It takes more than a year to become professional
While the professional standards changes will set a benchmark, it is important to remember that these are only a minimum, Bryan Ashenden writes.
The Government has got it right.
These could be six controversial words, but when it comes to the latest draft of the professional standards legislation, contained in the Corporations Amendment (Professional Standards of Financial Advisers) Bill 2016, the absence of a particular (and perhaps common) phrase means the Government has got it right.
The latest draft of the professional standards legislation made some changes to the initial draft, including extending the date for existing advisers to comply with new requirements, whilst also providing some clarity on the level of formal education required.
By the beginning of 2024, existing advisers will need to be able to demonstrate completion of relevant education at a level at least equivalent to a degree.
Whilst this doesn't require the completion of a degree per se, it does mean that from 2024 onwards, Australians will know that anyone providing advice to them will have completed relevant studies, and been assessed, at a level significantly higher than is required today.
Additionally, all advisers (existing or new) will need to complete the new national exam, although the updated draft legislation does provide for a possible exemption from this requirement for existing advisers.
Like most of the measures, the proposed Standards Body will have responsibility for setting this exam and determining who may be eligible for an exemption.
The third requirement, which applies only to new advisers, is to complete "at least one year of work and training that meets the requirements", which are to be set by the proposed Standards Body.
Whilst we will need to wait for the Standards Body to be formed to formalise these work and training requirements, there are a couple of important factors to be aware of around this requirement.
A person can provide advice during this period
In response to a significant level of feedback on the initial draft, a person can be registered as a "provisional relevant provider" during the course of the period that they are undertaking the relevant work and training. In essence, it's like providing advice with your "L" or "P" plates on.
This change is important as it allows a new adviser to gain real, hands-on experience in advising clients, but under a supervision model.
Under the previous draft of the standards, the new adviser couldn't provide advice until after the completion of this year.
This could have meant that the new adviser may have sat in client meetings and observed what an experienced adviser does, but was not in a position to actually provide advice themselves.
Under the new model they can gain actual experience in providing the advice without having to deal with the issue of not being seen to actually provide personal advice.
More importantly though, this change will likely expand the scope of who will be willing to employ a new adviser during this period of supervision.
If you know the person you employ can actually provide advice during this period, would you be more willing to employ them?
Arguably the answer will be "yes" in more circumstances than was previously the case as the new adviser can actually be directly involved in revenue generating activities for your advice business.
The person has to be appropriately supervised
Whilst there is arguably some refinement to the model that could and perhaps should take place, it is proposed a new adviser is supervised by a person who is a relevant provider — i.e. an adviser who has met the educational and exam requirements.
This means someone with sufficient experience will oversee the activities of a new adviser for a relevant amount of time, and can provide guidance and feedback along the way.
There is a requirement that the supervisor also be present when the new adviser provides personal advice, which should give comfort to the client as it means any potential errors in the advice (which we would hope are none) will be picked up in real time and addressed immediately.
This is where the new adviser is operating with their "L" plates.
After a period of time has elapsed where the supervisor is satisfied that because of the new adviser's education and, perhaps more importantly, the on-the-job training, that the supervisor doesn't need to be present when the personal advice is provided, this requirement can cease.
This is when the new adviser moves to their "P" plates.
If you are the owner of a financial advice business, then this change again gives you flexibility and comfort.
Assuming you are the supervisor, you get to make the call when you no longer need to be present.
You get to determine when you believe someone in your business is of a sufficient level of experience that they can see and advise clients without the need for you to be present, which means you can also focus on providing advice to your own clients.
Overall, it means that there will be more advisers able to see and advise more clients, which can only be a good thing.
At all times though, it is proposed that the supervisor must approve any statement of advice — irrespective of whether the new adviser is on their "L" or "P" plates.
It is only at the end of the period when the "P" plates are removed that this requirement ceases.
It is not a "professional year"
Utilising the term that is often associated with the accounting profession requirements, many have referred to this year of work and training as the "professional year".
It is pleasing to see that the Government has not adopted this term for a number of reasons.
First, the draft legislation specifically states that that period goes for at least one year, which means that it envisaged that there may be times when more than one year is required.
For example, it could be that the Standards Body determines that it needs to be at least the equivalent of one year of full-time work, meaning those who only work part-time will be required to extend their period of supervision.
This should not necessarily be seen as a negative, given that new advisers can now provide advice during this period and don't need to have a supervisor present for the entire duration.
Secondly, it potentially envisages a requirement on the supervisor (or licensee) to decide when that period of work and training comes to an end.
Rather than just assume 12 months will be sufficient, it could be that supervisors (or licensees) are required to attest to the competence of the new adviser before they cease to be regarded as "provisional relevant providers".
This attestation would assist in ensuring the robustness of the system, as if it is deemed that person is not yet ready to advise unsupervised, the period can be extended.
Overall, this should help to reduce the risk of inexperienced advisers being in a position to provide personal advice to unwary clients.
Finally, it is perhaps an implicit acknowledgement that a person can be regarded as a professional after just 12 months.
Whilst the term professional year is often associated with the accounting profession, anyone who has gone through that program will be able to tell you it takes more than 12 months to complete.
In fact, there is relevant education that is completed first, followed by a period of at least 12 months of qualifying experience before you even commence the "professional year program" with the major accounting bodies.
That program generally takes at least 18 months to complete, which in reality means that it can take three years before someone completes their "PY" program.
There is still more to do
The changes announced by the Government in the updated draft of the professional standards legislation are steps in the right direction.
There will be equivalent levels of education completed across the industry. Almost everyone will complete the registration exam. New entrants will be supervised for a minimum of 12 months.
But there is still more to be done.
Whilst these changes will set new minimum benchmarks, it's important to remember that they are minimums only.
Members of a profession should continue to look to set higher standards and continuously improve.
Whilst many existing advisers may meet the new minimums today and only have to complete the registration exam in the future, to stop there will do a disservice to the trust that Australians should have in the process of obtaining financial advice.
Advisers are the custodians of the future wellbeing of many Australians.
As professionals, we should always be looking as to how we can do things better, service more people, and help everyone take an interest in their financial future.
Bryan Ashenden is the head of financial literacy and advocacy at BT Financial Group.
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