Advisers / Legislation / Licensees / Profession

Tinkering with adviser standards undermines the profession

Tinkering with standards could get in the way of the advice industry successfully transitioning to a profession

The financial advice education, professional and ethical standards program overseen by the Financial Adviser Standards and Ethics Authority (FASEA) not have been universally popular, but it was the best thought-out and most joined-up piece of thinking yet produced for how to address a number of shortcomings in the financial advice industry.

Last week the government announced a second round of changes to the original FASEA program of work and timetable, in what is becoming an increasingly piecemeal approach likely to cause more dislocation, uncertainty and anxiety, not less.

The first set of changes extended deadlines for existing advisers to pass the industry exam, and to obtain university degree or equivalent, or higher, qualifications. However, while announced they have not yet been legislated, and until the legislation is passed the old deadlines still apply.

And a second round of changes announced last week – also not yet legislated – abolish code monitoring bodies and compliance schemes, designed to police advisers’ compliance with the FASEA code of ethics that comes into effect in two and a half months’ time. It replaces the bodies and schemes with a new disciplinary system and single disciplinary body for advisers, as recommended by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Other than fulfilling a promise to implement every single one of the recommendations of the royal commission – except for that inconvenient one about mortgage brokers – the government has not explained why this approach is preferable to the previous one.

Financial advisers must still comply with the FASEA code of ethics from January 1, 2020. Current legislation requires financial advisers to be registered by their licensee with a code monitoring body before January 1 next year – and any licensee not registering its authorised representatives will be breaking the law.

Steps to protect licensees

Now, no code monitoring bodies will be created and in a statement last week, Frydenberg and Hume said ASIC is “considering the steps it needs to take to ensure that licensees do not breach the law by not registering advisers with a code monitoring body and will provide an update shortly”.

The government says “Australian Financial Services Licensees will also be required to take reasonable steps to ensure their representatives comply with the code”, but has not explained how compliance will be policed, nor how breaches will be treated, before this new body is set up and ready to go.

Apart from protecting licensees from unintentionally and unwillingly breaking the law, creating a new disciplinary body, staffing it and putting in place the necessary structures and policies, won’t be completed until early 2021, the government says.

But the second round of changes has an even more profound potential effect for the financial advice industry”

But the second round of changes has an even more profound potential effect for the financial advice industry, which was making progress towards becoming a profession but now has an additional barrier in its way.

A hallmark of any profession is that its practitioners regulate themselves. Professionals must comply with the law, of course, and it’s the role of regulators to ensure they do, and to punish them when they do not. But a fundamental characteristic of a profession is that its own members determine and set professional standards, generally exceeding those prescribed by legislation. 

Professionals police their own

They monitor their colleagues’ compliance with those standards and take action against them for any breaches. Really serious breaches can lead to an individual being removed from the profession. But the salient point is that professionals are policed and disciplined by their peers.

If the financial advice profession cannot set professional standards and police and discipline its own according to those standards, then it can’t call itself a profession. Six industry bodies had already co-operated – a remarkable achievement in itself – to create Code Monitoring Australia, to ensure compliance by their members with the FASEA code of ethics. All of that work, time and expense has been wasted, and an opportunity for the industry to step up in the manner of a profession and to police its own members has been lost.

“An opportunity for the industry to step up in the manner of a profession and to police its own members has been lost”

A code monitoring body and a compliance scheme created by the industry itself, although operating independently, would have had investigative powers, so it would not only be responding to breaches after the fact; and it would be required to report breaches to an existing regulator, the Australian Securities and Investments Commission. There does not appear to have been any dissatisfaction whatsoever with this idea.

Enter the royal commission

But in February this year the royal commission’s final report recommended the creation of a new disciplinary system and single disciplinary body for financial advisers. This was despite the fact that the royal commission was meant to take into account “changes to the regulation of the financial advice industry that are already in train, and will take effect in the coming years – including the improvements to adviser education standards and the introduction of the design and distribution obligations and ASIC’s product intervention power”. 

And it was despite Commissioner Kenneth Hayne’s comment that “Treasury, and many of the entities that made submissions, urged the need for caution before recommending change”. 

“This is undeniably right. As I said in the Interim Report, adding a new layer of regulation will not assist”

Commissioner Kenneth Hayne

“This is undeniably right,” Hayne said. “As I said in the Interim Report, adding a new layer of regulation will not assist.”

Yet last week the Treasurer, Josh Frydenberg, and Jane Hume, the Assistant Minister for Superannuation, Financial Services and Financial Technology, announced anyway that they would back this recommendation and ditch the entire concept of code monitoring bodies and compliance schemes, in favour of an approach that introduces further regulation and disengages the profession itself from monitoring and policing compliance.

That’s a blow for the financial advice industry on two fronts. It’s a second example of tinkering with a system that at least was holistic and coherent in its approach to raising adviser standards. And critically, it distances professional financial advisers themselves from taking active responsibility for setting, monitoring and enforcing standards among their peers.

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