Responses to recommendations made by the Parliamentary Joint Committee on Corporations and Financial Services  

Lifting the professional, ethical and education standards in the financial services industry

Paul Moran
Principal and Director
Moran Howlett Financial Planning Pty Ltd
AFSL 428848

May 2015

We strongly support the efforts of the PJC to improve professional standards within the financial advice profession. Comments and suggestions made in this response do not intend to criticise any of the recommendations but will focus on the practical implications of the implementation of the committee’s recommendations.  

Preamble to the responses

The pressure to avoid massive disruption to financial advice businesses has, in the past, meant that recommendations made by previous investigations and reviews into financial services have been ‘watered down’. It is our belief that this is because of an over-arching principle that advisers have been seen as a homogenous group and all regulations must apply to all participants equally. We have seen this approach in these recommendations again. The only differentiation has been made along the lines of Wallis in separating tier 1 financial products from tier 2 financial products. 
This differentiation is actually the difference between not receiving financial advice versus receiving financial advice as the majority of people would not consider information about a simple bank account or general insurance product to be financial advice. Indeed, the current trend is to purchase these products on-line. 
What we are left with is the catch-all regulatory approach that has not served the community well in the past. An ability for consumers to identify superior financial advice, as opposed to licensed financial advice would create a market mechanism that should drive professionalism and better consumer outcomes.
Having said that, we see great steps forward with these recommendations and hope that the majority will be implemented.

Feedback sought — the PJC model   
The introduction of the model recommended by the PJC would represent a substantial change to the current regulatory environment for financial advisers.
Question 1.1 	What impact would the introduction of the PJC model have on the structure of the financial advice industry?
The primary impact of the recommendations is to place a very enhanced level of responsibility, and power, in the hands of the professional associations. There are currently two primary professional associations that operate within financial advice and planning – the FPA and the AFA. In addition there are a number of fringe associations often with members or more than one association. These smaller associations do not have the financial capability of resources to meaningfully contribute to the proposals made by the PJC and are likely to remain fringe players or special interest lobby groups. 
Within the two abovementioned associations, the FPA is the dominant player with around 8,000-10,000 members depending on how you count them. The AFA has between 3,000- 4,000. They are hardly large member bases to rely on for the kind of outcomes the PJC is hoping for.
The PJC quoted a number of authorised representatives operating in Australia in excess of 50,000 and while this figure seems somewhat exaggerated by a number of people who probably do not provide financial advice, there is a vast gap between the number of members and the number of financial advisers.
It is inconceivable that 35,000 existing financial advisers will qualify for membership of these professional associations in the time frame suggested (or ever) and so we are likely to see a significant reduction in those offering advice. We see no real problem with this as it seems that from within this group, the largest problems exist.    
However, it is difficult to see how the many older advisers who have provided many years of experience to the industry would be able to meet significantly enhanced educational requirements – without blanket grand-fathering. One of the difficulties experienced in the past has been the argument that some advisers have been providing quality advice for many years but have never needed to obtain professional qualifications such as those proposed by the PJC recommendations. It is difficult to see how FPEC could resolve this issue and equally difficult to see the advisers now choosing to undertake specialist qualifications. 
In the past, increased educational requirements have been met through courses of dubious quality which is clearly not the intention of this committee. The introduction of the oversight body – FPEC - should rightly maintain educational integrity over all training programs offered. However, we are not here to discuss issues brought about largely because of the relaxing of RTO legislation that saw an explosion of poor quality courses that swamped the existing high quality courses.  
So, does the industry simply wait out the ‘old brigade’ (no disrespect intended), or allow them to continue with significant concessions as compared to others within the industry. It should probably be remembered that many of these older advisers specialise in Life Insurance and are indeed known colloquially as ‘Lifee’s’. There has been little evidence shown of these experienced advisers causing any of the problems raised that have led to recent criticisms of the industry.  
We will be discussing the timing of implementation later in this response. 

The PJC model would apply equally to advisers working in different size firms and under different licensee structures. 

Question 1.2 	What are the practical implications of the PJC model applying to advisers from all sizes and types of firms?
The opportunities to meet the requirements will be more easily managed in large firms, and as previously mentioned, this favours the large firms – especially the large institutions who employ by far the most advisers. One of the problems that may be encountered is the burn-out of graduates if their primary experience is working in a large institution. New entrants to this profession expect to be providing advice to clients willing to accept it rather than having the advice crafted around the financial product offerings of the employer. Whilst we recognise the actions of the committee expect that this will be significantly lessened under these reforms, the fact remains that the type of advice provided within institutions (super funds or banks) is not the type of advice that new entrants expect to be providing. 
My personal experience as a state training manage for a major bank in the late 1990’s (granted, some time ago) was the recruitment and training of 100 new advisers within a financial year with no net increase in adviser numbers by the end of the year – in other words a 100% turnover. There were a number of good potential advisers in that group but many lost interest in the advice profession because of the pressures of making money for the institution. 
There is little difference in the ability of advisers to meet the higher standards of education if necessary, other than the obvious scale benefits and cost reduction opportunities of large practices or institutions. This is not a reason to strive for overall higher qualifications. 

Under the PJC model, ASIC, licensees, the PSC, FPEC and the professional associations will have a role in raising standards and ensuring these are met on an ongoing basis.
Question 1.3	Are the lines of responsibility clear under the PJC model?
If our reading of the proposals is correct, the associations will have the greatest impact on managing the responsibilities of the PJC proposals. Everything centres around being a member of a professional association approved by the PSC. ASIC will accept information provided by the associations, the FPEC will be funded by them exclusively, and the licensees will need to ensure that all potential representatives are members of an association. 
However, the over-arching requirement for an association is that it is approved by the PSC. Does this mean that the various Legal institutes and councils, ICA and CPA Australia will be able to certify advisers or will get an automatic seat at the table?  Perhaps the Mortgage Brokers Association and other similar groups. It is important to focus on financial advice as a separate profession from the others and while the FPA has been the mainstay professional association in recent years (as discussed in the PJC re the FPEC etc.) surely more associations will want to venture into financial advice. The committee heard from a number of such associations who have expressed interest in moving into financial advice.  
It does leave one significant issue, though. If an association loses its PSC accreditation, what happens to the advisers who are its members?

Feedback sought — current regulatory framework   
Under the current regulatory arrangements, the legal obligation to ensure advisers meet the relevant training and competency standards falls on licensees. ASIC is responsible for ensuring that licensees comply with the conditions of their AFS licence. 
Under the PJC model, responsibility for meeting (and ensuring compliance with) training and competency standards is expanded to individual advisers and professional associations.
Question 2.1
What are the practical implications of this overlapping of responsibilities? Would this shift have flow-on implications for other provisions in the Corporations Act, or any other parts of the licensing regime?
It is difficult to see how ASIC could actually regulate the competency standards for individual advisers. They have been very unwilling in the past to even set any standards (see the withdrawal of the ASIC training register) and so the adviser register recently introduced is based on an honour system. There may be selective auditing of the register, but as it currently stands, the register says what the adviser tells it to.
Having said that, provided the guidelines are clear (and in the past they certainly have not), it is reasonable that advisers should be able to determine if they meet the requirements and what will be required to continue to meet them. 
We are concerned that the associations are also not resourced to manage this area properly. The move towards shifting responsibility from ASIC to the professional associations may require some government funding to the associations to assist with this management. Naturally the associations may have more to say about this.   

Question 2.2
Should licensees maintain a legal obligation to ensure advisers meet relevant training and competency standards? 
The current regulatory structure has failed to achieve the results expected and there has been little market structure to manage recalcitrant licensee’s ex-ante problems occurring. If professional associations are given the responsibility to manage training and competency standards, it would seem obsolete that the licensees should also have this legal responsibility.
However, we feel that the licensee should maintain a role in determining the suitability of qualifications and competency standards as ultimately, the buck (literally) will still stop with them. Unless a limited liability scheme is introduced that restricts the financial responsibility of the licensee over the representative, there is a great financial incentive to ensure and maintain high standards. 
Professional indemnity insurance is a significant factor in this and as the licensee is the entity who is currently required to hold this policy under Corporations law they would always need to be ‘in the loop’.

Feedback sought — education and training standards of financial advisers
Question 3.1
How would the PJC model interact with existing regulatory regimes for specific types of advisers, for example stockbrokers and tax advisers? 
As mentioned previously, as the ability to become a financial adviser or planner will now rest with the requirement to be a member of a proscribed professional association. Will this mean that any association who is approved by the PSC can offer members the ability to become financial advisers? We feel that financial advice needs to be carved out as a specialist area as it is in fact a specialist area.
An area of concern is the recently and currently being established area of Tax (financial) advice. The TPB has required that financial advisers register, become qualified, and maintain CPD specifically for the ability to provide tax advice as it applies to the financial recommendations being made to clients. This moves the management and responsibility away from both the licensees and the professional associations and seems to be at odds with the intention of the PJC recommendations. 
Further, there has been long and inconclusive dialogue regarding educational requirements and these are still not resolved.

Suggestion:		That the TPB aligns with the PJC recommendations and provides de facto responsibility for adherence to regulations to the professional associations. Further, FPEC be give responsibility to develop and manage the core educational requirements for the Tax (Financial) adviser designation.    

Under the PJC model, financial advisers providing personal advice on Tier 1 products would be required to hold a relevant Bachelor Degree. 

Question 3.2
Is holding a relevant Bachelor Degree the appropriate minimum education requirement? What is a “relevant” Bachelor Degree? Would this requirement limit the ability of other degree-qualified individuals to become financial advisers?
We note that the PJC recommendation was for advisers to hold AQF 7 level qualifications, and the FSI recommendation that a relevant tertiary degree be held for tier 1 products. Notwithstanding this, we support the requirement for an AQF level 7 course for all new entrants. Of course this could be an undergraduate degree, but it is very important not to remove the opportunity for an approved Graduate Diploma at the appropriate level. 
As per our submission to the committee, new entrants to this profession have typically come from other areas and professions – especially given the nature and maturity (age?) required to actually offer credible advice to individuals. An undergraduate degree for these entrants is too high a barrier to entry, but more appropriately an approved Graduate Diploma would suffice. Graduate Diplomas are more geared to part-time study, are less costly, and tend to be more focussed on core subjects. 

Question 3.3
What are the practical implications of requiring advisers to hold a relevant Bachelor Degree? 
Having been involved with curriculum development as part of an FPEC working group previously, it is apparent that within the University system, there is little scope at this stage for a true specialist degree in financial planning. This is because all of the Universities and Colleges base their course expectations on their existing competencies. As an example, if the University sees financial planning as an adjunct to an existing accounting degree, then the core subjects are simply offered as electives of that degree and there is pressure to include existing subjects that may be spuriously linked with financial planning as core subjects. 
This seems to be a necessary part of budget management within the University system but does little to actually develop new knowledge areas within what should be becoming a professional study area.
Please see further comments about the need for practitioner representation on the FPEC in addition to professional association representation.

Under the PJC model, financial advisers providing personal advice on Tier 1 products would be required to undertake a professional year and ongoing professional development.

Question 3.4
What are the practical implications of requiring new advisers to undertake a structured professional year at the outset of their careers as financial advisers, as a way to develop on‑the-job skills?   
Other than those practices wholly owned by large financial institutions, almost all financial planning practices are small businesses. The typical practice consists of between one and three licensed advisers and employs an additional one to five support staff.   
The relatively small size of these firms make it difficult to see how the professional year in its current form would be feasible. A graduate with a designated degree would have an expectation of a reasonable starting salary (say $50,000 plus additional employment costs of around $20,000) but would be able to add almost no financial benefit to the small business in the short term (perhaps the entire period of the professional year). We have seen this in our practice as we have tried to employ graduates in the past with very mixed results.  
On the other hand, there has been success with an internship approach where students align with practices on a part-time basis throughout their degree. 
Where professional years have worked, such as in Accounting and even Law, opportunities for process based work exist where repetitive activities allow some value add to the practice. There are many accounting and law firms with staff numbers in the teens and above and this is a differentiator from financial advice businesses. Clients want the advice from a principal. 

Suggestion:	The professional year concept be modified to provide an option for a number of hours of professional supervision that may be commenced as soon as education commences. This would still need to be properly managed and reported on, but the ability to place future potential employees on a part-time basis would be far easier to manage.    

Feedback sought — structure and role of a standard-setting body  
The PJC model would establish an independent FPEC as the central body to set education standards, professional year requirements, registration exam content and ongoing professional development requirements. 
Under the PJC’s recommendations, FPEC would be funded by approved professional associations and would comprise representatives from those associations, academics, consumer advocates and an ethicist. 
Question 4.1
What are the practical implications of FPEC performing this role? For example:
How would FPEC interact with regulators and government agencies, such as ASIC, and education bodies?
Would FPEC need to be supported by legislation in order to perform its role?
Is the recommended FPEC membership appropriate?
Outside our scope of expertise

Question 4.2
Are there alternative arrangements that would be more appropriate or effective?
Outside our scope of expertise 

Feedback sought — registration
Under the PJC model, individuals must be listed on the Register in order to practice.
Question 5.1
What are the practical implications of requiring individuals to be registered in order to provide financial advice?
Our concern is that ASIC may not have the resources to manage individual registrations. Currently, a third party manages registrations (the licensees) and this is recorded by ASIC. There would need to be a verification process that was manageable and cost effective. In the past, there have been instances of individuals providing inaccurate information about their bona fides and we see this as being of higher risk in an individual registration process.

Question 5.2
Should it be the role of professional associations to notify ASIC that all requirements have been met for an adviser’s registration, and of factors which affect their subsequent fitness for registration?
Given the comments above, we agree that a professional association should notify ASIC of an advisers suitability for registration. This is currently managed quite well by the main associations and would in fact, become a further reason to join an association.
The PJC recommends that, in addition to the information currently required to be listed on the Register, an adviser’s completion of the relevant education requirements, professional year and registration exam, and their professional association membership, higher qualifications and any censure or ASIC action, also be listed.

Question 5.3
What are the practical implications of having these criteria listed on a public adviser register?
Our only concern with this is that there will be a very large proportion of existing advisers who will meet the above criteria on the basis of either RPL or the fact that they are already practising advisers. The adviser register then will provide a ‘full’ detail of new entrants, yet only a partial detail for existing advisers.
Excluding the professional year details and registration exam details (which will need to have already been completed for registration in the first place) will place all registrants on equal footing.
Question 5.4
Are there alternative or additional criteria that should be listed on the Register? 
We do not believe so.

The current Register requires licensees to provide information to ASIC about individual advisers. Under the PJC model this responsibility would be shifted to professional associations. 

Question 5.5
What are the practical implications of having professional associations perform this role? For example, are professional associations sufficiently resourced and how would they interact with ASIC in relation to these requirements? Does this approach dilute the responsibility of licensees? 
Licensees have not been altogether efficient at managing their licensing obligations, and in fact, this is one of the reasons we are here at this point. The professional associations have a much greater stake in maintaining professional standards than any individual licensee. Diluting a licensee’s ability to ‘register’ an adviser without the necessary checks is something we would hope happens as a part of these reforms.
We feel that there would need to be some additional resourcing provided to the professional associations as a result of taking over some of the responsibility for licensing.

Question 5.6
Is legislative protection of the titles ‘financial adviser’ and ‘financial planner’ necessary?
Given the requirements for licensing, there would seem to be little benefit in proscribing these terms, however, areas such as real estate investing is still outside the purview of ASIC and so these terms may be used inappropriately. Proscribing these terms unambiguously states to the public that to call oneself a financial adviser or financial planner means that certain criteria have been met.

Feedback sought — exam
The PJC model introduces a registration exam at the end of the structured year of professional development.
Question 6.1
Do you consider a registration exam should be a component of a framework to improve professional standards?  Should the exam apply to both existing and new advisers?
Existing advisers who currently hold a professional designation in financial planning or advice (e.g. CFP) should be exempt from the examination. All others should be subject to a registration exam along with all new registrants. This is one of the most effective methods to force the raising of educational standards as it would move assessment for course content away from RTO’s to a centralised body.
It would also be a check regarding the quality of university courses also.

Question 6.2
What are the practical implications of the use of a registration exam? 
Not able to answer this question until some more details are available regarding the examinable areas and method of examination.
Question 6.3
What content should be covered in the exam?
The exam should be based on the prescribed course content of the FPEC content committee. It should cover all 8 core areas of financial planning education.
Question 6.4
Is FPEC the appropriate body to set the exam?  Who should be responsible for invigilating the exam? Who should be responsible for marking the exams?
We believe that FPEC, along with practitioner representatives and professional associations, should consult to set and conduct the exams. Course providers should not be able to set or invigilate the examinations. 
Perhaps a separate assessment body might take responsibility for this as a representative group of the above.

Feedback sought — ongoing professional development
The PJC model requires mandatory ongoing professional development for financial advisers. 
Question 7.1
What are the practical implications of the proposed ongoing professional development requirements?
We feel the professional associations are in a better position to answer this.

Question 7.2
Are professional associations well-placed to administer ongoing professional development requirements? 
Professional associations do a good job currently maintaining and managing the CPD programs. Licensees also provide support for this as a part of their PI insurance requirements. 
The current two step approach – licensees and professional associations – seems to offer a reasonable outcome.

Feedback sought — professional and ethical standards  

Code of ethics
The PJC recommended that professional associations be required to establish codes of ethics that are approved by the PSC. 

Question 8.1
What are the practical implications of having each professional association create its own code of ethics?  For example, what are the implications of having multiple codes as opposed to a single code?
Outside our scope of expertise
Question 8.2
What are the practical implications of requiring that a code of ethics be approved by the PSC? Are there alternative approaches that would be more appropriate or effective? 
Outside our scope of expertise

Role of the PSC
The PJC model uses the PSC as a key mechanism to drive continuing improvements in the professional standards of the financial advice industry. Under the PJC model, a professional association will need to have schemes approved by the PSC in order for its members to be registered as financial advisers, and for the association to be a member of FPEC.

Question 8.3
Is the PSC the appropriate body to drive improvements in professional standards in this industry? Are there alternative arrangements that would be more appropriate or effective?
Outside our scope of expertise

Question 8.4
What are the practical implications of having the PSC perform this role? For example, how would the PSC interact with ASIC?
Outside our scope of expertise

Question 8.5
What are the practical implications of requiring professional associations to hold a PSC‑approved scheme?
Outside our scope of expertise

Approval of a scheme under the PSC has previously meant capped liability for participants.  

Question 8.6
Is it appropriate that liability in relation to financial advice/services be limited at this time?  Is limitation of liability a necessary element for the operation of the PJC model? 
Outside our scope of expertise

Question 8.7
What are the practical implications of capping liability? For example, what changes to Commonwealth and/or state and territory legislation would be required?
Outside our scope of expertise

Question 8.8
Would an alternative arrangement, under which a scheme’s approval would not limit liability, be practicable?
Outside our scope of expertise

Role of professional associations
Question 8.9
What are the practical implications of mandating membership of a professional association? Are there implications arising from the increased responsibility on professional associations rather than on the licensee?

Feedback sought — other issues for consideration
Advice on tier 2 products
Question 9.1
How could the PJC model interact with the existing Tier 2 adviser training and competency requirements?
Outside our scope of expertise

Transitional arrangements
Question 9.2
Do you consider FPEC to be the best entity to determine transitional arrangements for existing advisers and advisers wishing to move within the industry?
FPEC along with representatives from practitioners and existing educators would be best placed to make these decisions. The nature of many of the FPEC representatives aligns them to requirements for new entrants and there is often a misunderstanding about what existing advisers already know. 
Universities are also bounded by their existing levels of expertise and tend to develop courses along the lines of their existing courses. We need to be able to develop new expertise amongst the universities but the existing frameworks do not support this currently.

Question 9.3
Do you consider Recognised Prior Learning a suitable transitional arrangement for existing advisers? 
Definitely, although there have been so may poorly designed courses over recent years that there would need to be some courageous vetting of the courses offered for RPL. The Diploma of Financial Planning offered as long as 10 years ago contained all of the core subjects now proposed for future courses, and with the addition of experience and CPD

Question 9.4
What is an appropriate timeframe over which existing advisers should transition to the new system?
This will depend on what the transition eventually looks like. If additional qualifications are required for a large number of existing participants, then at least 4 years might be an appropriate time frame. 

Question 9.5
Are there any alternative transitional arrangements that would be more appropriate or effective, for either new or existing advisers?
A differentiation between the more highly qualified advisers and the more minimum qualification advisers would strongly encourage the rapid uptake of any additional qualifications. Our earlier submission strongly suggested that more than one level of advisers would create a market mechanism for superior advice, and while rejected by the committee, we could see it apply in some form here.

Timing
The PJC recommended an implementation timeline that would see FPEC establish education standards by June 2016, professional associations  operating under a PSC approved scheme by 1 January 2017 and all advisers (new and existing) to be fully registered by 1 January 2019.
Question 9.6
Are there any particular elements of the PJC model that present timing challenges? 
Outside our scope of expertise

Question 9.7
What timing or phasing would most effectively balance the recognised need to raise standards and competency in the short-term against practicalities of implementing a new model to raise standards of new and existing advisers over the longer term?
Outside our scope of expertise

Feedback sought – Regulation impact
To help inform the RIS process, which will consider a range of policy options (one of which would likely be the introduction of the PJC model), we are seeking information on the current structure and education of the industry.
Question 1
How many/what proportion of financial advisers are likely to be affected by the introduction of a new professional standards framework (such as that proposed by the PJC)? If you are a licensee, how many/what proportion of your advisers would likely be affected?
If we are considering all authorised representatives currently in the ASIC books, then the number of advisers who would not meet the criteria would be in excess of 60%. Within our licensee operation, all advisers will meet the criteria immediately. We are, however, a boutique professional practice.

Question 2
What proportion of financial advisers working in the industry are typically new entrants (for example, graduates and those coming from other professions) versus existing advisers who have been in the industry for a number of years? If you are a licensee, what proportion of your advisers are new entrants (versus existing advisers)?
All of the advisers in our licence are existing advisers. We would expect that as a small boutique, we would have difficulty in being able to afford a new entrant who is unlikely to be productive for some time.

Question 3
What is the typical education level of financial advisers? If you are a licensee, what proportion of your advisers hold a relevant tertiary degree?
Within our practice/licence, all advisers are degree qualified or higher and all are Certified Financial Planners.

Question 4
What proportion of advisers are currently members of a professional association(s)? If you are a licensee, what proportion of your advisers are members of a professional association(s)? 
All advisers are members of a professional association and hold a professional designation.

The PJC model would represent a substantial change to current requirements.
Question 5:
What are the likely costs (labour and non-labour costs) associated with the various elements of the PJC model? These costs could include, for example, the direct costs to:
•	individual financial advisers; 
•	professional associations; and 
•	licensees.

Are costs likely to vary between different size advice firms, different professional associations, etc? If so, how? 
Outside our scope of expertise

The RIS will canvass various options and models for raising professional standards.
Question 6:
Are there alternative options (other than the PJC model) which would provide an enhanced cost-benefit outcome?
Refer to our initial submission that outlines a two level (not two tier) adviser regime. The higher level of advisers would be able to promote their higher qualifications as a means of driving the lower levels to achieve this or be seen as offering inferior advice.