The inherent risks in financial services reform

The financial services industry is a complex organism, writes Mike Taylor, and tweaking parts of it could lead to the emergence of unforeseen market distortions.

If there has been one common theme underlying the annual results announcements of Australia’s publicly listed financial planning dealer groups to the Australian Securities Exchange (ASX) this month, it has been that they are all appropriately positioned and ready to operate within the emerging new regulatory environment.

That was certainly the message being delivered by Count Financial and by DKN Financial Group and, of course, it was the position trumpeted by NAB/MLC when it delivered its result to the market.

The other common theme is that these dealer groups envisage the new regulatory environment creating scope for further growth, with the implication being that opportunities will emerge to acquire the groups and practices that fail to accommodate the new fee-for-service environment.

Australia – for the time being at least – now has a hung Parliament, so a new element of uncertainty has been injected into the commercial environment in which financial planning firms have to operate.

At question now is how much of the Labor Government’s Future of Financial Advice (FOFA) reforms – the separation of advice from product-based commissions – will remain in place.

What the major dealer groups and financial service houses have always understood about the FOFA changes is that they flowed from the report of the Parliamentary Joint Committee on Financial Services (the Ripoll Inquiry) and that the report received bipartisan support.

It follows, then, that the financial planners who clung to the notion that the election of a Coalition Government would put a halt to the elimination of commissions in the advice sphere were always going to be sorely disappointed.

But whoever emerges as the minister with oversight of the Financial Services portfolio needs to adopt a cautious approach to the implementation of the new regime and, in particular, dealing with the emergence of unforeseen market distortions.

It is already obvious that the removal of commissions from the planning environment will impose new cost pressures at various points in the financial services value chain, and it is also obvious that the major vertically integrated institutions have already proved more adept at accommodating those changes without serious impact to their bottom lines.

The equation is not quite so simple for non-aligned dealer groups and independent financial planners, and those filling in the fine detail of the new regulatory environment must be careful to ensure that they do not simply hand greater advantage to the major institutions – particularly the banks.

The financial services industry and, in particular, the financial planning sector, represents a complex organism with sophisticated interconnecting life-support systems. Those who have failed to understand precisely how it works can cause much damage.