Is it really necessary to have more rules from the financial services watchdog?

Regulation is a tricky balancing act for our financial services watchdogs. Tom Collins puts the case for less proscription on the latest batch of proposals from ASIC.

Regulation is a tricky balancing act for our financial services watchdogs. Tom Collins puts the case for less proscription on the latest batch of proposals from ASIC.

Recently the Australian Securities and Investments Commission (ASIC) released a plethora of policy proposals, interim policy statements, discussion papers and reviews. Some of these I would like to discuss, especially in terms of the consumer and the financial planner.

But before I do, I would like to comment on regulation. Recently I gave a talk on regulation, which I titled Regulation - friend or foe, crutch or protector. In summary, I argued that over-regulation leads to censorship, corruption, closed shops, inefficiencies and compla-cency, and stifles creativity and innovation. However, what is more important is that it leads to us abrogating our personal and social responsibilities, and obligations.

Some of my audience thought I believed in laissez faire. Far from it, but I do not believe in the other extreme either- prescribed, pater-nalistic over-regulation. There has to be some regulation. It should set out objectives, policy, outcomes and penalties. It should not be prescriptive and all participants should be held responsible for their actions - especially the consumer. This approach is called in-formed consent.

This talk was based on a column I wrote more than a year ago when ASIC was about to be born. In that column, I asked "... now (that) we do have one regulator, will we get an amalgam of the worst from the past or a brave new regulator that allows the industry to prosper (and thus Australia) while ensuring a fair and competitive market place, and providing sensible and real consumer protection?"

At the 1998 IFSA conference, ASIC chairman Alan Cameron said ASIC hoped to "promote confident and informed consumer involvement" but in the next breath said "to do this the ASIC would build on the regula-tory approach of its predecessor, the ASC". Then, "We will build a regulatory regime based on principles and we will strive not to be prescriptive ...".

However, I believe ASIC is not building its regulatory approach on informed consent, but becoming more prescriptive and paternalistic. This approach seems to stem from a belief that without growing regu-latory intervention consumers will be helpless. It gives no credence to the idea that consumers have the capacity to make decisions them-selves - and informed ones. Unfortunately, the industry is supporting this approach, especially financial planners as it further justifies and entrenches their role.

The consumer in this increasingly over-regulated environment is being told more and more what they should or should not do, for example, only invest in products that have a prospectus. Issuers of products and intermediaries are being required to provide more and more infor-mation and warn consumers about more and more things. For example, CLERP 6 proposes that a mandatory risk disclosure obligation be put on all financial intermediaries. The consumer is encouraged to seek advice. We even have a nice little booklet - Don't Kiss Your Money Good Buy. In it, the consumer is told the questions to ask when seek-ing an adviser. The perception is that with these questions, the con-sumer will be able to select the right financial planner.

The unintended consequence of this is that the consumer is becoming more dependent on regulation, which will lead to too much reliance and therefore little personal judgment. The perception is that the regulator has taken the risk out of the decision. This makes the con-sumer not safer, but more vulnerable - and especially to financial planners.

The proposed mandatory risk disclosure obligation in CLERP 6 on all financial intermediaries is a very narrow definition: "Risks will vary according to the nature of the product, and in some instances will include risks associated with the product provider". This is a product view of risk not a consumer view. What about the risks with the product seller/adviser or financial planner?

The selection of a financial planner is the riskiest decision the consumer will make. If the consumer selects the wrong planner, all the other risks are pretty well irrelevant. If they choose the right one, well, they're irrelevant again.

Well, how does a consumer select a financial planner? Should they se-lect a CFP, an accountant with a professional financial planner ac-creditation, an independent or one that charges fees? Are these valid selection criteria? Does the consumer need to know more? But, you say, the financial planner has to give the consumer an ASG - an-other regulated requirement. The ASG requires disclosure. The con-sumer should be confident that they now have sufficient information to make an informed decision. Do they?

The term financial planner, as opposed to stockbroker, investment ad-viser or insurance agent, suggests a person who is a generalist - who plans the financial situation for their clients. But how many do? How many still favour their background? For example, a financial planner with a stockbroking background may be biased towards direct equities or someone with an insurance agent background may be biased towards life company products. Even the current financial planners who came directly into financial planning are still really investment advisers with a bias towards securities.

Why? It is because of the way they are regulated and rewarded. Regu-lation, as discussed above, imposes a securities view on financial planning. There is remuneration for giving advice, but the main re-wards are based on placing lump sums and on-going fees (irrespective of whether it is fees or commissions). Advising consumers to keep their public service CPI indexed pension generates very little re-ward. Neither does advice on direct property. Also, advising clients with little capital is not very rewarding, so why not encourage them to gear!

Yet we have ASIC now trying to proscribe when the word "independent" can be used. Surely any relationships should be disclosed, and the consumer can make an informed decision. More importantly, you could argue that the proscribing of the word independent could me mislead-ing, given what I have outlined in the previous paragraph. The very nature of the regulatory regime does not allow for true independent advice. This is because it is industry and product based - not con-sumer based.

Even with all this regulation there are still loopholes where unregu-lated advice can be given, for example accountants on self managed super funds. More regulation is not the answer. The answer lies in having consumers with informed consent. Being paternalistic does not do this, it just leads to dependency. What is needed is change of at-titude by ASIC and other players in the industry. Ensure consumers are informed, but then let them take responsibility for their own de-cisions.