compliance regime

An elementary facet to our discussion is ALL costs of compliance imposed onto Advisers are factored into their business model and ultimately Consumers are paying for it, this reality seems to be lost on some key stakeholders.
PETER JOHNSTON
AIOFP Executive Director

The compliance requirements imposed onto Financial Advisers are complex, costly, bureaucratic, demanding, unnecessary and substantially inefficient.
Professional Planner magazine – Opinion piece 3/9/20
– Remember that thing called the Code of Ethics
Author ROBERT MC BROWN AM, Chartered Accountant, Independent chair of the Australian Defence Force Financial Services Council and a member of the Federal Governments Financial Literacy Board.

Executive Summary

The objective of this Paper is to work with all industry stakeholders to develop an Adviser retail compliance regime that benefits Consumers whilst simultaneously and fairly works for all parties. We believe the fundamental problem are differing interpretations by stakeholders of the legislation which has led to a costly bureaucratic regime that ultimately Consumers are paying for.

The stakeholders we are referring to are:

  • Politicians
  • Australian Securities and Investments Commission (ASIC)
  • Australian Financial Complaints Authority (AFCA)
  • Product Manufacturers (PM)
  • Financial Advisers Standards Authority (FASEA)
  • Financial Advisers (Advisers)
  • Professional Indemnity Insurers/Brokers (PI)
  • Consumers

The current compliance regime is not broken; in our view it just needs readjusting and coordinating to meet its obligatory and mandatory objectives of protecting Consumers from poor advice, product failure and excessive cost. The other important aspect is having sufficient practicing Advisers to service current and future consumer demand in a post COVID world. An elementary facet to our discussion is ALL costs of compliance imposed onto Advisers is factored into their business model and ultimately Consumers are paying for it, this reality seems to be lost on some key stakeholders.

The other reality is Advisers have no choice but to inform their clients of why their fees have escalated and this may have wider political ramifications going forward. The provenance of compliance legislation lays with Politicians, policed by ASIC/FASEA, implemented by Advisers/PM Compliance officers/lawyers and assessed by AFCA/PI if consumer complaints/losses occur. As previously suggested, we believe there needs to be more collaboration and coordination between all stakeholders to avoid confusion, bedevilment and/or disconcertion going forward.

Our intention is to conduct a Round Table discussion during October 2020 in Canberra (COVID permitting) and invite all stakeholders to attend either in person or via Zoom. The immediate objective is to present a restructured compliance regime for retail Advisers which will impact all stakeholders to varying degrees. We will invite and welcome stakeholder comment.

It should be noted that up to 1.5 million current clients are predicted to be disengaged from their Adviser within the next 6 months due to affordability factors. The average annual cost to maintain a client is over $6,000 per annum largely due to the current compliance regime, this must be reduced by at least 50% to retain most client engagement and supplemented with other incentives like the tax deductibility of advice.

Recently we sought feedback from our 6,000 Advisers in the AIOFP network on their views with compliance obligations and what can be done to improve the circumstances. It has become very clear that there is significant confusion, variance and redundancy across the industry over the compliance fundamentals and their interpretation by compliance and legal Advisers.

In addition, the sensationalist manner in which regulatory concerns are conveyed have had a drastic effect on the operations of the PI industry in this country, substantially driving up PI insurance premiums which ultimately impacts consumers.

The outcomes are Licensees adopting ‘over-the-top’ compliance requirements believing it is better to have redundant, unnecessary measures in place than face the possibility of lengthy and expensive regulatory review and the possible inability to obtain or retain their PI insurance – a legal requirement for a Licensee to hold to be able to continue to operate.

Unfortunately, the overall result is a vicious circle of substantially increased compliance costs encouraged by third parties in an atmosphere of fear which ultimately Consumers are paying for. We think it is time for Regulators such as ASIC, AFCA and FASEA to move away from their policy paradigm of not directly giving practical direction to Advisers on compliance matters. This culture has increased the uncertainty amongst the Adviser community and driven commercial opportunism by some parties to install a superfluous expensive compliance bureaucracy where the cost is being passed back to Consumers.

The contribution of Regulators giving some meaningful direction to Advisers will significantly help to reduce the cost of advice for Consumers by demystifying the expectations and trepidations around the direction of regulatory policy.

The key Regulator to perform this task must be ASIC, they are feared and respected by the industry. The industry needs ASIC to be more interactive and move away from the current ‘them and us’ culture that has been cultivated over the decades by both sides. We also believe that as part of the way forward more credence needs to be given to the experience of those giving advice (as is referenced in the Corporations Act section 961). Regulators may feel they are being treated as ‘the enemy’ by Advisers, but we can assure you that Advisers feel the same way with their treatment by all Regulators over many years.

Considering all Advisers and Regulators have a similar obligation to act in the best interests of consumers, it makes perfect sense for all to collaborate on a regular basis to assist each other to achieve this outcome – not wanting to involve COVID terminology but “we are all in this together”.

We would like to implement a genuine round table quarterly discussion group going forward with ASIC where issues are tabled and discussed in an open Q&A format where Advisers can detail the practical implications and unintended consequences on any change’s ASIC are contemplating. Decisions that impact the operations of a small business should not be done via press release and/or without consultation. These decisions are potentially affecting around 20,000 Advisers, 60,000 employees (who are predominately female) and 3,000,000 clients around the nation.

For instance, ASIC latest UNMET ADVICE NEEDS project should be discussed with a committee of Advisers before going to the wider industry for comment, it will save everyone copious amounts of time, energy and confusion.

Advisers are at the coal face dealing with consumers and are highly respected by them (as demonstrated by ASIC’s 627 Paper – ‘What Consumers Think’); these people become ‘family’ and the last thing Advisers want is poor advice/capital loss or having to cut them off due to compliance costs. All regulators/stakeholders must understand and appreciate this axiom – Advisers want happy clients other wise they leave, its not good for business to have dissatisfied customers!

A constant theme in this discussion is the cost of compliance imposed by various stakeholders onto Advisers is immediately passed back to Consumers. We do not regret constantly stating this fact, it is at the very crux of why around 95% of Consumers will be deprived of Advice going forward and why Advisers are leaving the industry if the current trajectory is maintained.

The secondary objective of this paper is to create a level playing field for all Advisers to operate in. The carve outs from FOFA and recent legislation for some stakeholders has created a prejudiced landscape for retail Advisers to operate in.

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