Regulatory reform is rarely a straightforward process even at the best of times. We know this because we’ve watched it happen in financial advice numerous times over several decades.
It always takes longer than most people would like, it generally happens too late (that is, it’s introduced to address a problem that’s already happened) and it very often goes too far. Not to mention the unintended consequences.
Another consequence of frequent and quite deep regulatory reform is that it invariably leads to layering of regulations, produces overlaps and sometimes inconsistent requirements between different pieces of legislation and, in short, over time tends to strangle the industry or sector it regulates.
That’s exactly what’s happened in financial advice, starting back in the early 2000s with the Financial Services Reform Act, and following a line through the Future of Financial Advice reforms, responses to the Hayne Royal Commission, the introduction of professional standards and education requirements and other bits and pieces, right up to the government’s anticipated response to the Quality of Advice Review.
It’s created a bit of a mess. And it’s exactly this regulatory Gordian Knot the Minister for Financial Services Stephen Jones is trying to cut – without the whole thing unravelling. Jones’s challenge was made clear in the adviser breakfast sessions he’s been attending, organised by Conexus Financial, the publisher of Professional Planner, in partnership with Allianz Retire+.
“Over [a] decade or so, motivated by all the right reasons – which are consumer protection, accelerated by catastrophes…or scandals like those exposed by the Hayne Royal Commission – what we have done is solve the same problem about three or four times,” Jones told the breakfast event in Sydney on Monday.
“So behoves us to take a step back. Hopefully, we can do this and take a step back and say, okay, how many times do we need to solve the one problem?
“We’re trying to protect consumers from bad advice. We’re trying to protect people who don’t understand sophisticated investment products from being marketed sophisticated investment products. How many times have we solved for that same problem? And how much of that regulation that we’ve put in place is not adding any additional benefit to that task of protecting consumers? That’s the issue you all want to deal with.”
In Michelle Levy’s Quality of Advice Review, Jones has been handed a dense, sophisticated review of the regulation of financial advice that contains 22 recommendations to (among other things) identify “opportunities to streamline and simplify regulatory compliance obligations to reduce cost and remove duplication” and “whether parts of the regulatory framework have in practice created undesirable unintended consequences and how those consequences might be mitigated or reduced”.
If it were a simple case of rubber-stamping the recommendations and sending them to the Office of Parliamentary Counsel to draft legislation, we’d be having a very different conversation right now. But we’d also run the risk of exacerbating the very issue the review is supposed to solve.
Jones is facing a complex sequencing issue and has to get his ducks in a row before he can pull the trigger. In addition to Levy’s recommendations, he’s also examining professional standards (including the adviser experience pathway). There’s a review of the Managed Investments Scheme regime underway, which among other things will examine the definition of wholesale, or “sophisticated”, clients.
Jones noted that some of the advice review recommendations “directly overlap with [other] jobs the government has said it’s going to do”.
“For example, the announcement we’ve made to review the code of ethics, a job of work that we’ve got to do this year. It’s very difficult for us to pick up some of the recommendations, as Michelle [Levy’s] report acknowledges, without having that job in train as well.”
There’s been frustration and disappointment expressed at the roadshow breakfasts at the fact that after the advice review reporting process, which ran from March to December 2022 and involved extensive consultation with the industry, Jones has opted to conduct another period of consultation. But he denies he’s “conducting a review on the review on the review”.
“I’m certainly not doing that,” he said.
A period of uncertainty now is the price, in a sense, of securing certainty in the longer-term. Nevertheless, the industry requires more clarity than it currently has. Business decisions are being deferred or put on hold; investment is being delayed or shelved; decisions on whether to undertake additional education have been put on hold and, if they remain on hold much longer, some individuals may run the risk of missing the January 2026 deadline.
We can expect Jones to hasten slowly and the industry will need to take him at his word that a considered, deliberate approach now will avoid a scenario where we’re facing another review of failed financial advice regulation a few short years from now.
