NCA backflip shows advice profession tarnished by Shield and First Guardian

The world has changed. 

This is how Minister for Financial Services Daniel Mulino justified the government’s decision to renege on its commitment to allow financial advice licensees to participate in the new class of adviser regime ushered in by the second tranche of the Delivering Better Financial Outcomes (DBFO) reforms. 

The statement is not wrong. 

The collapse of the Shield and First Guardian master trusts, which left thousands of Australians out of pocket to the tune of $1.1 billion, has understandably worked its way to the top of the minister’s agenda. In so doing, it has changed the composition and pace of the legislative initiatives on Mulino’s to-do list. That list is long, with much of it inherited from his predecessor, Stephen Jones, who was liberal with his promises over his near-decade in the portfolio in government and opposition. 

As well as changing the government’s priorities, it is fair to say inclusion in the new class of adviser regime – which would have allowed advice licensees and their authorised representatives to employ individuals who do not meet the stringent criteria for professional personal advice to give some sort of scaled guidance to consumers – has also dropped down the list of the profession’s policy priorities.

Two years ago, when negotiations over DBFO were in full swing and the scale of the Shield First Guardian incident had not bubbled into the open, some advice providers mounted the argument that if super funds, insurers or other providers were granted such a reprieve from the advice laws, then the profession should be included as well.

But the growing, existential – and many would say unjust – bill emanating from the Compensation Scheme of Last Resort means the NCA proposal became more of a ‘nice to have’ than a strategic imperative for the profession. Plus, some of the regulatory compliance burden and duplication has been eased by technological innovations in the interim, especially the application of AI to the cumbersome advice process.

Few advisers, therefore, are probably incensed over this particular political flip-flop – and would much rather see action on the CSLR or refinement of education and ethics standards. 

That position is understandable, especially given the time pressures on the advice profession and challenges it faces. But it risks glossing over the significance of the omission from the perspective of the profession’s public standing.

“I remain convinced by the underlying public policy rationale [of DBFO],” Mulino told the Conexus Retirement Leaders Summit last Wednesday, following his landmark address to the National Press Club, during which he announced the NCA proposal was making a surprise comeback.

“But I think it’s fair to say that… the First Guardian/Shield world was a different one, where suddenly I was crafting a whole bunch of provisions that were focused on more consumer protection. I think a sensible way of doing that, in light of the fact that there are a number of risks in the broader financial services ecosystem, is to at first do that with APRA-regulated super and life, and with appropriate guardrails there.”

Implicit in the minister’s comments is a heightened risk assessment for the financial advice sector relative to other financial services. This is despite the profession being subject to layers and layers of regulatory oversight, statutory obligations, increased education requirements, PI insurance and a code of ethics – not to mention a compensation scheme it is bearing the brunt of funding!

Without question, the handful of advisers who recommended Shield or First Guardian to consumers (and their licensee) have done enormous damage to them as individuals and the industry as a whole. 

But they are by no means the only sub-sector that presents “risk [to] the broader financial services ecosystem” or that should be held to account for their role in the collapse of the problematic funds. Blame should also rest with the research house that rated them, the auditor that ‘audited’ them, the regulator that registered them and the platforms/super funds who hosted them.

The latter are especially relevant given they are APRA-regulated. Despite the minister’s confidence, seemingly prudential oversight was not sufficient for mitigating this particular risk.

This brings us back to the NCA. Many advisers and licensees canvassed by this column are against the idea of super funds or insurers providing forms of lower-tier “advice” to consumers. 

Some oppose the notion on principle, given the toll taken by the hard-fought battle for higher professional standards, which resulted in about half of the country’s advisers leaving the industry. But others worry that were this experiment to go awry, the profession would be blamed given it would technically be an “advice” failure.

Mulino’s decision to renege on Jones’ inclusive approach to the NCA proves they are right to be nervous. This is really just the latest case in a long history of advisers being blamed for the misdeeds of other, more powerful groups.

The most obvious example is the big banks fleeing the scene after the Hayne royal commission only for advisers to be hit with the regulations and compensation bills that followed.

Interestingly, the banks are also prudentially regulated, setting up a blueprint for fights still to come.

When they inevitably return to the wealth sector and request to be included in the NCA as their entry point, remember you heard it here first.