Get rid of the Financial Services Reform Act!

Does anyone, except the Government, Treasury and the regulators, really think that the Financial Services Reform Act (FSRA) is working? Many may think that enough has been written about theAustralian Prudential Regulation Authority(APRA) — but I don’t. What about the ‘turf war’ that is brewing between APRA and theAustralian Securities and Investments Commission(ASIC)? What I would like to do in this article is discuss why FSRA and APRA should be scrubbed and in my next article consider some alternatives.

First to APRA. Because of the silos that still exist in financial services, the Government announced last year (as a part of its superannuation reform) that all super funds will require a licence. And not an Australian Financial Services (AFS) licence but a new type of licence — and it will be a tougher licence to get, according to APRA!

APRA says “a trustee licence to offer superannuation services to the public will possess the same risk management expectations as a licence to take deposits from the public, or sell insurance to the public”. One wonders what this means for those who offer retail superannuation master trusts.

Does this mean they will not only have to satisfy the conditions of this (trustee) licence but also the conditions of an AFS licence and the Managed Investments Act (MIA)?

Some of the conditions for the trustee licence include: fit and proper responsible persons; sound risk management plan; and sound outsourcing arrangements. These sound familiar to the conditions for an AFS licence and MIA. Will APRA assess the conditions the same way as ASIC? What do you think?

And what responsibilities will APRA expect the superannuation fund to undertake? APRA has already asked some superannuation trustees whether they know if advisers are correctly representing their (the trustees’) fund. They suggested trustees should review any plan that an adviser put together that recommended their fund. That’s frightening!

Firstly, what about privacy? Secondly, what competence would the trustee have in assessing the advice in the plan? Thirdly, what about the additional costs? And who would wear the additional costs — and for what?

Recently, APRA had to back away from the statement that Australia’s retail investment industry is based on bribery. And at the ASFA conference last November, an APRA speaker said “by 2005 amateur hour will be over in superannuation management”. It appears that APRA is moving from the regulator with the soft glove to the regulator with the mangled lead fist.

More and more of superannuation product (including allocated pensions) is being sold through intermediaries. And this will rise even further if fund choice ever gets up. Even today, about 70 per cent of an intermediary’s business is related to superannuation (and allocated pension) advice. Does this mean it would be more logical for APRA to regulate intermediaries?

Which brings us back to FSR. As far back as June 2001, I questioned the FSR draft Bill (MoneyManagement,June 21, 2001). Now in 2003, with the Act in operation for nearly two years, my worst fears have been confirmed.

FSR promised a single licensing and conduct regime for financial services and a single disclosure regime that is consistent and comprehensive. Has FSR delivered on either? No! That is unless superannuation, debit products (margin lending) and investment properties are not financial services. If the FSR Act was subject to the Australian Competition and Consumer Commission (ACCC), it would be struck down for being misleading and deceptive.

Further, I doubt whether the FSR definition of a financial service would pass the ‘reasonable person’ test — its definition of financial advice certainly would not. FSR defines financial advice as product advice. This means that unless advisers are giving advice on an actual product, they are not giving financial advice, and therefore are not covered by FSR.

The Act is complex and it has been a field day for lawyers and compliance people. Some will tell you that everyone has to be licensed while others will tell you that everyone must receive full financial planning advice. Der! The Act doesn’t cover financial planning, it only covers product advice. For call centre people it even gets odder. For people working from a script in a call centre, they can be authorised without having to satisfy PS 146.

Then there is the farce of authorised representatives and representatives, depending on whether the adviser is an independent contractor to or employed by the licensee. How does ASIC know who the ‘employed’ representatives are? More importantly, how can the public find an ‘employed’ representative or even know that an ‘employed’ representative is a representative at all?

And to cap it all off there’s the Australian Financial Services Licence. The one single licence — except that it does not cover debit products, investment properties and most likely superannuation. But the consumer won’t be confused, just the industry.

ASIC expected to issue thousands of these in the two-year transition period. But some nine months into the transition period only about 300 have been issued. One has to ask why, and whether it is possible for those remaining to be licensed within the next 12 months? The answer to the second question is obviously no.

Will ASIC have to use more of its scarce resources? Will it have to streamline the process even more? Will it have to lower its requirements? Will the transition period have to be extended? Will it have to do all of the above — and more?

The more fundamental question is why did everyone have to re-licence anyway? The strain put on the resources of both the industry and the regulator is enormous — some put the industry’s cost at $50 million. And this at a time when there is pressure on costs and fees. The reality is that the consumer will pay again — and for what?

Will an FSR/AFS licence ensure that the consumer is better informed and protected? Will it be easier to catch the crooks and jail them? Will it lead to a more efficient industry? My answers to all three questions are no, no and no.

In effect, as I said in my June 2001 article, FSR makes the situation worse, not better. The law is more complex, there are more loopholes, there is more dependency and there are more resources going into licensing than regulating, that is, discovering and prosecuting the crooks.

In my next article I will discuss alternatives to FSR, especially the way another country does it in a very simple way. I’m not for no regulation, but I’m against over-regulation, mis-regulation and inept regulation. And as for APRA, it probably exemplifies all that is wrong with FSR.