While financial planners operating in the Australian market may consider that from a regulatory point of view, they have it tough, spare a thought for planners working in other financial planning industries around the world.
The arrival of theFinancial ServicesReform Act(FSRA) this year, has ensured the Australian financial services sector is considered one of the most regulated and transparent industries in the world.
However, financial planning industries are constantly evolving to provide better disclosure and regulation for all industry participants.
According to Watson Wyatt consultant David Harris, the regulatory standards of the Australian financial planning industry are currently being adopted in other regions of the world as best practice.
“People can belly-ache and complain all they want about the regulatory system in Australia, but basically it’s being emulated in Asian regions,” he says.
Harris says one example is Singapore, where its regulatory body, the Monetary Authority of Singapore (MAS), is currently seeking industry comment on the SingaporeanFinancial Advisers Act2001(FAA). This Act aims to improve the compliance and transparency standards of the industry.
“TheFinancial Advisers Actis a carbon copy of the FSRA in part,” he says.
Some of the key provisions and requirements in the FAA cover financial requirements for licensed financial advisers, criteria for approval of the chief executive officer and his or her duties, and restriction on the use of the term ‘independent’, and licence application procedures.
“Some countries in Europe are highly prescriptive, for example the UK, and Singapore is following that trend,” Harris says.
The regulatory body in the UK is the Financial Services Authority (FSA), which as Harris says, has become increasingly instructive and detailed in its reform of the financial services industry.
“There is clear concern in the UK that the details for financial planning are highly prescriptive, so compliance costs are huge,” he says.
Harris says the FSA’s firm approach to industry reform is in reaction to the mis-selling crisis, which occurred in the UK financial services market between 1988 and 1994, and basically involved life agents selling inappropriate pension products to clients.
“The result is a lot more detail on regulation, with heavy enforcement and heavy fines,” he says.
The mis-selling crisis severely impacted on the number of life agents working in the UK financial planning industry, which has dramatically decreased from approximately 210,000 intermediaries in 1992/93 to some 59,000 currently in the market. The flip side of this is that the number of financial planners has grown.
The FSA has also introduced specific rules on what fund managers can charge in relation to marketing and distribution costs, effectively setting a limit of one per cent on these charges under theStakeholder Pensions Act.
However, despite a tighter compliance and disclosure regime, there are still financial products in the UK industry regarded as simple and not requiring investment advice.
“That’s very serious and it raises the question here in Australia whether it is inappropriate for superannuation funds receiving compulsory super to have a need for commissions on something that is [in fact] compulsory,” Harris says.
Targeting the structure of the UK financial planning industry are a set of proposals introduced by the FSA earlier this year, which if successful, would effectively remove the current distinction between financial advisers that are independently owned and advise across all products and companies, and those tied to an institution and sell only its products.
In Australia, the FSRA provides an enforced definition of independent, however in the UK, how financial planners define themselves is central to the reform proposals.
Investment adviser regulation in New Zealand is derived from both common law and legislation, drawing upon theInvestment Advisers (Disclosure) Act1996, theSecurities Act 1978, theCrimes Act 1961, theConsumer Guarantees Act 1993and theFair TradingAct 1986.
The Securities Commission oversees compliance of the New Zealand financial planning industry.
The issue of disclosure is principally covered under theInvestment Advisers(Disclosure) Act 1996, which provides a two-tier disclosure regime that makes the distinction between initial disclosure and request disclosure.
According to the New Zealand Securities Commission discussion paperLaw Reform: Investment Advisers, initial disclosure is that which the investment adviser is required to make before giving advice or the investment broker is required to give before receiving a client’s money.
Request disclosure is that which the investment adviser must make as soon as practicable and in any event not later than five working days after the request.
Proposals for disclosure reform suggests that the information in both tiers of disclosure be disclosed to an investor before investment advice is given. Further, that reform be made to issuers and promoters of securities to which the investment advice applies remain excluded from the Act.
There is also a suggestion that disclosure may be too limited and material benefits such as trailing commissions may not be sufficiently covered.
Strong support for the proposals for reform cover making the recommendation of illegal offers of securities an offence and strengthening the enforcement of investment adviser law.
According to the discussion paper, to date no enforcement actions have been taken under the Act by regulatory bodies. Under theSecurities Act, the Securities Commission does not include a role under the enforcement provisions of theInvestment Advisers (Disclosure)Act.
“It is doubtful that the Commission has standing to bring proceedings under the Act. In any event, the Commission has not been funded for enforcement work in the courts in recent years.”
In the US, the regulation of the financial planning industry is the responsibility of the US Securities and Exchange Commission (SEC).
However, the SEC regulates the financial planning industry at a federal level and in the US, regulation does vary from state to state.
Further, while there are designated financial planners, many people seek financial advice from life agents. This is quite different to the Australian market where insurance agents are not as common.
“The big issue for the US is whether brokers or financial planners are the desired model, because Internet trading was very popular before the bull market,” Harris says.
He says because of the lack of a uniform regulatory approach in the US, there are no consistent trends in the financial planning industry.
“At this stage, it is quite uncertain where the US industry is going and whether distribution models are going to be in abundance,” Harris says.
