Have we been sold a pup? FSRB fails to deliver

The Financial Services Reform Bill currently before parliament sets out to provide a consistent and comprehensive regulatory framework for our industry. Tom Collins reckons it is neither consistent nor comprehensive.

Recently I was asked to prepare a presentation on what is missing in the Financial Services Reform Bill (FSRB). This required me to do a lot of reading and discussing the Bill and ASIC's policy proposal papers, with many people, including some lawyers. Unfortunately, the conference I was to do the presentation at was cancelled, but I am so alarmed at what is missing from FSRB (and even what is in FSRB) that I am using this article to highlight some of my more serious concerns.

This was an interesting way to review the Bill (yes I am a masochist) and I did it mainly from the perspective of distribution, ie dealers, advisers and consumers. In broad terms, what's missing from FSRB is an understanding of how advice is given and what protection consumers really need.

Before I go on, I believe any changes to the financial services regulatory environment should have to pass three simple tests: will the consumer be better protected; will it be easier to catch the crooks; and will it lead to a more efficient industry. Not only does FSRB fail all of these tests, it actually makes the regulatory environment more complex and less certain both for consumers and advisers.

Recently ASIC did a road show (ASIC Speaks) on the Bill. They identified two main outcomes of FSRB: "single licensing and conduct regime for financial services and Single disclosure regime - that is consistent and comprehensive". Does FSRB achieve these outcomes? No!

Well, the answer would be yes if you agreed that the definition of financial services should not include debt products (mortgages and negative gearing) and investment property. The answer would be yes if you agreed that the definition of a single licensing and conduct regime should encompass different conduct obligations for advisers, professionals who belong to a declared professional body, bank tellers, travel agents, and, because they are left out, real estate agents and mortgage brokers (I could add talkback radio presenters, but that would be being churlish). The answer would be yes if the definition of a single disclosure regime meant that all of the above were subject to the same disclosure regime.

The Bill lists 10 obligations for licensees and their representatives (financial advisers) and 10 for declared professional bodies (DPBs) and their members. "Well that's the same" I hear you say. But are they the same 10? No! The licensees are required 'ensure that the financial services are delivered competently and honestly'. But the same obligation is not required of DPBs. Why not? There are even two other mentions of "competence" in the obligations of licensees, but none for the DPBs.

Also the licensees have to have adequate risk management systems in place. But guess what, the DPBs have no such obligation. Obviously with the way many solicitors have been conducting their mortgage books, there is no need to oblige them to be competent or have demonstrable risk management systems.

But what I am most alarmed about is that FSRB defines financial advice in terms of financial product advice, and even from this very limited definition, debt and investment properties are excluded. For consumers, I believe this will be confusing, but more importantly give them a false sense of security. It is reasonable for a consumer to expect that when he/ she goes to a financial adviser (who holds him/ herself out be a representative of a licensee) that all the financial advice they receive, and all the financial products they recommended to them, are covered by the financial advisers licence?

What is covered is very little - I would argue that it is as little as a third of what an adviser does that is covered by the definition of financial services product. In public policy paper (PPP) no. 6 (Licensing: Principals and representatives), an example is given concerning paraplanners. The example has the paraplanner collecting the information directly from the client (including their objectives, financial situation and needs), preparing draft advice, preparing the draft plan, and assisting the adviser with the delivery of the advice to the client. Do you think the licensing provisions apply to the paraplanner? Well they don't!

So what does the adviser have to be licensed to do? In summary, two things: give product advice and place the business. But where is the most risk and the most value added? In essence when does the consumer most need protection? If the data collection is not done properly, if the client's needs are not properly understood, if the strategy is wrong, then what use is the rest of the process.

Consider this scenario. A client comes to you with $200,000 and seeks your advice on listed securities. Easy, product advice, so you have to be licensed. The same client then asks about gearing. Not so easy, as gearing is not regarded as a financial service, therefore you do not need to be licensed to discuss gearing or gearing products. They same client then asks about borrowing against their home to buy the shares. Do you get the drift? But what is possibly more dangerous - advising about the shares or about the gearing or borrowing? What if the same client had come in and asked about an investment property?

Other examples where it appears you don't need to be licensed are seminars on: superannuation fund conversion, redundancy, negative gearing and wealth creation. There are also many occasions where advisers give advice that does not include product specific advice. A client might want to know when they can retire, or whether they should put more into their superannuation fund. They might want to know whether they should accept a redundancy package and/or how it should be structured.

What about Australia's version of the UK pension scam. It's happened here in the past, it happening now and it will really happen if fund choice is brought in without the proper safeguards. What about advisers recommending that clients cash retail products to move into a wrap (churning). Is this product advice? Possibly not - as a wrap is not a financial product.

If you're confused, think about the poor consumer. And, as we are in the era of full disclosure, will the adviser have to disclose which part of their advice, and the advice process, is and is not covered by his/her licence. Because, if they don't the consumer will think that all of the advice, and all of the process, is covered by the licence.

Further to get a licence, the Bill imposes a number of organisational capacity requirements. These cover such matters as; compliance measures, monitoring, supervising and training representatives, organisational expertises, financial and non-financial resources and risk management measures - to name some. I can understand the need for these capacities for a product manufacturer, but for a licence to run a financial planning firm, are they all really necessary.

If I was a consumer, and knew that a financial planning firm had to satisfy all of these requirements, I would feel secure in the apparent protection this offered. But what if a firm, or one of its representatives does the wrong thing, would I think "this can't happen, because this firm has been licensed and monitored by a government regulator"? If something does go wrong, why can't I blame the regulator and even go them for some restitution? Is ASIC becoming the defacto auditor of financial planning firms?

If the regulator is not going to accept some responsibility, why license in the first place? Why give the consumer a false sense of security? Also, if you are going to regulate, why only do half a job? Why leave some products out and some of the advice process out - arguable that part of the process where there is the most risk and the most value added.

Finally, back to my three simple tests, and applying them to FSRB from the advice giving (distribution) perspective. Test 1; will the consumer be better protected? No, because most of the advice process which includes those parts where there is most risk are not covered. Test 2; will it be easier to catch the crooks? No, because so much effort is going into mis-regulating the good guys that there won't be the resources to chase the crooks - and most of the really crooked things are outside the scope of FSRB. Test 3; will it lead to a more efficient industry? What do you think?