Response to 
   Parliamentary Joint Committee on Corporations and Financial Services
                                                        Recommendations 
  To lift professional, ethical and education standards in the financial services industry      
                                                           By 
                                Robert M. C. Brown AM BEc FCA
I am a chartered accountant, a financial educator and a former licensed financial adviser of some thirty years’ experience. I offer the following brief comments on certain recommendations of the PJC.
Independence of the FPEC
I support the PJC’s proposal to establish an independent Finance Professionals’ Education Council (FPEC), controlled and funded by professional associations that have been approved by the Professional Standards Councils. 
However, in doing so, I note that technical education of planners, while improving their competence, will not necessarily improve their ethics and behaviour. That requires the development of uncompromised professional and ethical standards, including the removal, not just disclosure, of conflicted remuneration arrangements (more on this below).  
I oppose the control and funding of such a body by financial institutions. The messages this would send to the public in an environment in which our objective must be to create a trusted profession of financial advice are fundamentally wrong. The conflicts of interest are obvious. 
Whichever model is adopted, it will be central to the credibility of the new body that it is genuinely independent of the industry’s commercial interests. In that regard, it is instructive to note the recent regrettable experience of the Accounting Professional and Ethical Standards Board (APESB). This body was established some seven years ago as an independent entity within the accounting profession. Its role is to independently develop professional and ethical standards to which the accounting bodies and their members are required to adhere. According to the APESB, this will always be done in accordance with a clear, open and public consultation process with stakeholders (including the public) following which a binding decision is announced. 
In November 2012, the APESB announced, after an unprecedented five year public consultation process, its decision to issue an ethical and professional standard on financial planning services (APES230) in accordance with the profession’s fundamental ethical principles (building on the minimum standards set in FOFA). 
This new standard would have comprehensively precluded accountants who offer financial planning services from receiving any form of conflicted remuneration, including commissions, asset fees, volume bonuses and other product sales/FUM accumulation incentives of any kind. 
It soon became apparent that certain commercial interests in the financial services industry were not willing to accept the “independent umpire’s” announcement. Subsequently, considerable lobbying took place of the accounting bodies, who are the shareholders and source of funds for the APESB. Within weeks, the APESB had changed its previously announced public position and had issued a watered-down standard that satisfied the commercial interests of its critics in the financial services industry. 
The reputational damage from this episode to the accounting profession and to the credibility of its standard setting process has been immense. Perhaps anticipating a problem of this nature, I note that the PJC sensibly recommended that the board of the proposed FPEC should include academics, at least one consumer advocate (preferably two representing different sectors) and an ethicist. 
Clearly, if anything can be learned from the APES230 story, it is that the key to success for the FPEC will be its certainty and adequacy of funding and the genuine independence of its Board, including most importantly, the manner of appointment/termination of its members. 
Of course, I accept that the focus of the FPEC (education standards) and the APESB (professional and ethical standards) may be somewhat different, however, the governance risks for the new body are similar and obvious, especially in the light of the APESB’s experience. 
Furthermore, it’s hard to envisage how the Board of the FPEC, whose role will be the education of financial advisers, will be able to avoid discussion of sensitive professional and ethical standards, in which case its independence will be fundamentally important to its credibility and success. 
Legislative Reservation of Descriptors  
I support, with reservations, the PJC’s recommendations to legislatively reserve the descriptors ‘financial planner’ and ‘financial adviser’ and to require persons who offer financial advice to be members of a recognised professional body.
My first reservation is that we must be careful about how a professional body becomes ‘recognised’. It would be politically easy to take “the line of least resistance”, resulting in a long list of bodies of varying quality. I hasten to add that this does not necessarily mean that the largest bodies with access to the largest resources should necessarily be granted recognition. Nevertheless, in assessing ‘recognised professional body’ status it will be important to assess a body’s quality, including its members’ academic qualifications, its standards (professional, ethical and technical), its governance, its financial position, its professional development requirements and its ability/willingness to engage in disciplinary procedures. 
My second reservation is if these recommendations were to allow legislatively endorsed financial planners/advisers to continue to receive conflicted remuneration payments, such as commissions paid by customers (aka asset fees/‘fees for service’) and life insurance commissions, little will be achieved for consumers. 
In fact, such an arrangement could seriously mislead consumers who may reasonably (and incorrectly) believe that all licensed planners/advisers are endorsed by government and guaranteed to act in their best interests. I suspect that many planners/advisers would be keen to encourage that belief. 
It follows that a recent proposal to distinguish institutionally-owned advisers from so-called ‘independents’ will not necessarily achieve positive outcomes for consumers unless the ‘independents’ are genuinely ‘true to label’ on ethical conflicts of interest, especially remuneration. This is certainly not so at present.  
Need for Meaningful Action
I have watched the course of regulatory reform in financial services throughout my career and must sadly conclude that behaviour in the industry has not substantially improved. There’s been a lot of rhetoric, a lot of complex ‘workaround’ legislation, but very little meaningful action to dismantle the industry’s product selling culture. If we are to create a trusted profession of financial advice, the latter must be our ultimate objective. Therefore, the worth of every reform proposal (including this one) must be assessed by reference to the potential to achieve that objective. 
I submit that unless we act comprehensively (preferably by self/co-regulation) little will change. Lifting educational standards of licensed advisers will make some difference (and should be supported), but we must be aware of its limitations. It is not the answer to resolving the industry’s unethical practices which are principally caused by conflicted remuneration. 
Therefore, unless industry bodies purporting to be ‘independent’ and ‘professional’ accept their responsibilities and act to lift professional and ethical standards without resort to diversions such as the need to lift ‘educational standards’ (a worthy cause per se), very little will change.
It is certainly desirable to have all licensed advisers in the industry with higher technical education, preferably a university degree. Hence, my support for the proposed FPEC. However, unless this is accompanied by comprehensive ethical reform, particularly in the area of conflicted remuneration, all that higher technical education will do is to create an industry of highly qualified product sellers. 
The APESB recognised this in its initial (undiluted) version of APES230. We only need look at the numerous embarrassing examples of miss-selling involving my own profession of accounting to illustrate this point, for example, widespread commissions on agri-business products, and commissions on real estate sales and borrowing in self-managed superannuation funds. 
As a result, parliaments of the future will be faced with the same problem that generations of politicians have failed to address; and the lack of trust and public confidence in financial advisers will continue.

 Robert M.C. Brown AM BEc FCA
7th May 2015