However, there is no good reason why one group should be exempt and another not. The reason up to 30% of advisers may leave the industry is because of increasing regulation. The advice gap the CPA so benevolently wishes to fill would not exist if this were not the case. Post Hoc Ergo Propter Hoc.
One set of rules for all.
David Graham M App Fin CFP(r) CIMA(r)
Is there a contradiction here? If accountants should be able to give financial advice without fulfilling educational and other standards, then financial advice can’t be too difficult to do as accountants can do it as a sideline.
On the other hand, education requirements for financial advisers have become much higher. Therefore financial advice is a highly qualified activity.
Which is it?
In any case I wonder if accounting and financial advice are quite different activities that require different skills. To me accountants are more similar to cricket scorers while advisers are more like cricket trainers. There are people who are excellent at both like John Buchanan, the former Australian cricket coach, but not many.
Aren’t accountants more task and transaction oriented (tax returns, financial statements) while advisers are more person oriented (what is needed for that person to improve their finances?)