Consumer trust isn’t something to be taken for granted, but reports from the UK, US and here at home are all pointing towards an uplift in trust levels around financial advice, which can only be a welcome development.
There are significant tailwinds behind the financial advice industry at the moment, but some major obstacles are still preventing advice practices from taking advantage of surging demand according to a new study from CFS.
The end is nigh for the SOA as we know it
As highlighted in our article recently covering the formation of the ‘single disciplinary body’ to govern and regulate individual financial advisers, the landscape continues to evolve on a near daily basis. Comments from ASIC in response to their call for submissions to make financial advice more affordable, suggested the Record of Advice could be set to make a comeback.
The Financial Services Council has proposed a bold change to the regulatory landscape in a recently released ‘Green Paper’. The group which is the leading peak body for a diverse range of financial services businesses from funds management to financial advisery networks, has flagged the continued overlap of legislation, ballooning costs and overly descriptive legislation that forces a sometimes-onerous compliance focus.
In framing their analysis amid the pursuit for more affordable and accessible advice, the FSC drew on statistics reported by the Sydney Morning Herald suggesting that the average fee for financial adviser is now $3,240, a 28% increase in just two years. In their analysis, they listed the multiple layers of costs being faced by advisers as key drivers of this increase, they included:
- Regulatory – such as ASIC levies, professional registrations, professional indemnity insurance, AFCA membership, education costs, cyber security, research and record keeping charges;
- Operating – Technology costs, general business overheads, the cost of new education requirement, staff costs, professional association memberships, insurance and tax;
Looking forward they flagged a number of additional charges to come including the Compensation Scheme of Last Resort, financial accountability regime the likely new range of Financial Services and Credit Panel charges.
According to the report, rising regulatory requirements and cost pressures are at the core of undermining the economics of the sector. Further, in many respects they suggest that financial advisers are now subject to a professionalism regime that exceeds that of many other respected professions.
On the issues facing the advisery industry the report is quite clear, there are many problems to solve which center around navigating complex, multi-layered regulatory requirements. The provision of limited or scaled advice on basic issues on a cost effective basis is only becoming more important, yet constantly changing regulation has made basic compliance difficult, forcing advisers to increase their fees. This higher cost ultimately diminished the perceived value to clients they suggest.
There are a number of core recommendations which have naturally garnered the majority of the headlines, chief among them being the proposal to abolish the ‘safe harbour’ steps outlined in the Corporations Act. They say these steps are ‘unnecessary and administratively complex’ and potentially give advisers a false sense of protection. The alternative should be based on the detailed requirements ascribed in the FASEA Code of Ethics.
Further, the report recommends removing complex jargon that confuses consumers, by breaking all advice clearly into general information or personal advice and most importantly, offering advisers a clear guide on how this should be allocated. The ultimate recommendation however is to abolish ‘unwieldy’ Statements of Advice and replacing them with Letters of Advice, that are directly to the point and therefore more ‘consumer orientated’.
It is this final recommendation that stands out, with the FSC outlining a layered approach to regulation breaking advice into general, simple personal and complex personal advice. Each type of advice will require differing levels of education and be linked directly to its scope. Simple personal advice would be limited to strategies and products in set areas, with more complex advice including SMSFs, aged care and other specialities requiring additional training. Both simple and complex personal advice would demand the same level of disclosure.
They suggest that financial advice should be clearly distinct from the current ‘financial product advice’ definition, noting a significant amount is strategic rather than product specific.
The report will remain open for submissions until 1 July 2021.
