The independence tonic

Tahn Sharpe

By

June 18, 2018

On the final day of the second round of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, counsel assisting Rowena Orr raised a question to Louise Macaulay, the senior executive leader of the ASIC advice team.

“Are you aware of whether any consideration has been given to requiring financial advisers to hold individual licences, rather than for the licensing to be at the entity level?” Orr asked.

Macaulay replied that she was not.

“Do you think there should be consideration of that, Ms Macaulay?”

“Speaking personally,” Macaulay said, “yes, I think there should.”

At Orr’s behest, Macaulay then explained why.

“Well, you wouldn’t have the intermediary, the licensee,” she said. “It would be a direct obligation on the individual. They would need to meet the professional standard. If they were unable to do that, then they would be out of the industry. So yes, it would be a more direct form of regulation.”

The interaction was important because it meant that the head of the team responsible for regulating the financial advice industry believed the current licensing system was not only inadequate, but also a hindrance to effective monitoring.

And she wasn’t alone.

ALTERNATIVE LICENSING

Shortly after Macaulay’s comments, industry stakeholders responded to the 28 questions counsel posed at the conclusion of the second round of the royal commission. Their submissions revealed widespread advocacy for exploration of an alternative licensing arrangement.

Question 24 asked if a “single system for professional discipline of financial advisers” was possible and whether extending licensing to an individual level would be appropriate. The Association of Financial Advisers (AFA) replied that “the option of individual licensing should be considered”, while ASIC backed up Macaulay’s view by reporting in its submission that “it would be possible to implement a single system for professional discipline of financial advisers”.

ASIC did, however, acknowledge the 2009 Ripoll inquiry report, which stated that while individual licensing “might improve ASIC’s ability to ensure those who engage in unacceptable conduct cannot enter the financial services industry”, it was ultimately “too costly to justify any regulatory improvements that may result”.

But that was then. In a post-royal commission world, the cost-to-benefit ratio of “regulatory improvements” may be viewed through a different prism.

The Financial Planning Association (FPA) said individual licensing would alleviate commercial pressure from licensees that could compromise an adviser’s application of best-interests duty.

“The professional obligations switch firmly to the individual,” the FPA’s submission reads, “and the pressure currently exerted by the licensee onto the adviser is reversed.”

The FPA’s submission also states that a system of individual oversight would take into account – and hopefully alleviate – the “confusing and difficult” disciplinary landscape. The current system, with six disciplinary levels, including the licensee, regulators and the new Financial Adviser Standards and Ethics Authority-led code-monitoring bodies, makes it “difficult to figure out which is the appropriate body to make a complaint to”, the FPA submission argues. The hope is that a “single body of jurisprudence” would not only be easier for customers to navigate but also reduce the regulatory and compliance burden for advisers.

Perhaps the most important leap the FPA submission makes is that it suggests a few alternative licensing frameworks, which leads to the crucial question: what would a landscape of individually regulated advisers look like?

ASSOCIATIONS IN CHARGE

The first of the FPA’s suggestions, that individuals be issued a “Practicing Certificate by an approved professional association”, is probably as self-serving as it sounds. As the largest adviser representative group, the FPA would be the primary candidate for this role. Nevertheless, the idea has merit. ASIC would continue to license advisers, but licensees’ monitoring and reporting duties would presumably be taken up by one or more nominated associations.

Ray Miles, founder and director of Fortnum Private Wealth, is sceptical that professional bodies such as the FPA can switch lanes and become policing bodies.

“The FPA has not shown themselves to be good at disciplining,” Miles says. “They can set professional standards but they can’t enforce them, they’ve got no chance.”

The issue was highlighted at the royal commission when Orr challenged AFA chief executive Phil Kewin to explain how the group could fulfil both representative and disciplinarian functions.

“I think we’ve already seen that there can be tension in those roles,” Kewin replied.

Encore Advisory Group chief executive Tom Reddacliff says the associations will need to be fortified by the relevant professional standards scheme to be taken seriously as disciplinary bodies.

“Look at the Law Society,” Reddacliff says. “They’re enacted by the professional standards legislation and legal professionals have to get certification through them.”

ClearView managing director Simon Swanson believes authority by legislation is also essential.

“They must have the power to ban someone,” Swanson says, before highlighting the infamous Sam Henderson case as an example of what happens when a professional body – in this case the FPA – doesn’t ban a compromised adviser from practising.

With the mandated and legislated authority to regulate individually licensed advisers, the associations could grow into the role. Reddacliff says this would necessitate a sharp detour in their priorities but that it could be done.

THE STATUTORY BODY SOLUTION

The FPA’s second suggestion is that “a statutory or independent body, separate to ASIC, would be responsible for individual registration”. Again, ASIC would license organisations, but this scenario would involve a separate authorised group that sets the registration criteria and monitors compliance.

FASEA is the statutory elephant in the room here. Aside from ASIC, it is the only existing financial services authority with a directive remotely aligned to that of the regulator.

FPA chief executive Dante De Gori insists the FPA did not have FASEA in mind as the statutory body.

“The role of FASEA is to set standards, not perform registration of practitioners, so it is well outside the qualifications for the suggestion,” De Gori says.

The inference then, is that the FPA is putting forward the option of setting up a new regulatory body; however, Encore’s Reddacliff thinks adding another layer may do more harm than good.

“I do worry that there are too many regulatory bodies going around,” Reddacliff says. “It could get very confusing and expensive.”

Angelique McInnes, a lecturer in the School of Business and Law at Central Queensland University, says FASEA is the most logical entity to license advisers.

“FASEA should not only be tasked with professional standards, education and ethics, but evolve to also appoint, register, regulate and discipline advisers and cease [individual advisers from practising],” McInnes argues.

She acknowledges that the journey from standard-setter to licensee regulator would be a leap for FASEA. “We have the body, but we haven’t got the infrastructure yet,” she says.

Nevertheless, she believes the authority is well placed to make this transition.

“It’s going to have to evolve,” she explains. “It looks like an insurmountable situation, but if you create another statutory body, it will have to start from scratch as well.”

The idea of FASEA in charge also has some institutional support. Jane Watts, general manager of advice at BT, published an article on the Westpac website in May outlining the duties the body could pick up.

“We envisage FASEA would be responsible for matters such as: entry into, and removal from, the profession; issuance of practising certificates; continuing professional development; and the setting of professional standards for individual licensees,” the article read.

ASIC BEEFED UP?

Another alternative is to increase the resources of ASIC so that it can adequately regulate individually licensed advisers.

At the Australian Council of Superannuation Investors Annual Conference, however, ASIC chair James Shipton intimated that the current regulator framework was not capable of fulfilling this function.

“The Australian regulatory system was not constructed to license individuals performing financial services roles,” Shipton said.

LICENSEE LURCH

Any conversation around individual licensing will call into question the fate of dealer groups, yet Encore’s Reddacliff says the good ones would benefit most from the change.

“The better groups with robust business models don’t fear this at all,” he explains. “Licensees will still be there and offer resourcing and support, but the licensing and risk parts would be taken out.”

Licensees would invariably need to reshape themselves, but their role would not diminish. If anything, advisers would rely on licensees for support even more as they take on more responsibility for their own conduct and compliance.

ClearView’s Swanson also believes that once the licensing element is carved out, licensees will be free to become pure “service organisations”.

“I don’t see individual licensing as a threat to dealer groups at all,” he says.

While licensees and dealer groups should thrive, their approved product lists may be called into question.

Fortnum’s Miles says APLs must be retained and, more importantly, insurers need to be a big part of the individual licensing discussion.

“You need an APL and a level of discipline,” he says. “And there’s no doubt that you’d need insurers to be part of the process from the start”.

BIG DATA STUFF

Reddacliff believes technology will be the key to enabling individual licensing. Regulating 25,000 advisers will be a tough remit, he says, which can be achieved only with a centralised information system that has advisers plugged into it.

“The regulator will need a clean and efficient database so information can be shared up and down,” he explains. “You need a data hub, and you need data interfacing to get the information from one spot to another.”

Further, Reddacliff says, the regulator will need “a series of language and analytics filters” to sweep advice documents for compliance breaches. Advisers would need to be connected to the system as a condition of their licence, he says.

Miles agrees that “big data stuff” must be harnessed to monitor individually licensed advisers effectively.

“The regulator will need to put all the new software that measures documents against compliance into its system and let AI check them,” he says. “That kind of technology is the only way we’re going to do it.”

THE WAY FORWARD

For the current discussions around individual licensing to become what Reddacliff calls a “movement of substance”, a taskforce needs to be assembled so a proposal can be drafted and released for consultation.

A measured, holistic approach is necessary. This cannot be done from a distance; advisers, insurers and dealer groups must all be involved.

“Remember, this is probably the most advanced financial planning industry in the world,” Miles says. “Australia does this better than anyone else. We just need to use our common sense to move towards a pure environment.”


TOPICS:   asic,  Clearview,  Encore Group,  Financial Adviser Standards and Ethics Authority (FASEA),  individual licensing,  James Shipton,  Ray Miles,  Tom Reddacliff

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