Adapting – and surviving – in an everchanging world

Two events of the past month have the potential to turn the retail financial services market on its head. Tom Collins examines the possibilities opened up by the sale of BT Funds Management and the implementation of CLERP 6 reforms.

A constant theme in my articles has been based on a saying by Charles Darwin - "it is not the strongest or most intelligent that survive but those who can adapt". The changing ownership of BT Funds Management and the Consultation Paper on Implementing CLERP 6 'Financial Products, Service Providers, and Markets - An Integrated Framework' could be two good examples to test Darwin's saying.

BT started in Australia when banks were banks, the big mutual life companies dominated the savings and superannuation market, Australian Fixed Trusts (AFT) was the biggest fund manager (unit trusts) in Australia and Macquarie was still Hill Samuel.

Life agents were earning (?) commissions in excess of 100 per cent of the first years' premium and advisers were being paid 6-8 per cent front end commission- and no trailer.

There was no Financial Planning Association (FPA) and this was less than 20 years ago.

Today, BT is the biggest fund manager in Australia, banks are no longer banks, there are no mutual life companies left (are there any life companies left!), AFT who and Macquarie now dominates the cash management market. Life agents now survive on a 10-20 per cent ongoing commission and most advisers are being paid 2-2.5 per cent with trailers around 0.4 per cent. And the FPA now has about 10,000 members.

In its early days BT challenged the status quo and delivered value and service. For this it was rewarded with success, and as a result it became the behemoth not unlike the ones it used to challenge in its early days. Who could have predicted what has happened to BT in the last six months. It was first bought by Deutsche and is now to be sold. I wonder if either a Management Buyout or public offering was considered. In many ways, this is sad as it marks the passing of an era. Let's hope that BT can adapt to its new owner, or probably more importantly, its new owner can adapt to BT. Another question is which of the current set of small nimble players will be the next BT?

Over the past few weeks I have been reading with interest the Consultation Paper on implementing CLERP 6. If the majority of the proposals in the Paper are implemented, adaptation will be the name of the game. Its main impact will be on the old Insurance and Superannuation Commission (ISC) side of the business, but it does also impact on the securities side.

The Paper seems to further entrench the two tiered regulatory structure of the licensee and their authorised representatives. This is a structure I question as it is not common in other jurisdictions. However, if it is to be, the proposals in the Paper make me wonder whether small licensees (one or two authorised representatives) will survive. The requirements being proposed for licensees are quite onerous. These requirements encompass financial, educational, organisational and managerial guidelines to name a few. The Australian Securities and Investment Commission (ASIC) will have to be satisfied with training and supervision systems as well as managerial and compliance processes.

The Paper goes on to say: "the relationship between licensee and authorised representative is one of principal and agent and employee". The licensees are still totally responsible for their authorised representatives as well as having the fiduciary relationship with the client (page 22). This will not sit well with those advisers who have been trying to usurp the role of the dealer (licensee), see themselves as the professional and believe an adviser controlled FPA should be setting the standards. How can an adviser who has neither statutory responsibility nor the fiduciary relationship with the client regard himself or herself as a professional? The FPA's CFP-centric view of the world is based on the USA model where the adviser is directly licensed by the regulator, has statutory responsibility and has the fiduciary relationship.

Before I get too many bricks from advisers, let me say that the problem is with the regulator not the messenger. In one of my earlier articles I argued against the two tiered regulatory structure as it is unique to this profession and, as far as I know, this jurisdiction. But ASIC, from a convenience point of view, wants to regulate hundreds of licensees rather than thousands of authorised representatives.

Yet in the past it has been easy, too easy, for sole advisers to get dealers licensees. It is obvious from the proposals in this Paper they are now tightening up. And I am sure ASIC has more reasons than convenience as their justification - or I hope they do.

For my twopence worth, if the FPA has ambitions to be a Self Regulated Organisation (SRO), it either has to argue that advisers are licensed by ASIC, or it has to truly represent the licensees (dealers). Only the association that represents the licensees can logically be the SRO. I am more and more coming to the conclusion that one organisation cannot represent both the employer/ principal and employee/ agent.

The Paper also see licensees not being able to use the terms "independent", "impartial", "unbiased" or similar words if they "breathe". Not quite, but I do not know of one licensee who could satisfy the criteria set to determine whether they could use any of these terms.

Soft dollar arrangements, allocation of leads, criteria set to attend conferences amongst other practices are part and parcel of the industry. I know of advisers who are part of dealer groups that are majority-owned by product issuers that give "independent, impartial, unbiased" advice. I also know advisers who have their own dealers licence who are almost slavishly tied to one or two product issuers - through referral programs and conference attendance criteria.

ASIC's proposal is superficial. It should either ban the words altogether or come up with some more substantive proposal.

One other area I would take umbrage with ASIC is over qualified privilege, or lack of it.

They have not proposed that it be provided to licensed Financial Service Providers (dealers).

These licensees have a statutory obligation to "know the product". As a result, most have an approved list. Reasons are given for why a product is approved, but many are circumspect about giving reasons for why a product is not approved.

This is because a dealer does not have qualified privilege and therefore can be sued for defamation - as a number of us have found out. Both Estate Mortgage and Austwide used this tactic successfully. The truth about Estate Mortgage would have come out at least two years earlier if it wasn't for defamation actions.

Finally does the "level playing field" this Paper purports to achieve mean stockbrokers will be under exactly the same rules as advisers - ie all advice in writing, and full disclosure? Does it also mean that the old "incidental to the business" loophole has been shut on accountants and solicitors.