Issues of concern to the BFPPG
Sales vs Advice
In financial planning there are two types of financial planners:- product sales people - whose priority is to sell product rather than to provide good advice); and
- advisers - whose priority is to provide good advice and for whom product advice is incidental.
Uninformed and financially illiterate consumers cannot tell these two groups apart because the product sales people seek to promote themselves as advisers. There needs to be a way for consumers to differentiate between:
- those people who are authorised to act on behalf o a distribution channel of a financial product manufacturer; and
- those people who work for AFSLs that are not associated with a financial product manufacturer.
Product manufacturer MERs are too high
These are too high because competition is typically not on product or price, but on distribution. There are too many "clips of the ticket" on the way through. The client pays in the end, even though they get little or no benefit from the extra clips. Part of the excess cost is kick-backs as below. BFPPG Members want ongoing costs to the client minimised as their focus is on long-term relationships and ongoing service.Compliance burden
The compliance burden for regular and ongoing advice is very onerous and adds considerably to the cost of providing such advice to consumers. Hopefully Nick Sherry's reforms will fix this problem.The term "independent"
Section 923 of the Corporations Act is so restrictive that virtually no financial planner can say they are independent, unbiased, impartial or any other word or expression that is of like import. This is bad for consumers as it makes it very difficult to differentiate between:- truly independently owned small AFSLs; and
- businesses that have been authorised to act on behalf of a product distribution channel that is owned and controlled by a financial product manufacturer.
Poor disclosure and poor enforcement of the law
According to the market survey by Roy Morgan Research in 2007, clients think that the advisers from the product manufacturer's financial planning subsidiary are "independent" advisers. This indicates a systemic failure to disclose relationships as required by the Corporations Act. It also indicates misleading and deceptive conduct. However, the representatives of the distribution channels of the big end of town seem able to breach these laws with impunity.Incorporation by reference
A recent imposition by ASIC's interpretation of an August 2007 Reg, but ASIC have backed off for the moment on the basis that Nick Sherry's new reforms will sweep away ASIC's interpretation. (Nick Sherry's initiatives may address this.)Kick-backs
Product manufacturer MERs are too high because of the level of kick-backs paid to some distribution channels. These kick backs to large distributors not only add to the cost which consumers pay, but they place small AFSLs at a disadvantage which may lead to a reduction in the number of small AFSLs and reduced competition in the market and reduced choice for consumers.Form versus substance
There is too much focus on the form of the advice and insufficient focus on the substance of the advice. Even the FPA focuses on the process of giving advice rather than the quality of the advice that is given. This current focus on form allows poor advice which has had all the the right boxes ticked to masquerade as "appropriate advice".
Consumer protection
Greater protection would be given to consumers if the substance of the advice were assessed against the following existing criteria.
- Corporations Law protection that the advice provider must HAVE a reasonable basis for advice.
- Full disclosure of factors which might influence i.e. 947B(2)(d) and 947B(2)(e).
- The well established common law obligations in terms of negligence, duty of care; fiduciary obligations etc.The Corporations Act 2001 requirement that:
- there was a reasonable basis for the advice and the advice was appropriate in the circumstances. Section 945A
- a licensee must "do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly" s912A(1)(a)
- The ASIC Act 2001 provision for protection in respect of:
- Misleading or deceptive conduct. Section 12DA.
- False or misleading representations. Section 12DB.
- Requirements to apply "due care and skill", and that advice is "fit for the purpose". Section 12ED
Failure to disclose volume over-rides as FSR requires.
Platforms - a product or a service
These days the lion's share of the profit is made by the platforms which have come to dominate the retail market and distribution channels tend to focus more on marketing the platform than the funds within the platform. The illusion of independence may be given when a distribution channel recommend a 3rd party investment option within their platform. Managers of 3rd party investments may have little option, but to contribute to the overall profitability of the AFSL and its parent by paying for "shelf-space", "education", "volume over-ride fees" etc.Financial Ombudsman Service
As discussed in the submission sent to Nick Sherry by 50 financial planners in May 2008.Also, as illustrated by the following quote from the FPA's submission in October, 2008 to the Financial Ombudsman Service re Financial Ombudsman Service Terms of Reference"
- "A sizeable proportion of the FPA's membership recently surveyed hold the view that FOS limits should not be changed without significant improvements in process and transparency. The FPA supports its members in highlighting the need for greater consistency of decision making, improved transparency in its findings, and further attention to be given to the valid concerns raised by licensees, particularly small licensees."
The regulatory environment
The banks and insurance companies now appear to control over 75% of the advice given to consumers. This in contrast to the preference shown by the public in the past for "independent" financial advice. This anomaly may be due to the unlevel playing field that has been created by Government - in particular the combined effects of:- the way the legislation (s923) has taken words that had clear meaning to the public and redefined these words so as to restrict independently-owned AFSL's from using these words to differentiate themselves from the distribution channels of the banks and insurance companies; and
- the failure of the government to take effective action against distribution channels whose authorised representatives give the appearance of being small ASFLs and which fail to effectively disclose the fact that they are authorised only to act on behalf of the distribution channel which is own/controlled by a bank or insurance company.
Other factors that contribute to the unlevel playing field.
- Communication with government is more difficult for small AFSLs than for banks and insurance companies. This is due in part to the Government being more willing to talk directly with banks and insurance companies than to small AFSL's and in part to the relatively limited resources of small AFSL's.
- On many issues, small AFSLs cannot rely solely on the Financial Planning Association (FPA) to represent their position. The impact of some issues can be quite different between smaller and larger AFSLs. The difference can be exacerbated because the majority of FPA members, and the bulk of FPA revenue, come from the distribution channels of the banks and insurance companies. Also, given the very large number of submissions that are made by the FPA it is not feasible for small AFSLs to provide input to the FPA on all matters and so the FPA may be oblivious to the concerns of small AFSLs or have a different set of priorities and timetable.
Why is political liaison very important to BFPPG?
We are a very important sector providing CHOICE to consumers. However, from time to time our sector comes under threat eg- the highly resourced big end of town (product manufacturers and distributors) in a subtle way, seek to project their product distribution channels and sales process as good advice and to have this entrenched in regulation and legislation via their lobbying - and since FPA membership is dominated by the big end of town. Also, as employees of the big end of town are often heavilly involved in preparing FPA submissions to government, the FPA becomes a vehicle to promote this cause. However, the FORM and sales PROCESSes of the big end of town are NOT the be-all and end-all of GOOD ADVICE. SUBSTANCE is what good advice is about, and many small dealers are able to tailor advice more precisely to the needs of clients with advice often being more personalised (compared with press-the-button sausage-machine advice from many product sales channels). Quality control mechanisms of small dealers can be very different for small dealers - including a higher reliance on the ethics and professionalism of the principal - and that the principal can more readily supervise his/her whole practice since it is typically in a since office. This needs to be accommodated.
- Occasionally, legislators get overly enthusiastic - and while well-meaning, they can create a monster which is bad for consumers. FSR V1.0 and ASIC's interpretation of FSR through it's Policy Statements (now Regulatory Guides) was such a monster. If you were a product sales operation providing simplistic press-the-button sausage machine advice, FSR 1.0 could be made to work very efficiently (as long as a 70 page SoA was acceptable to consumers). The BFPPG was the first major group to draw the short-comings to the attention of government, ASIC, FPA about 7 years ago. This was because FSR created a nightmare for regular-and-ongoing advice providers who provided non-simplistic advice. The compliance monster threatened to put small dealers out of business. It also created immense compliance uncertainty.
- So it is important that small dealers maintain linkages with government to help ensure that legislators take into account the issues for the independently owned advice sector. We just want to ensure that there is a level playing field which enables competition to flourish and consumers to make informed decisions.