Call for a Combined Working Group to Address Cost of Advice

The AFA has called for the establishment of a new combined working group to address financial advice regulatory and process improvements.

The association made the call for an ASIC/Treasury/industry working group as one of a number of key points it has raised in its submission to ASIC’s consultation on promoting access to affordable advice for consumers.

The association also points to the need for an appreciation of the importance of seeing the financial advice community as predominantly small business operators who are each trying to do the best that they can for their clients.

Other key recommendations include:

• The creation of an initiative to deliver improved regulatory certainty
• An increased focus by the regulator upon the prevention of compliance failures, rather than regulatory intervention and remediation
• It is essential to get the balance right in designing and enforcing the regulatory regime. It needs to be designed in order to ensure that the greatest good can be provided to the majority of clients, rather than to focus excessively on the avoidance of misconduct by a small minority.

The association’s detailed submission notes that it welcomes ASIC’s initiative with the Unmet Advice Needs project and the consultation exercise on promoting access to affordable advice for consumers.

“We are particularly concerned about the significant decline in access and affordability of financial advice for everyday Australians that has been occurring over recent times. It is our view that this decline in access and affordability is ongoing, as more financial advisers leave the profession, and those who remain are focusing increasingly on more affluent clients.”

…it would encourage the Government to consider a broader independent review of financial advice…

The AFA says that in the event that the consultation process does not generate the answers required to resolve the increasing problems with access and affordability, it “…would encourage the Government to consider a broader independent review of financial advice, to ensure that a suitable and appropriate package of reforms can be developed and implemented in a timely manner”.

AFA’s view is that that the regulatory regime is a key driver of increased costs and complexity in the sector, which is in large part responsible for the decline in accessibility and affordability.

“This is not to discount other contributory factors but, instead, to highlight that the regulatory regime is probably the most important factor.”

While it accepts the need for a rigorous regulatory regime, “…we also believe that there needs to be a sensible debate about finding the right balance. It does not make sense to continue to increase the regulatory obligations for all financial advisers whenever there is evidence of wrongdoing”.

In calling for a debate to take place, the association says: “In our view, there needs to be ongoing mechanisms and forums for the exchange of information on what is not working and what changes need to be made to better achieve the overall objective of improved access to affordable advice… This should be a shared objective for both the financial advice profession and ASIC. It will also inevitably require action by the Government.”

Understanding the Ideal Future State

In responding to the consultation paper, the association also took the view that it would be beneficial to consider what the ideal future state is for the operation of the regulatory regime for financial advice in order to make advice more accessible and affordable. This would include:

• A high level of regulatory certainty
• Easy access to guidance on regulatory requirements
• An efficient advice process, with each step adding value to the client experience and outcome
• The avoidance of duplication in requirements, oversight models and fees
• “An environment where licensees can make sensible informed decisions with respect to the compliance regime they operate [in]. This means that they have confidence in terms of what the law requires and what the regulator expects, rather than being overly fearful of regulatory intervention. This confidence needs to be long term, meaning that they can continue to have confidence in the future, that what they did today will comply with the expectations in the future.”

A vigorous regulator

The 18-page AFA submission also notes that within the advice sector, there has never been any doubt that ASIC was a vigorous regulator and that it was assertive in responding to any known misconduct.

“The fact that ASIC spent $56.2m in the oversight of financial advisers who provide personal advice to retail clients in the 2019/20 year is proof of this. It is further confirmed by the fact that this is the highest spend on any of the supervised communities.”

While the association only has a high-level breakdown of the total costs by type of activity from the June 2020 Cost Recovery Implementation Statement, that was based upon a total spend of $40.1m, “it is important to note that $19.9m related to surveillance and enforcement”.

“We are not aware of the reason for the very late increase in costs from $40.1m to $56.2m, however we would assume that this could be attributable to enforcement expenses. This highlights the level of focus that ASIC has on misconduct in the financial advice sector.”

It says that in reviewing this expenditure by ASIC “…what is disappointing is that only $0.8m of the original forecast of $40.1m was being spent on education and guidance. We believe that ASIC should consider a mantra based upon ‘prevention is better than a cure’, and significantly increase their focus on education and guidance”.

Click here to see the full submission.