In late July, the Financial Adviser Standards and Ethics Authority (FASEA) released a raft of consultation papers, including those on Continuing Professional Development (CPD), the professional year and foreign qualifications. When considered in conjunction with the previously released draft position papers on qualification pathways for existing advisers, FASEA’s code of ethics and the adviser exam, a picture of how FASEA plans to approach its interpretive role starts to emerge.
This edition of Industry Insights will focus on the larger themes emerging from FASEA’s draft positions. Granular detail on each of FASEA’s consultation papers is available to wealthdigital subscribers through our FASEA hub. Subscribers can log on to wealthdigital and click here to read more.
The horse has bolted and it took the gate too
Much of the commentary around FASEA’s positions seems to focus on the sheer weight of changes FASEA are implementing and refining. When looked at in totality, new degree-level qualifications requirements, an entrance exam, two-thirds more CPD, a new code of ethics with associated policing bodies and a professional year for new planners seems like a generation’s worth of change in one hit.
The problem is, implementing each of these changes isn’t FASEA’s choice. FASEA is just fulfilling the role required of it by the legislative changes that passed parliament in February of 2017. A cynical observer might suggest that this bill was an attempt to stave off a Royal Commission. If that was the aim, it failed, and now the industry has to deal with all the FASEA-managed changes in addition to any further ones that may come about after the Royal Commission brings down its findings.
The long and the short of it is, barring the government subsequently passing further legislation to again amend the Corporations Act, these FASEA-led reforms are going to happen. The best that can be done is to engage with FASEA to help shape how they interpret the new rules.
Theme 1 – FASEA is looking at the industry with fresh eyes
The first theme to emerge quite clearly from FASEA’s consultation papers to date is that the way industry regulation currently works is not necessarily the basis for how FASEA plans to manage it. This is most clearly outlined in FASEA’s CPD consultation paper.
It would have been reasonable to think FASEA would take ASIC’s RG146, with specialist areas at its core, as its starting point. This does not seem to be the case, however, with FASEA’s initial position requiring significant CPD on ethics and regulatory compliance. Technical competence is allocated a minimum of 5 of the proposed 50 hours per year. A similarly low focus on technical competence is evident in FASEA’s paper on the adviser exam.
This new approach is equally evident in FASEA’s paper on qualification pathways for existing advisers. FASEA’s paper all but ruled out the ability for education providers in the vocational sector to provide the courses necessary for planners to meet the requirements. This stands in contrast to the prominent role the vocational sector has played in providing qualifications to financial planners to date.
Theme 2 – The role of professional associations will shrink
To date, financial planning’s professional associations have been relied upon to play a central role in promoting professional behaviour and policing their members should they fail to do display such behaviour. Professional bodies have been the ones to establish codes of conduct and ethics, to have complaints and disciplinary processes, and to produce papers on what constitutes proper professional conduct.
After the Royal Commission’s hearings, there is a perception that the need for professional bodies to mollify their fee-paying members is in irreconcilable conflict with their role policing those same members.
Professional bodies’ core role in creating structure around CPD, as well as assessing CPD content and providing it with accreditation, was not reflected in FASEA’s consultation paper. “Approval” of CPD content is proposed to lie with the licensee and FASEA themselves will provide the framework for the CPD rules. It should be noted, this does not mean professional bodies will not require their own members to do CPD approved by the body.
In May, ASIC released a consultation paper on its oversight of applicants to become a monitoring body of FASEA’s new code of ethics. While the consultation paper did not explicitly preclude professional bodies from becoming code monitoring bodies, the requirements to minimise conflicts of interest, have adequate resources, and proactively monitor planners’ activities would be hard for a professional body to meet.
Theme 3 – FASEA defaults to maximising requirements
A common thread in FASEA’s consultations has been that, where the option arises, they are choosing to maximise the requirement advisers need to meet. This is most evident in the consultation paper on CPD.
The headline issue from FASEA’s CPD paper was the requirement for planners to do 50 hours of CPD per year. Coming from the previous position where a base of 30 hours per year was common, it isn’t surprising that a two-thirds increase has caused some raised eyebrows.
50 hours of CPD would put financial planning in the same league as engineers and doctors. While advice is clearly important, it should be hoped that doctors and engineers have the highest CPD requirements amongst the professions, as people could die if they based their judgement on outdated knowledge.
50 hours of CPD would exceed the annual requirements applied to accountants (40 hours on average), mortgage brokers (30 hours), nurses (20 hours), teachers (20 hours on average in NSW) and lawyers (as little as 10 hours in NSW). It seems clear that FASEA’s starting point was to have the highest requirements of the professions.
A similar approach seems to have been taken when drafting FASEA’s new code of ethics. It is hard to find an equivalent clause to the one quoted below in any other profession’s code of ethics:
Individually, and in cooperation with peers, uphold and promote the ethical standards of the profession, and hold each other accountable for the protection of the public interest.
This clause could mean that a planner who doesn’t report a peer’s suspected, unethical behaviour is in contravention of their own code of ethics. In practice, they would be a guilty bystander.
It is reasonable to hypothesise that, in these examples, FASEA may just be taking an extreme starting point so that negotiations can result in a final position that is still strong. If so, it is essential that planners and industry participants participate in FASEA’s consultations.
Theme 4 – A strong focus on formal education and ethics
It is to be expected that the value of formal education be at the core of FASEA’s consultation on qualification pathways for existing advisers. It has been the prominence of formal education in FASEA’s draft positions on the professional year for new planners, as well as on CPD, that has been surprising.
Out of 1800 hours-worth of work to be completed by new planners as part of their professional year, 800 hours are proposed to be dedicated to education. Required qualifications can form part of these 800 hours, however it is fair to assume that many planners entering this professional year will have already completed their undergraduate degree.
It is reasonable to wonder how new planners will fill these 800 hours. Potentially it could be spent acquiring a designation or doing specialist training. As noted by FASEA in their consultation paper, a tertiary education subject is typically 120 hours of work. This will require 6 and two-thirds subjects to fill the 800-hour requirement, in excess of most designations’ course-work components.
Ethics is one area that has been given great prominence in the FASEA consultation papers. Examples of this prominence include proposals that:
- all existing planners will need to pass an ethics subject to meet their qualifications requirements,
- all new planners will need to document how they address 2-3 ethical dilemmas in their professional year,
- a minimum of 10 CPD hours per year are to be on professionalism and ethics, and
- 15% of the adviser exam will be on FASEA’s own code of ethics with a higher pass mark (75%) than any other section.
Without a doubt, ethics is a worthy subject and one all planners should consider at length in their practice. That said, the focus on ethics may be somewhat strong, particularly in the CPD requirements where it could be argued that, unlike the law, one’s ethics are not something subject to regular changes.
FASEA’s emphasis on ethics seems to stem, in part, from its own role in drafting a new code of ethics by which all planners must abide. The validation of this code is most easily achieved if all other areas focus on it, even if that focus becomes disproportionate.
So, what to do?
As identified earlier, there is little to be achieved by arguing the validity of the legislative changes with FASEA. The best courses of action available to all advice industry participants are to:
- Be involved in the conversation within the industry. If you believe higher qualifications, an exam, a professional year, beefed up CPD and a new code of ethics is overkill, engage politically. The implementation timeframe may be able to be lengthened. If there is a dramatic shift, some of the requirements may be lessened legislatively.
- Engage in FASEA’s consultation process. Read its papers and, if you are concerned about certain areas, make a submission and be involved with those made by your professional bodies.
While FASEA is currently funded by the big institutions, big institutions’ current trend of exiting advice would point to this model not always being in place. It is not unimaginable that FASEA will eventually be paid for by planners in a more direct manner. As such, it would seem sensible to take this chance to help mould the policies you may end up paying FASEA to enforce.