The financial services system is broken.

It is too tight.

The concept of loose and tight systems is typically the domain of science and engineering but it is just as applicable to other fields, professions and industries.

The current financial services regulatory regime is the perfect example of a tight system and what can go wrong when extremely prescriptive, rigid controls are in place.

A decade after the introduction of the Future of Financial Advice and MySuper reforms, and four years after the Life Insurance Framework, adviser numbers have been decimated, growth has stalled, and fewer people are seeking professional advice.

The mounting compliance burden has pushed up the cost to serve and subsequently advice fees, quashing accessibility and affordability.

The key to this industry’s future lies with entrepreneurs. Entrepreneurs are bold and innovative. They challenge conventional thinking, develop new products and services, and create jobs. They drive economic growth.

Unfortunately, entrepreneurs don’t thrive in tight systems. They need room to play to their strengths, move quickly and take measured risks. They need the ability to try and succeed, and potentially fail.

But there’s no appetite for failure in financial advice, particularly after the Hayne royal commission. Advice must be perfect; people’s retirement savings are at stake.

In trying to ensure quality advice, the regulators have dictated the advice process and, in doing so, business models.

Now, as part of the Quality of Advice Review, Treasury wants to examine if “simpler principles-based regulation can replace any of the current detailed requirements” to reduce the cost of compliance, encourage “new forms of advice” and stimulate growth. In other words, it is looking to loosen things up.

The advantages of a loose system can be seen in new, largely unregulated sectors. The rise of the sharing economy saw companies like Airbnb, Uber and Amazon expand quickly. More recently, the buy now, pay later (BNPL) sector has boomed, epitomised by the success of Afterpay.

Looking back at the heady days of financial planning in the ’80s and ’90s, growth was underpinned by the enthusiasm and ambition of hungry advisers and a relatively loose regulatory setting.

There is no question that rules are critically important. They build trust and confidence and ensure appropriate consumer protections. We’ve seen the devastating consequences of being overly lax. Regulators and policymakers need to get the balance right.

Similarly, business leaders need to ensure robust systems and processes, and appropriate governance and oversight, without stifling joy and enthusiasm.

The importance of joy and enthusiasm can’t be underestimated. Learning plus excitement equals growth, but there’s little joy in tight systems. Just look around.

In my experience, the best places to work have a leadership group that encourages entrepreneurial thinking.

The board and senior leadership team articulate the company’s vision, strategy and values, ensure the right people are in the right roles and then take a step back and let people to do their job.

With this Keynesian-style approach, employees/member firms/subsidiaries are backed by a central governing body that provides resources, oversight and stability. However, responsibility for things like operations, recruitment, pricing and marketing is decentralised.

People are empowered and incentivised to think for themselves, solve problems and pursue opportunities.

For regulators and business leaders, adopting a loose system isn’t easy. It is counterintuitive to traditional approaches and it requires trust. boards and management need to trust their people. Those that can’t be trusted shouldn’t be there.

Consider how the workplace has changed since the onset of Covid-19.

Today, many employees have the flexibility to work remotely, choose when they go into the office and stagger their hours around school pick-up and drop-off, gym classes and other appointments.

Away from their manager’s prying eyes, employees are happier and more productive.

With that in mind, the prospect of a looser system flowing from the advice review is exciting.

As an emerging advice profession, a more principles-based approach to regulation makes sense.

Advisers should be encouraged to use their professional judgement, based on their education, skills and experience. Entrepreneurs should be released to think creatively, build strong businesses and prosper. In this eco-system, backing entrepreneurs is a winning strategy.

3 comments on “Advice future hinges on less constrictive regulatory regime”
  1. Avatar
    Jeremy Wright

    Paul is right that the system needs to allow entrepreneurs scope to take the risk to build viable businesses, that can create employment and positive outcomes for their clients and for the economy.
    However, having lived through 35 years of the financial planning journey, where it went from care free, exciting opportunity, to what seems like the dark ages, there must be a balancing act of client protection and sensible Regulations that make sense and are easy to follow for everyone, including clients.
    Today, we have crushing regulations that cause fear and uncertainty, which has led us down the path so an SOA, which is supposed to mean Statement of Advice, in Advice land, actually means, Save Our Ass.
    For the client it means, “I have no idea what this SOA legal dictionary means, which also means I have to trust what you say, as I have neither the time or expertise to read or understand what you have put in front of me.”

    So that is the world we live in today, where years have been lost and Billions of dollars have been spent, so we can provide advice in the written word that no-one understands.
    It is all very well for pundits today, to want to turn back time to the good old days, which in theory is great to free up time and costs to see more people. However, if the same rules apply, where you can be hung out to dry, because your professional judgement may be interpreted differently to a Regulator, Licensee or Judge, then rapid growth, could also lead to a rapid deceleration similar to hitting a wall, which helps no-one except the Lawyers, who always win in any situation.

    If we want to see a turn around in Adviser numbers and the costs to go down, then CLARITY becomes the number one issue to be dealt with.

    Common sense rules, that everyone understands, or at the very least, a step by step set of protocols that can guide all parties to a point where moving forward is an easy choice, that reduces the risks and encourages entrepreneurs to make the first steps TOWARDS, not AWAY from growing their Businesses, then we stand a chance to breathe and sleep easier, which in turn will help take away what has been a continual nightmare of uncertainty.

  2. Avatar
    Justin Daniel

    The joy from being an adviser sailed years ago. Dont get me wrong, we have some great days. But the burden explained above is real.

  3. Avatar
    Justin Daniel

    well said paul- The importance of joy and enthusiasm can’t be underestimated. Learning plus excitement equals growth, but there’s little joy in tight systems.

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