20 Aussie advice review findings IFAs need to know

An influential royal commission report contains stern warnings for those who oppose further reform in advice regulation down under. How many do you think could apply to the UK advice profession?

A highly influential (and lengthy) report on financial services, banking and financial advice in Australia has made damning remarks about the state of play down under following Australia's retail distribution review (RDR)-style reforms.

The Financial Conduct Authority will review the RDR later this year, and will no doubt read the Australian report with the UK advice market in mind.

We have drawn out the implications of the report on UK IFAs: 

Why adviser remuneration is in the spotlight down under

We have boiled down the the key points of the report for you, How many do you think could apply to the UK advice profession?

A highly influential (and lengthy) report on financial services, banking and financial advice in Australia has made damning remarks about the state of play down under following Australia's retail distribution review (RDR)-style reforms.

The Financial Conduct Authority will review the RDR later this year, and will no doubt read the Australian report with the UK advice market in mind.

We have drawn out the implications of the report on UK IFAs: 

Why adviser remuneration is in the spotlight down under

We have boiled down the the key points of the report for you, How many do you think could apply to the UK advice profession?

There is still too much self-interest in the Australian advice community!

What the report said:

[On so-called 'grandfathered' commissions] 'It is time to ignore the ghostly apparition of constitutional challenge conjured forth by those who, for their own financial advantage, oppose change that will free advice about, or recommendation of, financial products from the influence of the adviser’s personal financial advantage.'

Mortgage brokers should be treated and regulated in the same way as financial advisers.

What the report said:

'After a sufficient period of transition, mortgage brokers should be subject to and regulated by the law that applies to entities providing financial product advice to retail clients.'

Client fees must be renewed annually by clients.

What the report said:

'The law should be amended to provide that ongoing fee arrangements (whenever made): must be renewed annually by the client; must record in writing each year the services that the client will be entitled to receive and the total of the fees that are to be charged; and may neither permit nor require payment of fees from any account held for or on behalf of the client except on the client’s express written authority to the entity that conducts that account given at, or immediately after, the latest renewal of the ongoing fee arrangement.'

 

The difference between independent and restricted advice must be clearly communicated to clients.

What the report said:

'The law should be amended to require that a financial adviser who would contravene section 923A of the Corporations Act by assuming or using any of the restricted words or expressions identified in section 923A(5) (including "independent", "impartial" and "unbiased") must, before providing personal advice to a retail client, give to the client a written statement (in or to the effect of a form to be prescribed) explaining simply and concisely why the adviser is not independent, impartial and unbiased.'

There should be another review!

What the report said:

In three years’ time, there should be a review by government in consultation with [the Australian Securities and Investment Commission] of the effectiveness of measures that have been implemented by the government, regulators and financial services entities to improve the quality of financial advice. The review should preferably be completed by 30 June 2022, but no later than 31 December 2022.'

New laws are needed to prompt correct disclosure of wrongdoing.

What the report said:

'All [Australian Financial Services Licence] holders should be required, as a condition of their licence, to take the following steps when they detect that a financial adviser has engaged in misconduct in respect of financial advice given to
a retail client (whether by giving inappropriate advice or otherwise): make whatever inquiries are reasonably necessary to determine the nature and full extent of the adviser’s misconduct; and where there is sufficient information to suggest that an adviser has engaged in misconduct, tell affected clients and remediate those clients promptly.'

A new disciplinary system is needed for financial advisers.

What the report said:

'The law should be amended to establish a new disciplinary system
for financial advisers that: requires all financial advisers who provide personal financial advice to retail clients to be registered; provides for a single, central, disciplinary body; requires AFSL holders to report ‘serious compliance concerns’
to the disciplinary body; and allows clients and other stakeholders to report information about the conduct of financial advisers to the disciplinary body.'

Deducting advice fees from defined contribution pensions should be banned. 

What the report said:

'Deduction of any advice fee (other than for intra-fund advice) from a MySuper account should be prohibited. Deduction of any advice fee (other than for intra-fund advice) from superannuation accounts other than MySuper accounts should be prohibited unless the requirements about annual renewal, prior written identification of service and provision of the client’s express written authority set out in Recommendation 2.1 in connection with ongoing fee arrangements are met.'

Unsolicited sales of pensions should be banned.

What the report said:

'Hawking of superannuation products should be prohibited. That is, the unsolicited offer or sale of superannuation should be prohibited except to those who are not retail clients and except for offers made under an eligible employee share scheme.'

There has been an increase in financial advisers in Australia.

What the report said:

'Over the last decade, many Australians have sought financial advice. Over the same period, the financial advice industry has grown significantly. As at 1 April 2018, there were 25,386 financial advisers in Australia, an increase of around 41% compared with the number of financial advisers in August 2009. The Productivity Commission has noted that in 2015/2016 the financial advice sector was estimated to be worth $4.6 billion in revenue.'

Consumers gave evidence to the commission over poor advice they received, and it is not good news.

What the report said:

'Mrs McDowall received poor advice. By the end of her experience, Mrs McDowall said: I will never, ever trust anybody again, even if they say they’re a professional this or a professional that. It’s all just to gain money for their side.'"

Ouch!

What the report said:

'For some time now, a financial adviser has been something between a salesperson and a professional adviser. The industry has moved from scandal to scandal, causing financial harm to clients, and damaging public confidence in the value of financial advice. This cannot continue.'

The advice profession in Australia is still between a rock and a hard place.

What the report said:

'The financial advice industry is still caught in this structural link between product issuers and the adviser’s legal obligation to act in the best interests of the client.'

Vertically integrated financial services models may be the most convenient, but they are not necessarily the most efficient.

What the report said:

'Vertical integration also promises the virtue of efficiency, which is then passed on to consumers in the form of lower costs and greater access to financial advice. Customers may also enjoy the simplicity of dealing with just one institution. However the internal efficiency of the "one stop shop" does not necessarily produce efficiency in outcomes for customers. The "one stop shop" model creates
a bias towards promoting the owner’s products above others, even where they may not be ideal for the consumer.

Regulators have set the market up for further scandal by failing to fundamentally reform the financial services.

What the report said:

'Regulatory responses, however, focused on the remediation of specific instances of poor advice, rather than seeking to identify root causes within institutions and the industry. Those responses set the tone for future approaches to misconduct by financial advisers, that is, to compensate customers according to arrangements
negotiated with ASIC while requiring few changes to the business itself.'

The 'Future of Financial Advice' (FOFA) reforms were a first step to amending adviser remuneration.

What the report said:

'Perhaps more significantly, the FOFA reforms required the financial advice industry to make a fundamental change to the way advisers were remunerated. Before the introduction of those reforms, a significant source of revenue for financial advisers was commissions on the products they recommended.'

'While the compromises made in the FOFA reforms allowed advisers to continue to receive many of those commissions – most notably, trail commissions on products purchased before 1 July 2013, and upfront and trail commissions on many life insurance products – the ban on conflicted remuneration played an important role in shifting the financial advice industry from a commission-based model to a fee-for-service model.'

Advisers attempted to replicate the up front payments they received traditionally in the form of commission with up-front report fees.

What the report said:

'In what appears to have been an attempt to replicate the revenue stream that flowed from a combination of upfront and trail commissions, many advisers charged an upfront fee for preparation of a statement of advice, and encouraged clients to enter into an "ongoing fee arrangement", under which the adviser would charge an ongoing fee in exchange for particular services.'

Australia has a relatively new body to look after the financial adviser market.

What the report said:

'A new Commonwealth standard setting body, the Financial Adviser Standards and Ethics Authority (FASEA), was established in 2017 to develop these requirements and govern the professional standing of the financial advice sector. FASEA will develop the new code of ethics, and professional organisations will be able to apply to ASIC for approval as code monitoring bodies. All advisers will be required to subscribe to the code of ethics of a monitoring body by 1 January 2020.'

And there are new rules too...

What the report said:

'Other requirements commenced on 1 January 2019. From that date, new advisers are required to hold a relevant degree before they are eligible to sit the exam and commence a year of supervised work and training. Existing advisers have two years to pass the exam (by 1 January 2021) and five years to reach a standard equivalent to a degree (by 1 January 2024).'

Report commissioner Kennth M Hayne is reserving judgement on whether the advice market should be viewed positively yet.

What the report said:

'Once these changes have taken effect, it may be possible to ask again whether the financial advice industry has truly changed from an industry dedicated to the sale of financial products to a profession concerned with the provision of financial advice. But, in my view, without more being done, the answer will be "no."'

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