One day “financial planning” will be accepted as a worthwhile profession, “financial adviser” will be considered a worthwhile title, and both will be held in high regard. However, we all need to accept that this is not an overnight shift – it will take a decade or longer to iron out the embedded culture of the past wrongdoings. During this process a new era will arrive, with direction provided by the advisory community and its selected professional bodies – not the current manufacturing oligopoly of the banks and the AMP.
While the destiny of this latter group is more pragmatically shareholder-driven, an adviser’s work involves community-based social care for the financial wellbeing of everyday Australians. Only recently, when speaking to an adviser who had supported a widow through her husband’s funeral, I was reminded of the stark difference in the role of advisers and their level of engagement. No statement of advice (SoA) or media network will pick that up, but it’s the real deal for good advisers.
The regulator itself – the Australian Securities and Investments Commission (ASIC) – has an important role to play in the transformation by accepting that it also has to change its processes, and not just argue that the advice community needs to change. It means more than just playing its current role of compliance enforcement and soft/tough talking to industry leaders and executives in the wealth chain about the cultural change. It means examining where the regulator itself contributes to the shortfall in common-sense terms. This means accepting that atonement for the sins of the past must be shared. Then we can get on with self-improvement.
The problem with AFSLs
One area that could be explored more carefully is how Australian financial services licences (AFSLs) are issued, to whom and how. It’s all very well to argue retrospectively that a licence is being poorly managed and failing to meet governance and social standards. But how was the licence issued to the recalcitrant responsible managers (RMs) in the first place?
This leads us to where we are at present, with the Financial Ombudsman Service (FOS) and ASIC trying to promote the concept of an industry-funded compensation scheme to overcome the limitations of professional indemnity (PI) insurance, so that consumers are better protected. It is suggested that funding should come from existing licensees, on top of all the other costs of compliance and PI that good operators already incur.
So they pay twice. How logical is that, given it’s not the good guys who are causing the problem?
The whole concept of an industry-funded compensation scheme is wrong. Instead of addressing the cause of the problem, it creates a soft landing – nothing improves and governmental bodies are protected from negligence.
Here are three valuable points to consider, instead of the proposed band-aid.
1) AFSLs are currently issued by ASIC after reviewing electronic applications and without meeting the applicant face to face. An interview process would throw up huge improvements in capability of assessment, to such an extent that they might reconsider the skill set and operational expertise of the applicant, among other things.
2) PI insurance, which is mandatory, is issued by the underwriter via a broker and again, the insurer never meets the applicant. So we have planners who ASIC has never met, and who the insurer has never met, and a broker who gets paid commission for getting an outcome – and who, once again, often never meets the applicant. Sound sensible when something goes wrong?
3) AFSL approvals generally are not granted to RM applicants who do not have retail advice experience. This means applicants with experience in corporate governance, risk management, investment management, legal and underwriting get excluded – but a planner with three years’ experience selling life insurance qualifies as a responsible manager.
One can therefore assume that ASIC chairman Greg Medcraft should not or would not qualify to get an AFSL – neither would the MD of a trustee or custodian business, unless they have given face-to-face retail advice. Is that a sensible policy?
The quality of managers
By addressing some of these massive shortcomings we can improve the quality and depth of the RM world in line with directorships and the Corporations Act. This will protect consumers more than an artificially funded scheme.
Furthermore, much of the current thought around banning RMs from ongoing involvement in the industry should be a matter of course. We have RMs in the industry who have been involved in significant consumer losses due to their behaviour and management. We have advisers who have had their licensee enter administration and disappear. We have had complete demonstration of the lack of understanding around risk management, coupled with inadequate supervision and monitoring of authorised representatives – and still they sit in the AFSL community and influence behaviour.
It’s not always the adviser to blame for what’s wrong. Change from all of us is needed, and it can start from the supply side of the advice industry. Let’s start talking about good apples again – it’s a better vision. And there are lots of good apples in this industry who genuinely care about their relationships and who they assist.
