The regulation of financial planning is clearly heading towards greater accountability and professional responsibility for individual advisers.
It will be each adviser’s responsibility to attain new professional, ethical and entry-level education standards, meet continuing professional development requirements and pass a proposed industry-wide exam. Advisers will foot the bill for their own regulation, through the much-discussed Australian Securities and Investments Commission (ASIC) industry-funding model.
Advisers, and advice practices, will also be under increased pressure to handle consumer complaints fairly and effectively as a single external dispute resolution body is created – the Australian Financial Complaints Authority.
Not all regulatory changes are focused on the adviser. An ASIC enforcement taskforce is exploring ways to hold the management and executives of financial services firms accountable for poor financial advice.
But by far the brightest light is being shone on the implications for advisers as individuals – and rightly so. Therefore, questions are being asked about the role licensees should play in authorising individual advisers, and whether that task could be better performed by a body unrelated to and independent of existing licensees, applying and policing education and professional standards consistently, right across the emerging profession.
A good test
The AFSL concept is less than two decades old, having originally arisen from a review of the Corporations Act in the early 2000s. So-called Financial Services Reform (FSR) replaced individual licensing of advisers with a regime under which the holder of an AFSL authorises an individual or a corporate entity to provide advice.
This has the not-inconsiderable effect of reducing the number of entities that ASIC is required to issue licences to from about 24,000 individual advisers, at last count earlier this year, to about 1600 AFSLs, and clearly no shift back to individual licensing of advisers will happen without the regulator’s agreement.
“From the regulator’s perspective, it’s a little too early to make a call on that issue,” deputy chair of ASIC Peter Kell says.
“In some ways, the introduction of professional standards will be a good test,” Kell says. “If that plays out in a positive way, if industry bodies ultimately can play a constructive and effective role, well, then ASIC has always been of the view that if you can have effective co-regulation, where industry itself plays a positive part, then we’re all for that.
“So let’s see how some of these reforms, especially around professional standards, play out over the next few years. Let’s see what comes out of that, and then I think we’ll be in a better place to make that judgement.”
A model in flux
The entities we know as licensees look different today from how they looked a decade ago, and will look different again in 10 years – or even by 2024, when the deadline arrives for all existing financial planners to hold a relevant degree or degree-equivalent qualification.
The demands of advisers and consumers are already changing. The managing director of Infocus Wealth Management, Rod Bristow, says the role of the licensee is being reassessed.
“The licensing thing was always an artificial construct of FSR anyway,” Bristow says. “Really, the fact that licensees emerged was almost accidental, but here we are.”
He says regulatory trends “are kind of pushing towards [asking]: If the adviser has got to pay for their own regulator, and the adviser has got to pay for their own education, and so on, then what role is the licensee playing?
“The licensee model – if I can grossly oversimplify – is going to move more towards a consulting business model over time.”
Bristow says a licensee will still provide a range of services to advisers and practices, including compliance support and monitoring.
“Unless licensees can work with advisers and genuinely add value to their business, I think they’re going to struggle,” he argues.
Time to reassess
The licensing role of the licensee needs to be reassessed in light of the historical context that gave rise to it, and the regulatory changes that are coming, says Julie Berry, principal of Berry Financial Services, a corporate authorised representative of Clearview.
While it may have been convenient for a regulator to issue and police a smaller number of licences, “now you’ve got ASIC imposing a fee every year to enable them to do the policing that they should have been doing in the first place”.
“The licensee’s need to do that policing…is that really there any more?” Berry asks.
When it is stripped back to its essentials, “all a licensee is, is a service provider. They should be there to provide software, compliance, research – all the tools you need to give quality advice.”
It should not be the licensee’s role to provide product. In fact, the licensee need no longer even license the individual adviser. An external entity could do that – the way the Tax Practitioners Board already does for tax agents and tax (financial) advisers or it could be an extension of the role of the fledgling Financial Adviser Standards and Ethics Authority.
Berry says: “For me, a licensee should provide the research, the training, the compliance. They can charge a fee for that; they could do group [professional indemnity insurance], and maybe some wizards and systems to help me; and they should just charge a flat fee for whatever services I think I want.”
She says this would signal to consumers that advisers are “beholden to a proper regulator or regulatory environment”.
“[You’d have] service providers over here, getting paid for what they offer, and products over there,” she says. “Why is that so hard?
It defies belief to me that it’s so difficult. But we’ve come from that historical position where ASIC went, ‘How do we monitor, control and supervise these people – I know, we’ll get someone else to do it.’ And so we have licensees.”
A culture of quality
The chief executive of Madison financial Group, Annick Donat, says the role of the licensee is to create and develop a culture for the provision of high-quality professional advice. Licensing individual advisers is the least valuable thing it does.
“I don’t think that’s valuable at all, but it’s a necessary evil,” she says. “It’s commoditised – everyone has to be authorised.”
If an external third party were responsible for the authorisation and policing of advisers, it would have the independent authority and obligation to remove an adviser from the profession, potentially without reference to the licensee.
“It’s fine with me,” Donat says. “If they shouldn’t be advising, they shouldn’t be advising. I was talking to the head of another licensee, who shall remain nameless, who said [they] just wanted to get rid of this particular AR [authorised representative] and move them on to another licensee. That’s wrong. Just get rid of them.”
Removing the ability of licensees to authorise advisers would also eliminate entities that have developed a reputation as licensees of last resort.
“Why they exist in the first place is the question we should be asking,” Donat says. “Why did they come to be? It’s not just a price thing. A lot of people say a licensee of last resort is cheap, you pay your fee and you’re authorised. But did they come to be because the ones that are a bit more expensive don’t add value? Did they come to be because there are advisers in the community who shouldn’t be advising but can’t take no for an answer, and the leaders that let them go didn’t do anything about it? Or did they come to be because [an adviser] is just starting out, and we don’t have a place for that person?”
Five years from now, “advisers won’t be authorised” by a licensee, Donat predicts.
“[A licensee] will be like a buying group, a community,” she says. “That’s where Madison is going. We want to make ourselves irrelevant from the bureaucracy point of view; where we want to be relevant is helping small-business owners, the entrepreneurial spirit, and helping them deliver advice in a much faster way.”
The director of channel services at AMP, Michael Paff, says that even as the adviser’s demands change, the future is bright for the licensee that has “a very strong value proposition and thinks deeply about what that is for consumers and advisers”.
Paff says professional and education standards, shifting demographics and the role of technology are already changing how advisers work, how advice businesses are structured and staffed, and how licensees are required to support them.
“On the back of that, how do we reimagine the value proposition of a licensee?” he says. “If you think about the licensee historically, a lot of our focus has been around the authorised representative. They’re the people who are licensed, and they’re the people we recruit, train, develop and govern, and the like. But if you look at an advice practice today, it’s shifting. We’re seeing the shape and size of advice practices change. We’ve got
some advice practices now that are 120 employees.”
Paff argues successful licensees need to focus on helping advisers develop leadership capability, support them in practice management, and provide coaching, “and whilst we talk about education standards, that’s quite a narrow view given what an advice practice will look like in the future, where we’re much more about professional services”.
What ongoing role licensees have in the actual licensing of advisers depends on how licensing is defined, she says.
“If licensing is just some background checking and putting people on a register, in some ways, that’s an administrative task,” he says. “But if it’s about making sure the person is appropriately skilled, has appropriate policies, training tools, monitoring and supervision, and about [rectifying advice] when things don’t go right, that’s very different.
“Even if somebody centrally licenses the AR, all of those obligations still rest with the licensee, or the business if it’s self-licensed.”
A licensee evolution
Infocus’s Bristow says that, over the years, licensees have provided “a really valuable, almost an umbrella, to allow advisers to operate without that burden of running their own business and having a compliance infrastructure and that sort of thing”.
“Advisers have benefited from the ability that licensees have to aggregate at scale and really drive some better commercial outcomes for them than they might be able to drive for themselves,” he says.
Those benefits can still be provided, even if responsibility for licensing advisers is removed, and licensees will continue to play a role in building a strong, professional advice community. Bristow says “advising can be a pretty lonely game”, and advisers need to share a sense that they are “part of a community that they can come together with and share thoughts and ideas”.
“There has to be value created in that, otherwise there’s no point doing it,” he says. “Licensees will not disappear, they’ll still be there. It’s not an Armageddon scenario, but I do think genuine value has to be delivered – that’s the key thing. It’s management consulting for the masses – a PwC model that’s applicable to small businesses. That’s what the licensee model could evolve into.”