The eye of the reform storm

10th December 2020

More than 20 months on from the tabling of the Hayne Royal Commission’s final report, the advice industry finds itself in the middle of an unprecedented time of reform. Adviser numbers are rapidly dropping, however government-commissioned reports have been pointing to a great unmet need for advice amongst the Australian public.

In December’s Industry Insights, we take a look at a whirlwind 2020 and reflect on the changes already impacting the advice industry, as well as those to come.

When status quo became a no go

The shape of the financial advice industry changed markedly in 2020. The long-held dominance of large institutions in the marketplace broke, with all but one major firm dramatically reducing their adviser numbers.

This reshaping of advice business ownership became inevitable long before the Hayne Royal Commission. Advice dealer groups have always struggled to turn a profit for their owners, and when an avalanche of remediation over unfulfilled future service agreements hit the big advice-owning institutions in 2015, the value of owning advice businesses evaporated. Of course, being dragged over the coals in public proceedings certainly didn’t help, nor did the cost of new financial planner training, education and professional year requirements.

In the wake of this ownership reshuffle, thousands of advisers have had to find new firms, familiarise themselves with new product suites, and grapple with new advice models and the question of how to implement their own compliance regimes.

Regulation overkill

Australia’s revolving door ministries and prime ministerships haven’t helped matters, as different regimes have thrown new, and more complex, regulatory requirements at the advice industry.

Tit-for-tat regulation wars between accountants and advisers resulted in accountants losing their SMSF exemption, and advisers being subject to a second regulatory body – the Tax Practitioners Board (TPB). With this came a second set of training standards, a second registration period, and a new code of professional conduct for advisers.

Hot on the heels of this second regulator came a de facto third regulator – the Financial Adviser Standards and Ethics Authority (FASEA). FASEA’s genesis can realistically be viewed as an industry own-goal, as the advice-owning institutions tried to formulate a compromise with the government to avoid a Royal Commission. Clearly it didn’t work, and with the major institutions largely leaving the advice industry, FASEA’s funding model also evaporated.

These issues with FASEA have led, inevitably, to the government’s announcement that the body will be disbanded and its responsibilities and functions split between Treasury and ASIC. Legislation to implement this realignment is scheduled to be introduced to parliament in the first half on 2021.

Consolidated oversight

The harbinger of FASEA’s demise came in June of this year, when the government announced plans to abandon the need for advisers to subscribe to “code monitoring bodies” that were answerable to FASEA. This reversal was part of a larger plan, prompted by a Hayne Royal Commission recommendation, to establish a single disciplinary body for financial planners that would eliminate the need to answer to multiple regulators.

It is now clear that the single disciplinary body will be the Financial Services and Credit Panel (FSCP), a department of ASIC. This same department will oversee the adviser exam and some sundry functions of FASEA. Treasury will be responsible for setting standards through the registration of legislative instruments. It is reasonable to hope that Treasury and ASIC will have a more efficient relationship than ASIC has with FASEA – encapsulated by the stasis in which RG146 has sat since 2012.

It is important to note that none of the requirements FASEA has overseen have been earmarked for reform or removal, only that the body administering them will change.

In November, the government also supported a recommendation from a review of the TPB which should give advisers further reason for hope. The recommendation was that the dual regulation of financial advisers by ASIC and the TPB be streamlined. This would include a single point of registration and a single code of conduct. Furthermore, the government restated that financial advisers should only be subject to a single disciplinary body, rather than facing sanction by both the TPB and ASIC.

With some good guidance, 2020 will be looked back upon as the industry’s nadir of regulatory confusion.

Making advice more accessible

This prospective consolidation of regulatory responsibility is accompanied by a concerted push to make advice more accessible for Australians.

The most obvious indicator of this is November’s initial consultation paper from ASIC on affordable advice. This paper is a first step in reviewing the framework for advice – and diagnosing why it is that so few advisers offer scaled advice services. That said, the language used in the paper indicates that ASIC already believes the settings are in place for the provision of scaled advice, and it will take a concerted effort from the industry to get the rules relaxed so that the risk in offering such a service also reduces.

Two other reports released publicly in November, the Retirement Income Review and the ASIC’s independent report into consumer engagement in insurance in super, also call for advice to be made more widely available to Australians.

The Retirement Income Review stated that Australian retirees are ill-informed on how retirement income should be structured. They also expressed concern that Australians have too great of an expectation that their retirement fund’s investment returns will pay for their retirement, rather than the saved capital itself. It should be noted that the review found that super funds are best placed to correct these misconceived views, particularly through the adoption of the Retirement Income Covenant.

ASIC’s independent report into consumer engagement in insurance in super also noted a need for greater guidance among the general public. It noted:

Some potential improvements (to provision of insurance through super) could be:

  1. Helping members understand:
    1. the differences between the insurance products on offer.
    2. The differences between insurance inside and outside super.
    3. Double dipping: that is whether it is possible to claim on more than one policy. Several members had heard that claiming on more than one policy was not allowed, so there was no point in having two. Questions about this came from people with death cover outside and inside super, and from people with more than one disability policy.
    4. Changes in insurance needs over the course of their lives.
    5. The implications of pre-existing conditions on switching.
  2. Calculators on all super fund websites would help people work out how much cover they need and how much it would cost. For death cover, some people wanted to know how much cover to have, for example how much their partner would need to pay for school fees if the member died. For income protection policies, the calculation was more of a trade-off –‘if I have X cover, how much will it cost?’

While some of these suggestions could be met by super funds providing good factual information to their members, others would necessitate personal advice in order to meet the member’s individual needs.

These reviews and consultations all point to a shift in government policy towards a relaxation of regulation. This relaxation would be in the name of widening access to advice.

The storm has yet to pass, but the signs are promising

2020 was a tumultuous year for advisers.

While the winds of change will continue to blow in 2021, there is hope that some of these prospective changes will empower advisers, rather than just create a greater regulatory burden. For those who have stood firm, the opportunity to assist a wider demographic range of Australians is on the horizon. It will, however, require a nimble mindset to take advantage of any favourable changes that are forthcoming.

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