Tue Oct 25

Financial adviser 'reforms' will undermine yet another royal commission recommendation

Written by: Gurbinder Gill, Teaching Scholar, Financial Planning - Department of Accounting, Faculty of Business and Law, Deakin University

If you were facing open-heart surgery you’d want to know your surgeon was qualified. Or, if you were going to court, that your lawyer was specialised in the relevant area of law.

Should you expect any less from a financial adviser, with whom you may entrust your life savings and financial security?

Even before the revelations of the Hayne royal commission ^[1] into misconduct in financial services, the need for greater professionalisation of financial advisers was acknowledged.

In 2017, the Turnbull government made reforms ^[2] that included a code of ethics, a requirement to pass an exam, and the need to hold a “relevant degree” – meeting Financial Adviser Standards ^[3] set by Treasury and covering 11 knowledge areas (see table below).

This has been expected of new financial planners since 2019. Those already in the business have until 2026 to comply.

But now the federal government is considering watering down these standards.

Broader ‘pathways’

A Treasury consultation paper ^[4] proposes to waive the requirement for advisers with at least ten years’ experience and “a clean record of financial practice”. This will fulfil Labor’s election promise ^[5] to create an “experience pathway”.

The paper also proposes lowering the degree requirements for everyone else.

Instead of an approved degree having to cover 11 knowledge areas, it will only have to cover five – dropping the areas of superannuation, retirement, estate planning, insurance, investments and financial plan construction.

The intention, the consultation paper says, is “that a broader range of degrees become eligible as entry pathways to the financial advice profession”.

The motivation for this isn’t spelled out, but is almost certainly due to a huge decline in the number of financial advisers – by almost 40% in the past three years, according to Rainmaker Information ^[6], a research company that specialises in the financial services industry.

But it’s hard to see how the move will help the industry become a profession, with similar standards to the rules that regulate doctors, lawyers or accountants.

Regulatory ‘tsunami’

Rainmaker’s report, published last month ^[8], says the number of financial advisers in Australia has declined from 26,500 in 2019 to about 16,700.

In February, the Assistant Treasurer and Minister for Financial Services, Stephen Jones (then still the opposition spokesperson), blamed this decline on a poorly managed “tsunami of regulatory changes ^[9]”.

Assistant Treasurer and Minister for Financial Services Stephen Jones addresses parliament on August 2 2022. Mick Tsikas/AAP

Some, such as the degree requirement, predate the Hayne royal commission. Others stem from it.

The Association of Financial Advisers ^[10], which represents several thousand advisers, says extra compliance imposed by the Australian Securities and Investments Commission following the royal commission has “broken ^[11]” the industry.

One directly affecting incomes is the ban (since January 2021) on receiving ongoing commissions from companies for selling those companies’ super, investment and insurance products.

Banning these payments, known as “grandfathered commissions ^[13]”, was a key recommendation of the banking royal commission. They had been worth $800 million ^[14] to financial advisers the previous year.

Incomes will be reduced further if the government proceeds with a proposal to ban commissions on life insurance ^[15] sales.

Specialist knowledge needed

Reducing degree requirements will somewhat reduce the burden now faced by financial advisers. The question is whether it will offset the other factors that make the job unappealing.

Lowering education standards will certainly do nothing to give the community more confidence in the industry.

Given the increasing complexity of financial products and the connection of the different advice areas, specialist knowledge is increasingly needed.

When recommending insurance cover, for example, an adviser must know more than just the types of cover and products. There are rules around beneficiary nomination, which is also part of estate planning. There are options to pay for insurance from your superannuation, which may affect your retirement balance. There are different tax consequences for different options.

Cutting back educational requirements in these areas is unlikely to improve the overall quality of advice.

Hitting the brakes on professionalisation exposes clients to greater risk and lays the foundation for another royal commission into financial services.

In his final report ^[17], Commissioner Kenneth Hayne endorsed the 2017 educational reforms. The “prevention of poor advice begins with education and training”, he stated, adding:

I believe that, as they come into effect, the new education requirements will improve the quality of advice that is given, and improve the way that financial advisers manage the conflicts of interest with which they are faced.

Watering down these education requirements as proposed will not improve the quality of financial advice. It will only slow the path to professionalising the industry.