Mandatory stress test for planning clients

Financial advisers should be required to administer mandatory personal stress tests on their clients as part of the broader advice process, according to the Institute of Actuaries of Australia.

In a submission to the Parliamentary Joint Committee on Corporations and Financial Services, the institute has argued a personal stress test is needed in the advice process as well as a range of changes to the sale of certain financial products.

It said the proposed stress tests would be aimed at measuring the impact of adverse events on an individual’s financial position in an effort to avoid a repeat of the calamitous investment practices undertaken in the lead-up to the global financial crisis.

It said there also needed to be restrictions on the sale of some structured products, limitations on the use of the word ‘guarantee’ and changes to the remuneration structures around the provision of advice.

Commenting on the submission, the institute’s president, Trevor Thompson, said mandatory personal stress tests would address a number of common themes that appeared to have contributed to the personal losses which followed the collapse of financial services providers, particularly where high levels of leverage or investment concentration were concerned.

“The strategies which were used by many of the recently collapsed companies had the potential to have disastrous outcomes for clients either because of high leverage or high concentration, and these consequences were not well-communicated to consumers,” he said.

The chair of the institute’s wealth management committee, Tony Cook, said among the benefits of a personal stress test would be the ability of consumers to more easily understand the impact of high risk strategies.

He said advisers would also benefit from having an objective tool to support the advice process.