A day rarely passes without someone in the financial advice industry publicly complaining about the complex and costly regulatory burden imposed on advisers. One industry leader has even claimed the burden has become so great that several large advice groups are now moving away from servicing retail clients in favour of wholesale clients where the regulatory requirements and risks are considerably lower.
Given widespread, if not universal acknowledgement that the industry’s complaints are reasonable, why hasn’t the burden been lifted? Indeed, why is it continuing to grow, for example, with claims of an additional impost on advisers arising from the new product design and distribution obligations?
The uncomfortable answer is that the Australian community doesn’t unreservedly trust the financial advice industry to deliver on what amounts to a ‘social contract’. The terms of the contract would be that the industry must behave as a true profession in return for lifting of the regulatory burden on its participants.
The community’s hesitation is hardly surprising, given the revelations of the Hayne Royal Commission and the negative attitude of many in the industry towards FASEA’s mandatory Code of Ethics which commenced on 1 January 2020. This attitude is regrettable because the Code offers a wonderful opportunity for financial advisers to break free from overbearing regulation about which they complain and to transform themselves into true professionals.
Advisers may be wondering whether all the rhetoric about the ‘journey to professionalism’ has been worth the behavioural change that they must necessarily follow. It’s not just a case of claiming to be a profession and it will be so. There is a price to pay. For some, that price may be too high.
The principal sticking point in the Code of Ethics continues to be Standard Three which requires financial advisers to avoid, not just to disclose, conflicts of interest. The plain English wording in this standard unavoidably lead to the conclusion that asset fees, life insurance commissions and other forms of product sales incentives are unacceptable in nearly all circumstances.
Realising this, some in the industry are calling for ‘clarity’. Most of those calls are disingenuous. They are not due to a lack of understanding. Most of the complainants know exactly what the standard means, but are not prepared to accept the conclusion.
In this context, the word ‘clarity’ is code for diluting, reinterpreting or rewriting the words of the standard so that its meaning aligns with those participants’ business models. If that outcome happens, the industry will be back to “business as usual”, the mandatory Code of Ethics will become little more than another ineffective overlay of red tape and the public interest will not have been advanced.
The anti-reformists can’t have it both ways. They can’t expect government to remove the regulatory burden about which they complain, while retaining the conflicts of interest which caused the problem in the first place.
However, if the industry were to embrace the principles in the Code of Ethics and the behavioural consequences that follow, it would be in a strong position to argue that the Code should replace much of the tortuous regulatory regime in the Corporations Act.
The future is in the hands of the industry. Do financial advisers want to be treated (unfairly or not) as a product salesforce and distribution network whose lives are controlled by a government’s ever-expanding, intrusive and costly regime of rules and regulations?
Do they want to continue advising clients under the pressure of conflicts of interest? Do they want to be participants in a demoralised, shrinking industry, servicing a sceptical community?
Or do financial advisers want to be treated as members of a trusted profession in which they are given the freedom, privilege and responsibility of making professional judgements in the context of a short principles-based Code of Ethics?
Do they want to be participants in a confident, growing and respected profession? Do they want to service a community that can afford to pay its professional fees (thanks to substantially reduced regulatory costs)? And do they want to see young people joining their ranks, confident that they are joining a genuine profession that is making a positive contribution in the community?
In posing these questions, it is important to acknowledge that many financial advisers are making judgements every day in their clients’ best interests. Most financial planners’ honesty, integrity and professionalism is admirable.
However, it’s undeniable that the industry’s culture continues to be affected by deeply embedded conflicts and other ethical issues which are addressed in the Code.
Ultimately, the question is whether the Code of Ethics can resolve these problems and transform the industry into the profession which it aspires to be. Without doubt, it can.
I submit that those who believe the industry can survive and prosper without the Code or with a diluted version of it, are unrealistic and out of touch with what the community expects and deserves. The Code of Ethics is the future of the profession of financial advice. It should be embraced in good faith, with enthusiasm and confidence.