Collins 17/08 – Licensing advisers – a waste of energy?

Australia’s financial advice industry is underpinned by licensing arrangements enforced and administered by the ever shrinking resources of our investment watchdog. Tom Collins reckons we should abandon this system.

The delay in the introduction of the Financial Services Reform Bill (CLERP 6) provides an ideal opportunity for both the Australian Securities and Investment Commission (ASIC) and Treasury to properly review the licensing of advisers.

It is proposed that under FSRB, anyone who gives financial advice has to be authorised. That is unless you are a real estate agent, solicitor, accountant or racing tipster.

The banks are complaining that their tellers will need to be authorised. The FPA is complaining about declared professional bodies and I argue that advice givers should not be licensed at all. I argue, also, that the Australian Consumer and Competition Commission (ACCC), not ASIC, should be responsible for consumer protection of the retail investor.

I have three arguments against licensing advice givers. Firstly, the playing field isn't even and still won't be under FSRB. Secondly, those that are licensed are perceived to gain government/ regulator endorsement and thus false credibility.

Thirdly, the time and resources ASIC puts into licensing advisers could be more meaningful spent on surveillance.

It seem absurd to me that a bank teller has to be authorised to advise on say term deposits, yet the real estate agent, the solicitor or the accountant will be able to give "advice" without needing to be authorised. Who can potentially do more harm to the consumer? Also, it is likely that the accountant and the solicitor will be perceived to be knowledgable on financial matters, as they are "professionals". How many bank tellers have run off with the trust account monies or put their clients into shonky investments and suspect mortgages?

Real estate. We have had time-share and now have off the plan selling. How many self-appointed gurus are there running around now offering "free invitations" to wealth seminars. These seminars have titles like: "How to uncover the secrets of fabulous wealth" etc. They are run by supposed self-made millionaires, who are going to share their secrets with you. Some of these seminars attract thousands of people. Some are not free and charge thousands of dollars to attend.

What most of them have in common is that they are a front for someone offering geared packages into either property or equities. The promoters are clever enough to work their way around the current licensing laws, and I suspect FSRB licensing requirements as well. It appears that ASIC and Treasury have put real estate and these gurus into the too hard basket.

Some time ago, the life agents wanted to be authorised. Alongside the now defunct Insurance and Superannuation Commission (ISC), they were devising a regulatory regime. Many advisers opposed this as they saw this giving life agents' legitimacy. Well, I think the same argument could hold for advisers.

Does the licensing of advisers help protect the client? Some arguments for licensing are that it ensures certain minimum standards and provides for sanctions. Paradoxically, if someone is not licensed, ASIC can deem them to be licensed and then impose the sanctions anyway.

However my main concern is implied legitimacy. I think it gives consumers a false sense of security. It is exploited by the industry and promoted as a compelling reason to use an adviser. But what does it really mean? Can ASIC guarantee the behaviour of the adviser? Can it guarantee you will get your money back if the adviser is naughty? Of course not. So, where is the value for the consumer? Why set up false expectations with implied legitimacy?

Before someone reminds me that ASIC licences the dealer, who then authorises the adviser, let me say, that this uniquely Australian two tiered structure, and how ASIC administers it, is what first started me questioning licensing.

Furthermore, advisers give advice on more than investments. They also advise on pensions, superannuation, structures, personal risk and estate planning. Or so they should if they do what the FPA calls financial planning. However, ASIC really only has authority over securities and insurances. So should advisers be authorised to give advice on these other matters as well? Who would issue these authorities?

I understand the ATO is saying that only registered tax agents can give advice on tax matters. As superannuation is essentially a tax structure, are advisers authorised to give advice on superannuation? Does one DFP unit on estate planning make advisers experts on this? For solicitors, it is an accredited speciality. So if an adviser gives poor tax advice or poor estate planning advice, what authority does ASIC have to sanction the adviser? Would any of the complaint resolution schemes be effective?

The consumer perceives the adviser as someone who can advise them on all the above matters. This is because the financial planning industry tells the consumer they can and then legitimises its assertions by claiming that advisers are authorised to do all of these things.

My third point is that the effort ASIC puts into licensing dealers and the monitoring of them and their advisers' behaviour is not a constructive use of their very finite resources. ASIC should focus on the manufacturers and exchanges and not the distributors. The real major problems over the last ten years have been at the promoter level, for example Estate Mortgage, Austwide and more recently Wattle. Wattle is a classic case of where you had both authorised and non-authorised advisers involved. What additional comfort did investors receive from those advisers that were authorised? None!

I can see no logical reason to authorise advisers. Apart from my reasons above, ASIC/Treasury does not think authorisation is necessary in the situation where an adviser is employed by a dealer. Surely this confuses the situation even more as some advisers will have authorities and some won't. In this situation, how will the consumer know who is authorised? How will ASIC know?

ASIC should do away with its two tiered licensing structure for advisers. There is no need for dealers to be licensed, as they are really not dealing in securities. In reality, they are managing advice givers and transaction processors. I think ASIC/ Treasury are yet to get their heads around this. There should be just a registration system for advisers. Manufactures could only accept business and pay commissions to advisers who were registered. ASIC would set the minimum requirements for registration, but may not keep the register. It could be kept by industry associations or by APIR.

Which brings me to my other point. ASIC should set the rules for advice giving, police them and prosecute when required, but the consumer advocate should be ACCC. By having ASIC as the consumer advocate puts it in an invidious situation and conflict of interest situations could arise. The industry would prefer ASIC as they expect it would be more understanding and sympathetic as it is part of the industry. There rests my argument.

In New Zealand there is no licensing of advisers. In the USA, there is a real mixed bag and the type of licensing depends on whether you receive commissions. The UK is currently reviewing its situation. I hope ASIC/ Treasury do take this opportunity to stand back and think through the issue sensibly and rationally, but more importantly from the perspective of the consumer. Keep simple, don't provide false legitimacy and don't be patronising.