How your financial planning practice is regulated
Sonnie Bailey explores some of the sources of regulation which extend beyond what financial planners may think of as ‘regulation’, in the narrow sense of the term.
What do the following services have in common?
- Working with a client to elicit their financial circumstances, needs, and objectives; and telling a client whether their financial objectives are realistic, including discussing what type of lifestyle they want in their retirement, what the cost of funding this lifestyle will be, and how long they can fund this lifestyle for:
- Helping a client to determine whether they can afford to buy a property, or whether it is prudent to do so, or whether they should sell one or more of their properties;
- Providing guidance to a client considering whether they should start or buy into a business (particularly one which will require a significant amount of their personal capital);
- Providing strategic guidance as to how a client should manage their debt.
For one thing, they are services that go to the heart of a client’s financial situation. These services could have a significant impact on their lifestyle and their medium to long-term financial outcomes.
Another feature that these services have in common is that they are not regulated as ‘financial services’ under the Corporations Act.
Your activity as a financial planner is regulated. Many would argue that you are heavily regulated.
I will point out that the Australian Securities and Investments Commission (ASIC) is not the only organisation that regulates your activities as a financial adviser.
You are being regulated in a variety of ways, by a variety of parties. I am going to suggest that the most important regulator of behaviour within your business is you.
Let me explain.
It’s clear that laws can regulate behaviour. For example, there are laws against speeding while driving. It’s safe to say that the more strictly these laws are enforced, the more effective they are at reducing driving speeds.
On the flip side, there is no law against lying to your spouse or best friend. Yet a large portion of us tend not to. Without being required to by law, we are regulating our behaviour.
So it’s clear that laws do not regulate behaviour alone. The factors that regulate our behaviour can be complex.
Perhaps some of our behaviour is driven by innate ideas of right and wrong. Others are probably enforced by social norms.
Some people say that their behaviour is influenced by their religious beliefs. And of course, consequences and self-interest can play a part.
Sometimes inertia plays a part: we do something because that’s how it has always been done.
As a lawyer, it’s tempting to say that at the deepest level, your behaviour is regulated by ASIC, enforcing the relevant sections of the Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001 and associated regulations and the conditions on your Australian financial services licence. However, this is not entirely accurate.
The Act and Regulations, and ASIC’s role in enforcing them, are important. By focusing on these, however, it’s easy to take an unnecessarily narrow perspective on what you can or can’t do.
To start with, the Corporations Act and Corporations Regulations are not the only sources of statutory obligations that apply to your business, and nor is ASIC the only government regulator.
An obvious example is the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, which is regulated by AUSTRAC. There are others.
The law, more generally, also applies to you – as it does to other businesses. For example, you may owe contractual obligations to other parties, which can be enforced if another party takes a civil case against you.
If you provide services to retail clients, you should be a member of an external dispute resolution scheme such as the Financial Ombudsman Service (FOS) or the Credit Ombudsman Service Limited.
If a dispute is within their jurisdiction, you are being regulated by the scheme of which you are a member.
They each have terms of reference. FOS’s terms of reference, for example, specifically state that rules of evidence don’t apply and that it can come to decisions based on what it thinks is fair.
It is, in a sense, a ‘law unto itself’ which regulates your behaviour by determining the consequences of disputes clients have with you.
If you are a representative of a licensee dealer group, then you will need to satisfy the licensee’s policies, which it can enforce.
This is another form of regulation. If you are a licensee, you are creating policies by which you regulate your authorised representatives.
Likewise, there is a strong chance that you are a member of an industry association. Industry associations have rules of conduct to which you must adhere.
There are even more subtle ways that your behaviour is regulated.
For example, in order to obtain a professional indemnity (PI) insurance policy, you may have to meet certain conditions, or conduct your business in a certain way. Approved product lists, for example, are not an invention of statute.
In many cases, a licensee needs to have an APL as a condition of its PI policy.
Another thing that influences your behaviour is the market. If there is insufficient demand for your services, then you aren’t going to have a business to run.
The market is determined by a variety of factors, including what your clients demand (or accept) and complementing or competing service providers and offerings.
Consumer demand is influenced by a number of factors. Many financial advisers would agree with me that there are a great deal of Australians who would benefit from receiving financial advice.
Many of these Australians aren’t aware of this, or they don’t look favourably on the financial advice industry.
This is influenced (regulated) by media sources and advocacy groups.
More close to home, is how you want you and your business to be perceived – to your clients and the world at large. Of course, reputational considerations influence your behaviour.
This is the supply side of the equation. It takes us to the biggest source of regulation impacting your business: you.
What type of reputation you want to develop and maintain flows directly from your response to the question: What type of business and services do you want to provide your clients?
If you focus on your role as an adviser, as it is regulated by ASIC in the narrow sense, you will end up with a narrow perspective on what your role as a financial adviser is.
The Corporations Act provides a very limited definition of financial product advice. This definition only relates to advice relating to items identified as ‘financial products’ under the Corporations Act.
The Act is silent as to any advice you might give in relation to the services outlined at the start of this article. The Act is silent in relation to many other similar services.
Taking the narrow perspective would restrict your business significantly.
As I read through adviser files and statements of advice, I sometimes wonder if the manner in which the industry is regulated (in the narrow sense) is confining the types of services that some advisers provide.
I suspect that regulation in this sense may be resulting in advisers providing services that don’t necessarily align with what the general public may want.
If you have let ‘regulation’ in the narrow sense of the term determine what your business is, it might be worth asking if you are letting this unnecessarily restrict (regulate) you.
After all, it should be you dictating what your business is, and the services you will provide your clients. Satisfying regulatory hurdles in many cases should be an operational, rather than a strategic, consideration.
A broader view of regulation may open your eyes to new business opportunities, and improving the nature and quality of your services to the mutual benefit of your clients and your business.
To what extent are you regulating your behaviour? Are you restricting yourself more than necessary?
Sonnie Bailey is a lawyer with Holley Nethercote Lawyers.
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