Self-licenced practices – An alternative view on risks

Recently there have been some sweeping statements about the potential for the next big problems being from self-licensed. This is not a new idea – it was first raised as a possibility a few years ago, and still nothing has occurred.

I would posit a different view – one long held, and whilst doing so make a couple of observations about the journey to a fully-fledged profession, that I think should be self-evident. As context, I have participated in a great deal of evolution since I first joined financial services in 1978 and have worked across several of the sectors within, and am grateful for my career – which I ended up in more by chance rather than by plan.

It is my opinion that there is unlikely to be any systemic problem arising from the self-licenced sector, and that frankly much of the argument is self-serving from mid to large licensees and their leaders who clearly have a vested interest in the status quo – whether salaries or equity. It’s probably important to add that for a long time have been/am one of them, however I have maintained since 2011 that the current Corporations Act licensing structure is systemically conflicted with a professional model and needs to change.

Firstly, let’s look at the self-licensed argument and challenge the claim made.

1. In my experience with advice (and all professional services), if the substance of the advice is sound (so the clients are better off) and the client service is good and responsive, then there is never a claim. Much of the highly touted monitoring and supervision are of processes and documents that we all know the clients don’t understand, value or are rarely read. Not to say they don’t have a function, but it is more on the defending of advice rather than helping our clients.
2. In a self-licensed firm, the owner and the principal advisers are the same, and they have the close and direct relationship with the clients. As well as establishing a close and very different relationship with the licensee than can exist in a larger model, microeconomics teaches us that the value is always greater for the provider who is adjacent to the client.
3. The personal balance sheet and their personal reputation and often personal friendships are directly at stake for a self-licensed operator – they have enormous skin in the game.
4. The vast majority of all payments made to settle mistakes have occurred in the licensees with by far the larger resources, especially in terms of compliance and legal. I accept that probably half of the amount paid out didn’t need to be if the organisations doing so had opted to (or been able to) investigate properly. ASIC in the past acknowledged their mistake in thinking in the early days of the passing of the Financial Services Reform Act (FSRA) that these types of firms were better practices due to the level of resources. I do understand that unpaid claims may be a problem in the self-licenced sector (although that does not explain the role of Professional Indemnity (PI) insurers who are required to be in place) and this is part of the reason for the Compensation Scheme of Last Resort but consider the dramatic difference in the scale of the problems identified.
5. At the core of these larger groups lie a few problems in my observation:
   1. If they have a problem, it is often systemic, and they may have hundreds if not thousands of the same problem due to the common processes and tools.
   2. A self-licenced firm (and some of the boutique licensees) has their issues quarantined into one practice – and perhaps even then only one of the advisers.
   3. A great many of the heads of the larger licensees are not nor have been Financial Advisers. Imagine if you will the Minter Ellison (or every other law practice) managing partner not being a lawyer? Same for accountants and other professions. I believe this is an area that would benefit from research, comparing licensees of all sizes run by actual experienced and qualified advisers, versus the rest. There would be a number of interesting elements to test, but the difference between a purely commercial perspective versus a person who is an experienced member of the profession having given advice is likely to be significant.
6. You don’t have to take my word for it. There is a group of providers who keep the scoreboard for licensees – PI insurers. Their message has been clear for a decade or maybe more, they charge less for self-licensed firms. If I were playing basketball again, I’d just point to the scoreboard. I have heard the counter to this is that there is a lag to claims – but it’s been a long lag time.
7. In terms of the resources invested in monitoring and supervision – I get it – it’s expensive to monitor disparate offices/practices and advisers. Here lies a fundamental advantage for a self-licensed firm (and one identified by PI insurers). Supervision in a self-licenced firm doesn’t need the same level of systems and people – they are immediately present, talking constantly, checking constantly, and watching everything that is happening live all in the same office location.
8. I also believe another factor that lessens the risks of a major failure with self-licensed firms is that complaints are handled better at the coal face by the principal and licensee who is also one of, if not the main, adviser. Clients have a relationship with an adviser – not a licensee – regardless of the technical state of the law. When the adviser and the licensee are the same it is better for dealing with dissatisfaction.

The current licensing approach is in my view systemically conflicted with a genuine profession.  I ran the FSRA project for Zurich Australia. From the day of FSR, the artificial creation of the licensee has been a problem. When Commissioner Hayne asked “how did we get to where we are” – the answer was obvious: the licensee structure combined with the definition of advice only and narrowly as the recommendation of a financial product (the least valuable part of advice) made it inevitable that we ended up where we did with product manufacturers owning advice licensees and seeing them as distribution.

In terms of becoming a fully-fledged profession, I live in hope that the Australian Law Reform Commission review will face into the full removal of licencing. Professions are not licensed; they are admitted to practice by, say, the NSW Law Society, or the CPA, or the Actuaries Institute. Even the concept of individual licensing which so upset many of my colleagues when proposed by the Financial Planning Association is ultimately inconsistent with a genuine profession. Strangely the idea of doing what all the other professions do seems to be difficult to grasp hold of. If we genuinely want advice to be a profession, we need to start using the lens and modus operandi of professions to chart our future. By and large self-licensed firms are closer to this and operate more like other professions’ practices.