Don’t lose sight of who regulation is ultimately meant to serve


February 25, 2014

There’s an emerging trend in the debate about regulation of financial services around the world. It demonstrates that some people have apparently learned nothing from history, and are so blinded to what they should have learned that they are likely (and quite happy) to wreak the same havoc on investors and taxpayers next time around.

But they’ll repeat the mistakes only if the public gives them a chance to. There is a growing chorus of voices being raised, alerting consumers to what’s going on, and if the financial planning industry isn’t very careful it’s going to find itself irretrievably on the wrong side of the argument.

The trend in question is the argument that reform and stricter regulation of financial services is not necessary and that it will stifle the ability of providers to operate efficiently (read: profitably).

We’re seeing this trend globally in arguments about more stringent capital requirements for banks; and we’re seeing it locally in arguments about winding back reform of the financial planning industry.

Capital requirements

One of the potential problems of more stringent capital requirements for banks will be how to generate an appropriate return on equity from a wealth management business. There’s an argument that says under these conditions banks will be keener than ever to pump money into their in-house investment products, to generate sufficient profits. This in turn has implications forhow they view financial planners – that is, as distribution – and the incentives they’re prepared to pay to ensure a healthy flow of funds.

The government argues its amendments to FoFA will ease the regulatory burden on business, and thereby facilitate easier and cheaper access to financial advice. That’s difficult to argue with – but the question that is being asked more and more urgently is: access to what sort of financial advice? Reform is useless if all it does is make it simpler and easier for consumers to find their way to financial planners who do not then work primarily in consumers’ best interests.

The reputation of financial planners already stinks. And a lot of the debate around the FoFA amendments is quite technical. To be frank, the public does not care about s961B(2)(g). It shouldn’t have to. All it should have to care about is whether or not a financial planner – any and all financial planners – will work unequivocally in their clients’ best interests.

That’s the issue that currently dominates the public discourse, and the message being received, loud and clear, is that the FoFA amendments put that at risk.

Devil in the detail

The SPAA SMSF National Conference in Brisbane last week heard a lot about the proposed amendments. It would be wrong to claim there was a consensus view, but one particular conversation stood out. This was with a person well versed in the law, and in particular in drafting regulations. This person said it was irrelevant whether the amendments were enacted by legislation or by regulation; what was really of concern was that the intent of the amendments relied too often on a single term or phrase.

Get that phrase wrong, this person argued, and you can – as been said by others, before – drive a truck through the reforms. And that mean that among other things, commissions would be back, big time. The devil is, indeed, in the detail.

An educated, forewarned public might be able to see through that detail to differentiate better between those service providers that have consumers’ best interests at heart, and those service providers that have their own best interests at heart. But being better educated cannot be consumers’ only defence.

Surrounded on all sides

No one asked them if they wanted to make contributions to superannuation in the first place; it’s a recipe for disaster to tell consumers on the one hand that they have to take control of their own retirement savings and then not adequately regulating the advice and services they need to do that.

It’s often said by financial planning firms that they want to put the client “at the centre of what we do”. That’s all well and good, and sections of the industry are serious and sincere when they say that. But in some quarters it seems they only want to put the client at the centre so the client is then surrounded on all sides.

TOPICS:  Future of Financial Advice (FoFA)regulation