Why the fixation with product related advice?

In my last article I discussed the role of the financial planner and how the Financial Services Reform Bill (FSRB) does not equate advice with financial planning.

Well, now I have had time to read ASIC's policy proposal papers (PPP) and no where in them, is there any mention of financial planning. But there is a lot written about financial product advice!

One could wonder if financial planners need an Australian Financial Services Licence (AFSL). In the AFSL Map - Summary, it lists certain authorised words or expressions that can be used by licencees. They include stockbroker or sharebroker, futures broker, life insurance broker, general insurance broker and insurance broker or insurance broking. There is no mention of financial planners or financial advisers or financial consultants, for that matter any type of adviser.

In the PPPs, ASIC attempts to define personal advice and general advice, but in terms of product advice. This apparent lack of understanding that advice can be independent of product probably explains a lot. Risk is only defined in terms of products. You can only call yourself independent if you receive no rewards, commissions etc from product suppliers. Disclosure revolves around product disclosure.

It appears that either they do not recognise that advice can be independent of product, or that they have no jurisdiction over non-product advice. I cannot believe that they do not have jurisdiction over non-product advice, remember the investments adviser's licences. Therefore, why are they delineating advice in this very narrow way? Is it because they also believe that the giving of advice always leads to a product sale. (If they do, they should read my last article.)

Advice is broader than product advice. However, if this is the how ASIC wants to delineate advice, is most of what a financial planner does outside the jurisdiction of ASIC? If a financial planner does not advise on or deal in any product and only earn fees from the client, does ASIC have jurisdiction over him/her? Is this the only person that can call themselves independent?

You continue to see the emphasis on product advice when you look at the PPP on IPS 146. In that ASIC further clarifies who should be trained to Tier 1 or Tier 2. It appears that the Tier 2 training standard only applies to people giving retail product advice about; motor vehicle insurance, home buildings and content insurance, travel insurance, personal and domestic property insurance and basis deposit products. Does this mean that the Tier 2 training standard covers everything else off?

So next time you are doing an overseas trip, make sure you travel agent does a needs analysis before he/she offers you travel insurance. Also make sure they provide you with their Financial Services Guide (FSG) Statement of Advice (SOA) and Product Disclosure Statement (PDS). If you're lucky, they may provide you with some travel brochures as well!

Product advice is only a small part of the advice that financial planners gives and may be even no part of the advice given. So what does the Tier 2 training standard apply to? Does it only apply to product advice? If so, will this require training programmes to be revamped so that they focus on products. DFP is a vocational course not a product course.

I should have asked before now - what does FSRB regard as a product. Is a managed investment a product or is the XYZ equity trust the product? If I give advice about the merits of managed products versus listed securities, am I giving product advice? Is an IDPS a product? If I am giving advice on the merits of using or not using an IDPS, is this giving advice?

The above and two other matters raised in the PPPs are interesting from the accountants perspective. FSRB PPP No 1 covers licensing, in particular declared professional bodies. It says (section B16 pg 22) "Members of declared professional bodies do not need to hold a licence to provide financial product advice (this exemption does not apply to dealing)." Interesting! Assuming accountants belong to a declared professional body, they can do everything except deal without a licence. (By deal, they mean place the business and earn a commission.)

We are yet to see the PPP for declared professional bodies, but already there are two sets of rules, and, silly me, I thought we were going to have one licencing regime. It could be that the poor travel agent is subject to more regulation than the accountant is.

But back to accountants or any profession that belongs to a declared professional body. There just maybe be a way to earn a 'quid' without being a licencee. The PPP's allow for referrers to receive a fee as long as it's paid independent of a transaction being completed or not (D5(d)(i) pg 34.) So it appears to me that a professional could provide product advice and then refer the client to a licencee to conduct the transaction, but be paid for all referrals (say a flat dollar amount), irrespective of whether the transaction is completed.

Or, consider this scenario, the accounting firm owns a licencee, but none of the partners are authorised. They refer their clients to the licencee they own and take on referral fee. However they do share in the profits made from the licencee. I'm glad there is one set of rules for everyone.

They often say that the devil is in the detail. I've been in support of CLERP 6, the precursor of FSRB, as I believed in a level playing field, horizontal regulation rather than vertical. But I wonder whether FSRB, as it is currently drafted is the answer. At one end we are being over-regulated (travel agent) at the other end, privilege is leading to under-regulation.

FSRB will be touted as providing consumers with more protection, more security, but does it? In defining advice as product related and risk in terms of product, it is giving consumers a false sense of security. Advice is broader than product and in many ways more important than product. And the greatest risk for a consumer is poor advice, and the best way to get poor advice is from a poor adviser. Therefore, the greatest risk is the adviser not the product.

It would be interesting to know where ASIC, but more importantly Treasury, received their advice in drafting FSRB in terms of advice and risk. Wherever, it was poor advice and its unintended consequences are that it puts consumers at further risk.