The aphorism “the road to hell is paved with good intentions” once again comes to mind when observing the latest attempts by the federal government to legislate the worthy recommendations of the Quality of Advice Review. I say “once again” because politically compromised and unnecessarily complex laws have been a constant feature of financial advice reforms over many decades.
As all licensed financial advisers know and experience daily, a mountain of reactive legislation has been constructed with which they are expected to comply in meticulous detail. This allows politicians to claim that they’ve identified shortcomings in the law and have acted to stop rip-offs and scandals. However, carve-outs, exemptions, workarounds, qualifications, compromises and political backdowns have become so common in the legislation that well-intentioned reforms rarely see the full light of day or are diluted so as to benefit certain interests.
Nevertheless, the industry has complained loudly and bitterly throughout the decades about the complexity of the compliance regime under which its participants are forced to operate, the high cost of service delivery and the inaccessibility of its services to the “unadvised” public. These complaints have merit, but there’s considerable irony (apparently lost on many in the industry) as to the central role that financial advisers have played in creating the problems in the first place.
It seems that history may well be in the process of repeating itself with the not altogether encouraging implementation of the Quality of Advice Review. The so-called “quick wins” that were enthusiastically promoted by the government seem to be neither “quick” nor even necessarily “wins”. Good luck to the Minister with implementing the rest of the recommendations when the simplest and quickest ones appear to be so difficult.
The key challenge to the achievement of genuine and positive reforms in the financial advice industry is for the parties to agree on whose interests should be paramount. It’s one thing for industry participants to say that the interests of consumers must come first and quite another for them to act in ways that clearly support such a statement.
We observed this tension way back in 2013 when the accounting profession (of which I’m a member), so steeped in highly-principled rhetoric about protection of the public interest and the imperative to avoid conflicts of interest, forced the profession’s independent standard setter to dilute its proposed financial advice ethical standard. This action, enthusiastically supported by interests both within and outside the profession who claimed fealty to the best interests of clients, was designed to allow the continuation of commissions, asset fees and other conflicted product incentives for accountants involved in the delivery of financial advice services.
On enquiring about how this could have happened in a true profession, I recall being counselled by senior executives of the accounting bodies that the principal role of those bodies is to protect members’ commercial interests against predatory competitors in the rest of the financial advice industry. Therefore, I was informed, it was necessary to compromise time-honoured ethical standards, so that the interests of “stakeholders” (product providers/financial advisers/clients) could be appropriately balanced, rather than retaining the traditional understanding that (after the public interest) the clients’ best interests must always come first, even to the detriment of the members’ commercial interests.
Given this disturbing misunderstanding and reinterpretation of the role of a profession in society, one can begin to understand why the reputation of the profession of accounting has fallen so far and how recent scandals involving conflicts of interest and tax consulting might have occurred.
Another example of this tension between interests is the Future of Financial Advice legislation (FOFA) which was introduced in 2012. The original version of FOFA was full of good intentions and strong, undiluted ethical reforms. This was especially the case in the key areas of conflicted remuneration and the best interests duty. However, by the time the legislation was finalised, its contents were so compromised as a result of lobbying by interests who claimed nevertheless to support consumers, that the proverbial truck could be driven through the law.
This made the legislation far more complex and costly to administer, not to mention of limited effectiveness. Even so, the minister continued to assert that consumers remained paramount in the final version of FOFA (as did the industry). The reality is that the legislation could have delivered so much more and at a much lower cost, if it were not for all the carve-outs, exemptions, workarounds, qualifications, compromises and political backdowns promoted by the lobbyists.
Instead, FOFA’s major impact was to substantially increase the cost of service delivery by financial advisers without resolving the conflicts of interest that it was supposed to address. This is not to say that FOFA was a failure. There were some positive initiatives. However, based on a cost-benefit analysis, it’s by no means clear that the legislation was worth all the trouble taken by the competing stakeholders, not to mention by the government that sponsored it.
Then came the final report of Hayne royal commission in 2019 which many of the industry’s longstanding ethical shortcomings, previously ignored or compromised by FOFA, were embarrassingly identified. This led to more recommendations and legislation, notably in the area of “fees for no service”.
This was followed by the final report of the Quality of Advice Review, the laudable purpose of which was “to ensure that Australians have access to high quality, accessible and affordable financial advice”. The review contains an excellent situational analysis of the industry and makes some sensible recommendations for reform. Of course, there will never be unanimity on every detail of the review’s recommendations. It would be unrealistic to expect that to happen, however, the future would be much clearer and easier if competing stakeholders were to genuinely agree on whose interests must be paramount. There should be no doubt on this point. The clients’ interests must always come first.
Until there is genuine agreement on this fundamental issue and the behavioural consequences that must flow from it, the way forward will continue to be confused, unclear and ethically compromised. As a result, many of the worthwhile recommendations of the Quality of Advice Review may be diluted or may never be implemented. Regrettably, the process of reform is made all that much harder because there’s a great deal of highly-principled rhetoric being used by interest groups, giving the appearance of unity and commonality of purpose, but there’s a limited amount of mutual trust.
There is a simple solution to all of this nonsense. It’s the mandatory Financial Advisers Code of Ethics. It’s only one page. It’s not rocket science. It contains twelve high-level ethical standards that the financial advice industry needs to follow to achieve the consumer-first outcomes that have been unsuccessfully sought through layer upon layer of complex and compromised legislation that has been introduced since the birth of the modern financial services industry in the 1970s.
No doubt, I will be accused of being unrealistic and impractical by seriously expecting that the industry’s principal challenges (namely, lowering the cost of advice, removing conflicts of interest and creating trust) can be resolved through genuinely adhering to this short Code of Ethics. I respectfully disagree.
It is the true definition of madness to continue with the current approach in which advisers are forced to spend so much of their valuable time stressing over what does or does not comply with unnecessarily complex, compromised and prescriptive laws and regulations. It is not in their interests and it is not in the interests of their clients.
A far simpler and more effective approach to regulation is to squarely place responsibility on individual financial advisers to make professional and ethical judgements under the twelve standards in the principles-based Code and to support that approach with credible oversight from the regulator.
When it comes to judging the last fifty years of financial advice regulation, I’m not suggesting that nothing has been achieved. But we’ve certainly managed to miss the forest for the trees.
Robert MC Brown is a chartered accountant with more than 30 years’ experience in taxation, superannuation, financial planning and education.
