“How sharper than a serpent’s tooth it is
To have a thankless child!”
— FSC Media Release (or, possibly, King Lear, Act 1, Scene 4)
Context and conflict
If I’d begun my criticism of the White Paper by asserting that the FSC is like “a man who, having killed his mother and father, throws himself on the mercy of the court because he is an orphan”, I’d understand their need to respond to my article “Reform by gaslight: The FSC White Paper on Financial Advice”.
I didn’t, so I don’t.
My article in Professional Planner, “Reform by gaslight” took a balanced approach to the issue, but was perhaps more nuanced than it first appeared.
I was critical, but would have been more so if I’d chosen to focus more closely on the assumptions and influences that underpin the FSC’s main arguments. Rather than speculating why the FSC is so sensitive to objective criticism, or why they feel entitled to lead the debate, I’d like to address some overlooked details and explain why I think that advisers, and advice businesses, are better placed to drive the public debate on the regulation of advice.
Before we start, please read the FSC White Paper on Financial Advice and the independent research provided by KPMG.
FSC White paper on advice
KPMG Research on Advice
Let me start with a concession against my own interests; although I believe that although the White paper is flawed and infuriating, it’s not a wasted exercise but simply one that would have immensely benefitted from involving advice professionals and clearly acknowledging that regulatory complexity and increased cost are (at least in part) consequences of the choices, conflicts and conduct of the FSC and its members.
To be clear, the FSC’s recommendations for reform are not entirely without merit. While they might optimise product distribution, some recommendations could improve both advice quality and the client experience. For example, the FSC’s idea to create a clear demarcation between financial advice and product information is laudable, but too limited. They propose that the definitions should be product agnostic. I’d suggest that the reform should be more ambitious; references to ‘financial product advice’ should be removed and replaced with references to either ‘financial advice’ or ‘general information’.
If this were done, consumers could more easily understand that all financial advice – provided by competent, capable and qualified professionals – considers their personal needs and circumstances. In contrast, general information does not and cannot consider their personal needs.
In this division, general advice is simply financial advice with a limited scope.
Likewise, although the development of a sustainable advice profession may be an afterthought, the FSC’s push for self-regulation (Recommendation 21) and their endorsement of current licensing models (Recommendation 23), might make co-regulation by 2030 a realistic goal. Further, their recognition of specialist advisers (Recommendation 22), better access to consumer data (Recommendation 29) and the need for tax incentives for professional advice (Recommendation 31) all support the emergence of an advice profession.
Where we differ, markedly so, is in our views of participants’ agency and the principle-based regulatory regime that governs the provision of advice.
“I often find myself in discussion with those who don’t understand the regs and legs, but somehow think that new legislation will magically make their problems go away.”
— Nathan Fradley, FChFP
It may be obvious to advisers but I still find it particularly ironic, that the association whose members railed against the uncertainty and complexity of principles-based regulation, and lobbied for carve-outs and prescription, now complain about the situation they midwifed into being. Beyond signalling the increasing irrelevance of the adviser associations, the FSC’s White Paper demonstrates an alarming mix of naivete, ignorance, inconsistency and cunning; while their new found realisation that compliance with 961B(2) [safe harbour] is not required to satisfy s961B [Best Interest Duty] should be embraced, they introduce additional complexity by suggesting that the Code of Ethics should not “be the sole over-riding measure by which the Best Interest Duty is met”.
No-one had ever suggested it was, but this misrepresentation appears to be the foundation on which they stand to argue for further refinements of the Code of Ethics to support “the long-term principles-based regulation of financial advice”. Many might argue that the Code already explicitly, and effectively, achieves this goal but those people might also struggle to reconcile the FSC’s opposition to prescription with their demand for principles-based regulation with “examples of what an ethical or professional advice provider looks like, how they approach their work and in what manner” and “reasonable and clear requirements”. More bizarrely, in my view, they advocate for a “Letter of Advice” to replace Statements of Advice and Records of Advice (Recommendation 5) and, while they position it as a simpler document, their subsequent qualification adds those matters required in a Statement of Advice.
While I agree with aspects of the FSC’s analysis, where we differ (and significantly depart) is that I don’t blame the legislative framework for the conservatism and poor decisions of advisers, licensees and compliance experts. As an industry, we collectively made choices to suit institutional preferences and we are now reaping what was sowed. The legal framework is not the cause of the complexity and compromises that increases both cost and confusion. In counter to the FSC’s view, I believe that a principles-based framework facilitates, rather than compromises, the provision of efficient, effective and honest financial services.
In fact, many professional advisers, like Nathan Fradley FChFP, understand that the current regulatory settings and rebut the near constant requests for change. In his view, the current law allow advisers to “give advice that is both clear and concise, and with much less time and documentation than we use as an industry; Yet we continue to hear calls to throw it all out and start again, to achieve this outcome.”
I’d suggest that Fradley’s insight appears to be validated by MDS’ recent survey of self-licensed financial advisers which found that almost 60% of respondents are more profitable now than two years ago.
While the FSC’s independent analyst, in contrast, found these same obligations to be costly and prohibitive, it’s their focus on increasing efficiency (rather than increasing advice quality) that suggests their prioritisation of product distribution over professional advice. I appreciate that their argument might be more nuanced, but I think that this conclusion is, in fact, validated by their dismissal of Statements of Advice as “defensive compliance documents” (rather than consumer warranty documents) and their view that the Westpac case shows that General Advice is unworkable (rather than showing that misrepresenting personal advice as general advice is unworkable).
Punching down
“Legislative and regulatory change over the past 20 years has ultimately compounded the complexity, cost and undermining the economics of the sector – it is not simply the result of misconduct from one part of the sector.”
— “FSC responds: Relitigating old debates won’t reform the industry”, Tahn Sharpe, November 11, 2021
I clearly hit a nerve.
In “FSC responds: Relitigating old debates won’t reform the industry”, the FSC sought to respond, and dismiss, my criticism of their paper without, substantively, addressing the issues I sought to highlight.
I understand their position, but let me emphasise a point lost amongst the righteous outrage of those not at all responsible for increasing complexity, costs and confusion; Advisers (and advice businesses) are far better placed to lead the debate on advice reform.
In fact, my strongest criticism of the paper is that the Advice Associations should have been leading this debate rather than simply deferring to, and echoing, the FSC. In some respects, it’s not the FSC’s presumption, but the other Associations’ absence that is most galling; their failure to lead the debate that directly concerns every one of their members may be further evidence of what some have described as “the increasing irrelevance of the professional associations”.
While the FSC acknowledged its members’ role in the events leading to the Hayne royal commission, the FSC representative asserted that the industry’s regulatory jam is “about more than historical misconduct, with constant and increasingly repressive rule changes inhibiting the delivery of advice”.
To a degree, this is true, but arguing that “cost is ultimately being driven by an incoherent regulatory framework progressively added to over several decades” without acknowledging your own contribution to creating that cost, complexity and confusion is disingenuous.
And, for the record, my criticism is less about ‘re-litigating old debates’ than ensuring that we all accept our responsibility, acknowledge our conflicts and complicity and work together to achieve better advice outcomes.
After all, this is the first step to recovery.
Unfair, but fair enough
“Product Issuers’ interest in advice is like pharmaceutical companies’ interest in patient care; their insights and perspectives are valid, but those of intermediaries and consumers are IMO more important for assessing what reforms are needed to achieve better consumer outcomes. ”
— @4greatadvice, 12 November 2021
Despite the FSC publicly dismissing my criticism of their White Paper as an attempt to re-litigate the past, it was reassuring to learn that they had, at least, considered my arguments.
As proof, on 15 November, the IFA confirmed that the Financial Services Council (FSC) announced their intention to engage with industry groups within the advice sector “following the release of a white paper last month that drew some criticism”.
Interestingly, they chose not to reference either Professional Planner, the original publisher, or the article that prompted their initial response. Nor did they reach out to me to participate in their consultation process.
I won’t speculate on their motives, but I simply hope that advisers, and advice businesses, are able to reorientate the FSC’s focus from Distribution to Advice.
I am neither opposed to the Financial Services Commission nor its determination to influence reform, I’m simply more focused on bigger issues. To be clear, I think that the FSC has a right, and an obligation, to contribute to the debate about advice, but it should not feel entitled to lead it. I think it would be in everyone’s interest for the FSC to step back and allow real debate to occur.
This, in my view, would be the best step the FSC could take to improve the provision of advice.
