Given the great amount of attention that’s been focused on the collapses of firms such as Storm Financial, it may come as a surprise to many of you that it is likely a very small proportion of Australian advisers — much less than 1 per cent of the total — who were responsible for the more than $3 billion lost by investors.
That’s right — much less than 1 per cent. We have around 17,000 practitioners, and the failed providers who will probably come to shoulder much of the burden for these catastrophic losses were small players by industry standards — as best we can tell, Storm Financial had around 13 advisers.
We’re all familiar with the frequently wheeled out analogy that a few rotten apples will do damage to those around them if left unchecked. And if you’re even slightly surprised by this 1 per cent figure, you can safely assume that consumers are probably under the impression that the percentage of unscrupulous or dodgy operators amongst us is much higher.
Minimising any further impact of these recent collapses on the reputation of our industry and preventing the same kind of losses in the future is vital. At the danger of mixing metaphors, we need to take steps as an industry to ‘weed out’ our ‘rotten apples’ and prevent them from popping up again in future.
It’s reassuring to witness the industry-wide response and commitment to this cause so far, especially with the scope given to the Ripoll Inquiry and the high profile and considered submissions to it from across the industry. Because of the nature of the issues involved though, and the heightened media and consumer sensitivity to them, there’s a risk that efforts made to uncover the root causes of provider collapses result in cosmetic rather than meaningful change.
That’s why I want to highlight some central issues that, while arguments about remuneration and conflicts of interest continue to dominate any debate, are in danger of being lost.
I presented on behalf of Guardian Financial Planning at the Parliamentary Joint Committee into Financial Services on these central issues because I truly believe that the elements which have contributed most to the recent corporate collapses are much less about how advisers are remunerated than (a) a lack of adherence to ethical standards by those operators who lost the majority of investor money, (b) a lack of regulatory supervision of the smaller operators and (c) the lack of capital backing of smaller operators.
My argument in essence is that smaller, non-institutionally backed operators — and it has been a small number of these at the forefront of the highest profile collapses — don’t have the same mechanisms or incentives to regulate in these three areas that the larger, institutionally backed players do.
And they haven’t needed to. The boom market conditions of the last 15 years created an environment where every adviser seemed to be able to rapidly create wealth, and where investors came to expect increasing returns on their money.
With the underlying problems associated with smaller operators at greater risk of collapse yet to come to the surface, this period is also characterised by the relative ease it takes to become a financial adviser and relatively low cost of securing an Australian Financial Service Licence.
The problems inherent in the non-institutionally backed model only became evident when the boom conditions ended. In general, the stronger an adviser group’s alignment to a large financial institution, the better the systems and structures in place to ensure adherence to regulations, legislation and business ethics.
For larger institutions, the emphasis placed on protecting reputation and brand filters down to the business practices of their satellites. This means institutionally aligned adviser groups are much more likely to be governed and protected by explicit policies around things such as hiring practices, supervision and compliance, education, and professional development.
To me, it’s clear that the lack of this same regulation over non-aligned adviser groups has largely been a root cause of the industry upheaval we have experienced, and continue to experience.
The way to remedy this systemic issue, as I said in front of the Ripoll Inquiry, is to put in place standards at adviser and licensee level that deter and flag unethical and risky behaviour, implementing a risk-based approach to supervision and monitoring to detect early warning signs, and working together with regulators on a joint approach that ‘weeds out’ those advisers who, through reckless or self-serving actions, risk tarnishing the whole industry’s reputation.
In addition to regulation, a critical difference has been the level of capital backing required behind the smaller operators. In those instances where the checks and balances have failed, institutions have stood behind their mistakes. Having deep capital reserves adds a crucial layer of protection for consumers.
Under current rules, the capital required to support $5 million in funds under advice, or insurance cover under advice, can be the same as that required to support $5 billion!
The amount of capital buffer required by all operators should vary with the scale of their funds and insurance premiums under advice. My reckoning here is if Storm had to put up $5 million in capital, for example, in order to operate, perhaps $3 billion in life savings would not have been lost by Australians.
Capital obligations imposed on banks and insurance companies by the Australian Prudential Regulation Authority (APRA) vary with the size of their balance sheets, and APRA closely monitors these. To achieve these same standards across the entire industry will require plenty of consultation and a commitment to decisive action, but for the good of us all it’s essential that it happens, and happens soon.
Competition and consumer choice is vital to a healthy industry. By working as an industry to extend those institutional systems and frameworks to non-institutional operators, we can end up with better consumer protection and a range of players from both sides of the fence.
Steve Browning is executive manager at Guardian Financial Planning and Cameron Walshe.
