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Chapter 3 - Review of the evidence and the Committee's conclusions

Introduction

3.1        Evidence to the Committee concerned the effect of the regulation on accountants and lawyers. While there was support for the reforms introduced by the FSR Act, evidence from accountants, lawyers and their respective professional associations was unanimous that the licensing exemptions in regulation 7.1.29 had been too narrowly framed.[1] 

3.2        Not all evidence was critical of regulation 7.1.29. The Financial Planning Association of Australia Limited (FPA) strongly supported the regulation and said it would provide for ‘greater consumer protection’ and remove uncertainties ‘which may be exploited by unauthorised individuals’. The FPA expressed specific support for the limitations applying to the licensing exemptions for taxation advice and advice on self-managed superannuation funds (SMSFs).[2]

3.3        The Committee will now review several points raised by witnesses about terms used and drafting anomalies in regulation 7.1.29. It will then consider accountants’ concerns before turning to issues raised by lawyers.

Drafting issues

3.4        Some submissions proposed specific drafting amendments either to give the regulation some efficacy or to correct possible inadvertent omissions.

3.5        The Law Council of Australia thought paragraph 7.1.29(3)(c) relating to the advice exemption for acquisitions or disposals of entities should be amended to:

• accommodate advice on part disposals or acquisitions; and
• ensure consistency in the terminology used in the regulation.

3.6        The National Tax & Accountants’ Association (NTAA) proposed that the exemption in paragraph 7.1.29(3)(e) should accommodate transfers to other related bodies which were not bodies corporate, such as family trusts.[3]

3.7        The Committee has identified what could be an anomaly in subregulation 7.1.29(4) which seems to exempt advice on taxation issues but only in cases where the client buys a financial product.

3.8        It also appears that the regulation has been drafted with the result that the licensing exemption applicable to ‘eligible services’ may not apply to ‘exempt services’.

3.9        The Committee makes further comment about the drafting of regulation 7.1.29 in its recommendations on page 28.

Regulation 7.1.29 and its implications for accountants

3.10      Accountants’ main concern was that the licensing exemption in the regulation did not allow them to make recommendations to clients about the suitability of one superannuation fund structure over another. Therefore, a client seeking this information would have to go to a suitably licensed person to find it.

3.11      One witness looked at the ‘flip side’ of the regulation’s limitation on superannuation advice, namely, that it also precluded accountants from advising clients not to proceed with certain superannuation arrangements.

3.12      In this regard, it is clear that regulation 7.1.29 does not prevent an accountant from setting up a superannuation fund on instructions from a client. However, this appears to presume that a client giving these instructions is acting in his or her best interests. Ms Susan Orchard, accountant, who appeared for The Institute of Chartered Accountants in Australia (ICAA), commented in this regard that:

...if somebody comes in and asks me to set up a self-managed fund, under this regime as it stands, I actually have to go ahead and set up that fund for them. I cannot talk to them and counsel them perhaps if it is an inappropriate thing for them to do based on the fact that they have a very small balance or that their record keeping and tax keeping has not been good in the past. So on the flip side that is also considered to be intending to influence under this regime.

...If you come in and say to me, ‘I want a self-managed fund,’...It may not be the wisest thing to do...I am intending to influence if I try and counsel you against that fund.[4]

3.13      As far as some witnesses were concerned, recommendations about superannuation structures and, indeed, other business structures, was first and foremost ‘tax advice’—not ‘financial product advice’—and so should not come within the FSR licensing regime. This point was made most strongly in the context of advice regarding SMSFs.

3.14      Mr Peter McDonald, Taxpayers Australia Inc (TAI), said that with superannuation products, ‘taxation advice is inextricably linked to financial advice’ and a person advising in this area had to understand the tax implications. He did not think that a person licensed under the FSR regime would necessarily have the requisite training to appreciate these tax implications.[5] 

3.15      He was concerned that the regulation had not achieved certainty about the licensing exemption but had merely blurred the line between taxation advice and the types of advice caught by the FSR regime. He noted that registered tax agents under the Income Tax Assessment Act 1936 (ITAA) were entitled to give taxation advice under the pre-FSR regime. It was his view that regulation 7.1.29 would only create adverse outcomes if it sought to characterise tax advice dispensed by registered agents under the ITAA as ‘financial planning advice’ and thus within the realms of FSR regulation.[6]

3.16      In addition to these concerns, accountants thought the superannuation advice limitation was arbitrarily drawn and did not appreciate the breadth of accountants’ knowledge and expertise. They also considered that this limitation would lead to the following undesirable outcomes:

• If unlicensed accountants were forced to refer their clients to licensees for recommendations about superannuation fund structures—
  • their clients would merely incur higher costs for no benefit; and
  • advice would become fragmented and suffer in quality.
• If accountants wished to continue giving superannuation advice that went beyond the scope of the licensing exemption in regulation 7.1.29—
  • the upfront and ongoing high costs of licensing rendered it a commercially unviable option for many practitioners;
  • the alternative to licensing—obtaining status as an authorised representative—would force accountants to become product sellers to pay their way and thus severely compromise the independence, impartiality and thus quality of their advice to clients; and
  • an accountant offering a quality service to clients as an authorised representative could lose his or her status as an authorised representative for reasons only that the accountant had not met the licensee’s sales targets.

3.17      The Committee will look at the claims made by accountants within the following framework:

1. why accountants say there should be a licensing carve-out for them;
2. why accountants say the superannuation advice exemption is inappropriate and will not work; and
3. how limitations on accountants’ licensing carve-out will affect consumers, specifically with regard to the impact on the quality and cost of advice provided by accountants.

Why accountants say there should be a licensing carve-out

3.18      The Committee was interested to know why accountants thought they should be able to make superannuation recommendations without meeting FSR licensing requirements.

3.19      Accountants responded that their qualifications and the requirements of their professional associations equipped them to offer high-quality advice on financial and business matters.

3.20      The ICAA and CPA Australia said the vast majority of chartered accountants had to complete postgraduate qualifications as part of their membership of professional associations. These qualifications, they said, included training in the broad classifications of superannuation fund structures to equip accountants to advise in this area.[7]

3.21      The ICAA, CPA Australia, TIA and the National Institute of Accountants (NTAA) had also commented in their joint written submission that one of the justifications for the earlier licensing carve-out made for accountants was ‘the Accounting Bodies’ mandatory Codes of Professional Conduct and Ethics, as well as mandatory Independent Quality Reviews for those accountants providing services to the public’.[8]

3.22      Ms Kath Bowler, CPA Australia, suggested that, in contrast to the training received by accountants, her experience when completing the diploma in financial planning was that it ‘covered what you should invest in...all the different types of superannuation products, but...not whether a self-managed fund, an industry fund or a retail fund is most appropriate.’[9]

3.23      Mr McDonald said that advisers on SMSFs had to be ‘totally qualified’ to operate in the SMSF area. This entailed having a good understanding of the tax issues involved. According to Mr McDonald, financial planners holding a financial services licence would not be suitably qualified to advise on these structures whereas tax agents and accountants were. Tax agents, he said, had to satisfy the requirements of section 251L of the ITAA which meant that ‘you must be fully qualified and, even better...you must have relevant experience to actually practise in that area’. He indicated that a tax agent’s licence could only be withdrawn by the Tax Agents Board for reasons related to their professional conduct. He contrasted this with authorised representatives who could have their status cancelled for not meeting sales targets and suggested that this militated against their independence and impartiality.[10]

Why the superannuation advice exemption is inappropriate

3.24      As indicated in the overview of regulation 7.1.29, subregulation (5) places limitations on the licensing exemption available in relation to advice provided about superannuation fund structures. It is clear that while the exemption applies to advice on ‘administration and operational issues’ and ‘compliance with legal requirements’,[11] the exemption does not include recommendations that a person join a fund or change the person’s contributions or investment strategy.

3.25      Accountants did not object to the licensing requirement for advice given about the investment strategy of a fund or investment in specific, branded financial products. However, they were highly critical that licensing would be necessary if they wished to make recommendations to clients regarding the relative merits of different superannuation fund structures.

3.26      Ms Bowler queried why recommendations on superannuation structures should be treated differently from advice on other structures given that you were ‘not telling [clients] where to invest their money’.[12]

3.27      Mr Peter Davis, practitioner with his own business, thought the limitation did not factor in accountants’ knowledge and experience or the extra costs that clients would incur if referred to a licensee for certain recommendations. He said that:

As an accountant of many years experience, I do not understand why I cannot use that knowledge and experience of both superannuation and my client’s affairs to make a professional determination about the appropriate superannuation structure for them.

...The advice that we continually provide to our clients in small business, taxation legislation, and other matters puts accountants ideally in the right position to be of assistance to them. [13]

3.28      Ms Orchard said that the exemption sought by accountants to allow them to advise clients on the relative merits of different superannuation fund structures was of a more ‘generic’ character in that it would not involve recommendations that a client purchase a particular branded financial product. She said in this regard that:

The issue comes down to self-managed funds, small APRA funds, retail funds, industry funds, corporate funds and government funds. People in the marketplace have access to each of those types of funds. They may already be in one of those funds. We are looking to be able to say, ‘This structure might suit this business operation’ or ‘This structure might suit you, based on what we know about you, your record keeping and other types of history; the types of funds that you have invested in superannuation or are likely to invest in superannuation.’

...we want to be able to be that generic and say, ‘Yes, you could have a self-managed fund, but as a worker in that industry your employer is going to have to pay to that fund; to have two funds is going to incur costs, there are going to be some implications of that.’[14]

3.29      With regard to SMSFs in particular, Mr McDonald said the regulation would result in a ‘blurring’ of advice on self-managed funds because ‘the tax and financial areas in the small managed superannuation fund...[were] dovetailed’. He added that, ‘You cannot have financial advice without having taxation advice, and that is what we see as the crux of the problem’.[15]

3.30      Mr McDonald said that the exemption as framed in the regulation would result in the situation where SMSF trustees:

...will need to have both their financial planner and their tax agent sitting opposite them so they can bounce all the ideas off them, because you have in effect a situation where the financial planner cannot give taxation advice and the tax agent cannot give financial advice. You actually need both of them there to make sure you end up getting the right advice in terms of the product on an ongoing basis.[16]

3.31      Many SMSFs were vehicles used by small businesses to manage their ‘entire business operations together with their potential retirement strategies’, Mr McDonald said, and because of this feature, ‘most of the decisions that [SMSFs] make are very much tax driven’. He argued that the legislation failed to recognise this and blurred the distinction between ‘what is tax advice and what is financial advice’.[17]

Effect on consumers—the cost and quality of advice

3.32      Accountants argued that the limitations in the regulation’s licensing exemptions would result in:

• higher costs for consumers; and
• a poorer quality of advice to consumers.

These alleged outcomes often went hand in hand and are therefore considered in this light.

Referrals, costs and fragmentation of advice

3.33      The higher costs which accountants said would ultimately be borne by consumers could arise in a number of different ways. They could arise from referrals, for example, which accountants argued would not only increase costs but impair the quality of advice given to the consumer.

3.34      The NTAA said in this regard that:

Often it is prudent, as part of general structuring advice, to suggest that the client establish a self-managed superannuation fund to hold the business premises. Accountants will no longer be able to provide such sound and practical advice unless regulation 7.1.29 is amended.

...

It is no answer to this criticism to state that the accountant should simply refer the client to a licensed financial planner for advice as to whether a self-managed superannuation fund should be included in the overall business structure. In most cases the licensed financial planner would seek advice from the accountant about the proposed structure and the client’s affairs which would merely cause undue additional cost to the client for no added benefit.[18]

3.35      According to Ms Bowler, if accountants were not licensed:

...advice will be fragmented because [consumers] are getting structural advice for two-thirds of their affairs from the accountant and then for this little bit of superannuation they will be going externally and there is a high chance that the advice will cause inconsistencies.[19]

3.36      Mr Keith Reilly, ICAA, continued in a similar vein and commented that:

...[with] the superannuation fund structure, you can provide factual advice on the differences between different types of funds. You can actually prepare a spreadsheet where you list the differences but you cannot then say, ‘Based on the results of my analysis and my discussion with you as the client, this fund would appear to suit you better than the others.’ What you have to say to the client is, ‘I cannot tell you that. You might be able to work it out in terms of how many ticks or crosses are there, but you, the client, have to make that recommendation or go to someone who is licensed who is a financial planner supplier, product flogger—call it whatever you want—to actually give that sort of advice’—which they would not give. What they will give is advice on what investments to put in there. That is really the issue.[20]

3.37      Mr Davis suggested that ‘costs for consumers are going to escalate quite astronomically’ either because of licensing costs or the duplication of work involved in a referral because the financial service is not exempted from the licensing requirements.[21]  He said that:

If I choose to go and get a licence, I have to pay that money [the estimated licensing cost]. If I have to pay that money, I have to recover that cost somewhere in running my business...So my overhead costs go up and all my clients pay, or I choose not to recommend superannuation funds for my clients and I send them down to a financial adviser. As the financial adviser...does not understand about [my clients’] taxation affairs...you have a to-ing and fro-ing thing which still means that the consumer is paying additional costs in his fees anyway.[22]

3.38      Mr George Lawrence, practitioner with his own business, considered it undesirable that he should have to refer his clients to a person having no familiarity with his clients’ circumstances for advice that he was best equipped to give. On this point, he said:

My main concern about [not being able to make recommendations to clients] would be that if my client has to go to a complete stranger—one who does not know the client—and the client does not know the financial person, as compared with somebody like me who has had something like 30 years of practice and has spent a lot of time with clients, there would be inappropriate advice given at an extra cost...[23]

High costs of licensing and flow-throughs to consumers

3.39      Accountants raised concerns that many smaller accounting practices wanting to give advice on those superannuation matters which regulation 7.1.29 had not exempted would be prevented from doing so by the high costs entailed in obtaining an FSR licence. Where accountants did become licensees, it was argued that clients would end up paying more but for no discernible benefit.

3.40      The Committee sought evidence to substantiate accountants’ claims about the high costs of licensing. Ms Bowler said that CPA Australia had considered becoming a licensee to provide its members with the means of becoming authorised representatives. She said CPA Australia had estimated licensing costs ranging from $25,000 per representative per year to give full financial product advice to $10,000 to $12,000 per representative per year to give more restricted general advice. This factored in PI insurance, ongoing training requirements, auditing requirements, compliance procedures and software costs.[24] 

3.41      According to Ms Bowler, accountants would not become authorised representatives if they had to pay $10,000 to $12,000 per year to do so. She indicated she had come to this view after receiving feedback from 3000 accountants.[25] 

3.42      When questioned about the Department of the Treasury’s response to these costs, Mr Reilly said, ‘We have argued a cost factor. Treasury has not, from memory, come back to us and said those costs are too high or too low’.[26]

Authorised representative status, accountants’ independence and effect on quality of advice

3.43      Under the FSR Act, accountants who could not afford the cost of licensing but still wanted to be able to deliver the full range of ‘trading accounting’ services, could become authorised representatives of licensees. However, accountants said this was not a viable option for those accountants who wanted to retain their independence and avoid becoming product marketers.

3.44      Mr Davis, for example, queried how it would add to consumer protection if accountants, as authorised representatives, were required by their sponsoring licensees to meet financial products sales targets so as to retain their licences.[27]

3.45      Mr Lawrence was doubtful that licensing would ‘guarantee good advice’. He commented that in his 30 years of practice as an accountant, he had never seen one financial planning recommendation that a person set up a self-managed fund. He attributed this to the interest of financial planners in commissions which resulted in a predominance of recommendations that clients invest in managed funds.[28]

3.46      Ms Orchard’s evidence suggested that, even if practitioners were prepared to meet sales targets to ensure their future as authorised representatives, this was not an option for every practitioner. In this regard, she referred to the situation with small practitioners having different specialties who often shared a common client base. She said that while some offered financial advice, others provided auditing services.

3.47      She suggested that her specialisation as an independent auditor did not lend itself to product marketing. If she were to become an authorised representative for a licensee, she said there was no guarantee that her future in this capacity would be assured. She explained why this would be so:

...I am the independent auditor—and clients often seek their financial advice from other sources...yes, I may be able to get a licence in the first year but will I be able to retain that authorised representation in the years ahead?  The dealer group undertakes significant costs in having to ensure that I am trained, that I have appropriate insurance, and all the other add-ons that go with licensing, and they need to get some recoup for that. They do not get any of my practice, so after 12 months I get checked out and I am back in the same situation.[29]

3.48      Mr McDonald shared these concerns and said a problem for authorised representatives was that their status could be ‘withdrawn at the stroke of a pen’. He referred to the executive director of his organisation as having had her authorised representative status withdrawn twice ‘because she was not pushing product’. He saw this as being inconsistent with the independence and impartiality in advice ‘that we see as being so dear’.[30]

3.49      During its inquiry last year into the regulations and ASIC policy statements made under the FSR Act, the Committee heard similar evidence about product pushing and the threat posed by FSR licensing requirements to accountants’ independence.[31]  The Committee was concerned that these claims were still being made and sought the Department of the Treasury’s views in this regard.[32]

3.50      The Treasury responded that:

There are licensees who charge on a fee-for-service basis. There is nothing to prevent a person becoming an authorised representative of a licensee and remitting to the licensee appropriate remittances to cover the costs of their supervision and competency requirements as set out in the legislation. There is nothing in the legislation that requires an authorised representative to sell financial products. In fact, the legislation is directed towards provision of advice.[33]

3.51      When asked to comment specifically on accountants’ allegations that the actual, practical effect—as opposed to the theoretical alternatives envisaged by the legislation—meant that authorised representative status entailed product pushing, the Department repeated that ‘there is nothing in the legislation that results in that industry structure’. Mr Rosser further commented that:

The testimony you have heard is that a person would be required to sell financial products. My evidence would be that I do not believe that that would be the case.[34]

3.52      In response to this comment, Ms Bowler sought to place accountants’ concerns about product pushing on a firmer footing and said that:

[CPA Australia] have the offer from COUNT, the largest dealer group for accountants, that they are willing to testify that they will not give proper authorities if somebody is not giving product advice because it is not worth their while to do that. We are certainly not aware of any dealers who offer [a proper authority without requiring the holder to give product advice] because we get asked for it from our members all the time.[35]

3.53      Moreover, in answer to those who proposed that it was open to an accountant to obtain a licence if becoming an authorised representative posed concerns about independence, Ms Bowler said that licensing would not be an option for accountants after 10 March 2004 because would-be licensees, among other things, needed experience as authorised representatives to qualify.[36]

The Committee’s views

3.54      The Committee considers that the application of the FSR licensing regime to accountants who do not provide investment advice on specific, branded financial products and merely engage in ‘traditional accounting activities’ is unnecessary. In this regard, the Committee endorses the following views expressed by Ms Orchard that:

To make [licensing] a requirement of the ordinary commerce of being an accountant adds an additional layer of cost of regulation to what is a function largely driven by compliance and largely driven by the tax act and all the legislative requirements. That is an unfair burden to place, predominantly, on small businesses.[37]

3.55      The Committee believes that regulation 7.1.29 should be amended—at the very least—to provide accountants with a licensing exemption for recommendations made about superannuation fund structures to their clients. In coming to this position, the Committee has taken into account that:

• accountants’ professional qualifications and post-graduate and ongoing training, quality control and ethical requirements of their professional associations provide sufficient oversight to meet an acceptable level of consumer protection;
• no evidence was produced to indicate that a person licensed to give financial product advice (both general and personal) and who is not already a professional accountant and registered tax agent, will have the requisite taxation knowledge or knowledge of superannuation structures to ensure consumers receive appropriate advice. Evidence from Ms Bowler and Ms Orchard, both of whom said they had completed a diploma of financial planning, suggests that licensees who do not have professional accounting qualifications and tax agent status may not give the quality of advice that would be expected on superannuation fund matters; and
• no evidence has been produced to date by interested stakeholders, ASIC or the Department of the Treasury to demonstrate that the gains to consumers if accountants are licensed will outweigh the costs of licensing.

3.56      The Committee believes that accountants have produced compelling evidence to establish that:

• the costs of licensing for many accountants will substantially increase their overheads and increase the costs to consumers;
• becoming an authorised representative of a licensee is more likely than not to place demands on accountants to push products and thus compromise their independence; and
• accountants who become authorised representatives could have their representative status cancelled for reasons entirely unconnected with the quality of the services they offer. There is no reason why they should be exposed to the potentially serious commercial ramifications that might ensue from cancellation of their representative status in such circumstances.

3.57      The Committee heard no evidence from the Department of the Treasury to indicate that the Treasury had given any real consideration to the issues raised by accountants. Given that accountants would have been liaising with the Treasury for some time about the scope of the licensing carve-out, the Committee considers this is unacceptable.[38]  The Treasury’s evidence on independence issues was not convincing and was clearly outweighed by evidence provided by the TAI and CPA Australia, among others.

3.58      On the issue of licensing costs, the Treasury said that ‘at various times we have heard a wide variety of costs. It is very difficult to make a judgment about them because they are wide and varied and they seem to move over time’. However, the Treasury indicated that it had not undertaken an assessment of licensing costs itself but had prepared a regulation impact statement (RIS) when developing the FSR legislation. [39]  The Committee notes that the RIS predicted:

• a reduction in compliance costs ‘particularly for entities that offer several different financial services and would have required multiple licensing under existing regulation’;
• there would be ‘some costs associated with the move to the new licensing regime’ but these were ‘difficult to quantify’;
• the increased competition facilitated by the FSR regime would benefit consumers ‘through lower costs and a greater range of products and services’; and
• ‘there will also be reduced risk of confusion due to participants holding several different licences to act in different capacities’.[40]

3.59      Looking at these predictions, the costs savings enjoyed by multiple licensees will not apply to accountants. The indication that ‘some costs’ would be incurred under the new regime but that these were ‘difficult to quantify’ does not clarify the situation for accountants. The Committee notes that the RIS seems to give considerable weight to comments made by the Investment & Financial Services Association Ltd (IFSA) that FSR legislation would have a ‘positive impact on the costs associated with the licensing and distribution of financial services’.[41] Nonetheless, the Committee considers the evidence given by accountants’ professional associations and practising accountants gives a more useful indication of how much licensing will cost them.

3.60      The Committee believes that the licensing cost predictions in the RIS for the FSR Bill are vague and inadequate. The RIS does not disclose any reliable evidence to support the Treasury’s conclusions about licensing costs. These appear to be little more than educated guesses.

3.61      The Committee considers that the Treasury was obliged to ensure it was in a position to assess the accuracy of licensing estimates put before it by accountants given the potentially serious implications involved. This clearly was not done although accountants’ licensing costs and associated issues have been in contention for a considerable time.

3.62      At the hearing, the Treasury took on notice the Committee’s more specific questions about licensing costs and provided additional information in a letter to the Committee on 19 June 2003. A copy of the Treasury’s letter to the Committee is in Appendix 3.

3.63      In this letter, the Treasury says that costs ‘will vary widely and depend in part on the scale, nature and type of the particular financial services business’. As far as initial upfront licensing costs are concerned, the Treasury advises that ASIC provides ‘guidance to applicants to enable parties to apply for a licence without the need for external assistance’. For smaller businesses that opt to use the services of licensing advisers to review their systems and help with documentation, the Treasury says the fee commonly charged is around $3,500. However, application costs are merely one component of upfront licensing costs.

3.64      With regard to PI insurance costs, the Treasury suggests that:

The need to ensure adequate compensation arrangements under the FSR should be seen in light of the fact that many applicants already hold professional indemnity insurance cover. This is especially the case for professionals such as accountants.[42]

3.65      The Committee accepts the Treasury’s point that accountants would hold PI insurance cover. However, the Treasury appears not to have investigated whether licensing per se could have an appreciable impact on PI insurance premiums, bearing in mind the additional risk exposure that is likely to be involved. The Committee is consequently reluctant to accept the Treasury’s implication that PI insurance costs will stay much the same. On this point, the Committee notes Ms Bowler’s evidence that ‘PI insurance is a big [component]’ of overall licensing costs.[43]  The Committee also notes the comments of Mr Lawrence that ‘the insurance would be at least $8,000’.[44]

3.66      Accountants referred to training costs as another licensing expense. The Treasury comments that accountants already have to meet ongoing training expenses as part of their membership of professional associations. It also indicates that ASIC recognises many courses run by these associations in PS 146, its policy statement on training requirements.[45] 

3.67      During the Committee’s inquiry last year into the regulations and ASIC policy statements made under the FSR Act,[46] accountants claimed that ASIC had failed to give proper recognition to accountants’ professional qualifications and training in PS 146. As training was only touched on during the current inquiry, the Committee is not in a position to come to a definite conclusion on this issue. However, it notes the Treasury’s somewhat equivocal comment that:

...the FSR training requirements might be expected to sit alongside rather than replace existing requirements and in many cases not result in a need for additional training. Evidence was provided to the Committee by at least some accounting representatives that they had sufficient training to advise to some extent on financial products’.[47]

3.68      The Treasury advises in its letter that it did not consider auditing and ‘systems and procedures’ would entail any or much greater costs for accountants. The Committee finds this difficult to accept given that licensing will subject accountants to a comprehensive conduct and disclosure regime which arguably will call for new monitoring and compliance systems. According to Ms Bowler and Mr Reilly, the auditing and compliance costs will involve significant additional expenditure especially for larger dealer groups because new systems will be needed.[48]

3.69      The Committee is not satisfied that the cost information provided by the Treasury sufficiently addresses the Committee’s request for an ‘indication of what it might cost an accountant to become licensed’ and ‘what [the Treasury says are] varying cost estimates associated with becoming licensed, whether as an authorised representative or otherwise’.[49]  With the exception of the estimated fees charged by advisers for assistance with licence applications, no figures were given to indicate what upfront and ongoing licensing costs, for example, a sole practitioner, smaller business (say up to five practitioners) and larger business might incur.

3.70      The Committee therefore questions whether the Treasury has sufficient information to support its conviction that the licensing of accountants and the costs entailed can be justified in terms of the benefits that will ensue to consumers who ultimately will have to pay for these costs.

3.71      The Committee notes that amended regulation 7.1.29 was intended to bring certainty to the market and was therefore disturbed to hear from several witnesses that the regulation merely created confusion about which types of advice would fall within the FSR regime and which would not or should not. In this regard, the Committee refers to Mr McDonald’s remarks that:

...there needs to be clarity in this whole process. I am not convinced by anything I have heard sitting here tonight that there is in fact clarity; quite the opposite, in fact—it is very fuzzy and confused. Until such time as the delineation between what we see as tax advice, legal advice and financial planning advice is corrected, I think this is going to be a very muddy area. With the whole intention of FSR being to protect the consumer, it seems to me that the consumer is the one in the firing line in this process, and they are the ones that are going to wear incredibly increased costs as a result of the process that is currently in place.[50]

3.72      In the context of accountants’ claims that much of their advice on superannuation fund structures could be characterised as ‘tax advice’, the Committee notes the FPA’s views that:

...the ‘incidental advice provisions’...have been used to systematically circumvent the FSRA licensing provisions...[And] many unlicensed individuals and firms have sought to provide advice on investment-related products such as ‘managed funds’ under the guise of ‘tax advice’.[51]

3.73      To the Committee’s mind, this is mere assertion as no evidence was produced to support it. On the other hand, the Committee notes the evidence from accountants, particularly with regard to SMSFs, indicating that taxation advice can be inextricable from (or possibly one and the same as) ‘financial product advice’ given in relation to superannuation fund structures.

3.74      As in the Committee’s earlier inquiry where licensing of accountants was discussed, the Committee defers to the views expressed by the Wallis Inquiry that:

Financial advice is often provided by professional advisers such as lawyers and accountants. This advice is typically provided in the context of broader advisory services offered to clients extending beyond the finance sector, often where an adviser has a wide appreciation of the business and financial circumstances of a client. In such cases, the best course is to rely upon the professional standing, ethics and self-regulatory arrangements applying to those professions.

However, a clear distinction needs to be drawn if an adviser acts on an unrebated commission or similar remuneration with a client and places such advisory activities on a footing similar to that of other financial advisers. In such cases, financial market licensing should be required.[52]

Conclusion

3.75      Given all of the above considerations and consistent with the recommendations of the Wallis Inquiry, the Committee believes that accountants should not have to be licensed under the FSR regime for advising their clients about generic financial products in the course of, and as a necessary part of their business and for which no payments are received by the accountant from a third party unconnected to the client.

3.76      The Committee notes that accountants are anxious to have their concerns about regulation 7.1.29 settled as soon as possible. The Committee notes further that accountants are prepared to accept some of the regulation’s shortcomings provided they can continue to give their clients personal and general financial product advice on superannuation fund structures and provided the confusion concerning taxation, financial product and legal advice is resolved. The Committee understands that accountants would not favour the disallowance of the current regulation or part of it because this would mean a return to the original version which was manifestly inadequate.

Recommendation 1

The Committee recommends that, as a short-term measure until proper consideration is given to a more comprehensive licensing carve-out for accountants, regulation 7.1.29 should be amended as soon as possible to:

• exempt superannuation recommendations made by accountants from FSR licensing requirements; and
• distinguish between taxation, financial product and legal advice so that FSR licensing is not required except for advice that can be characterised as predominantly financial product advice.

Recommendation 2

The Committee recommends that, for the longer term, the Government should give proper consideration to a broader licensing carve-out in respect of the following activities engaged in by accountants in the course of, but incidentally to, their day-to-day businesses:

• dealing in financial products; and
• financial product advice that does not amount to ‘product pushing’ of specific, branded financial products.

Recommendation 3

The Committee recommends that the Department of the Treasury should investigate the drafting issues raised in the submissions, particularly by the National Tax & Accountants’ Association, the Law Council of Australia and Mr Keith Harvey, to determine whether they require further action.

Regulation 7.1.29 and its implications for lawyers

3.77      The Committee received two submissions, one from Mr Keith Harvey, legal practitioner, and the other from the Law Council, commenting on the application of regulation 7.1.29 to professional activities carried out by lawyers.[53]  The Law Council referred in its submission to the licensing exemptions currently provided under the Act[54] in respect of financial product advice given by lawyers, and commented that:

By including these exemptions...Parliament has recognised the need to balance the costs of requiring lawyers to hold [licenses] against the benefits to be gained from their doing so. These exemptions are sensible and necessary given the wide definition of ‘financial product advice’...It is sensible that lawyers not be subject to additional licensing requirements given the professional standing, ethic and self-regulatory arrangements applying to lawyers.[55]

3.78      The Committee received these submissions relatively late in the course of this inquiry and so was not able to conduct as thorough a review of the points raised as it would have liked.

3.79      Nevertheless, the Committee has identified the following issues as being of concern to lawyers and will deal with each in turn:

• the failure of regulation 7.1.29 to exempt the provision of custodial and depository services in certain instances from the FSR licensing regime;
• the need for certain ‘dealing’ activities to be exempted; and
• the provisos in subregulation 7.1.29(1).

Custodial and depository services

3.80      While welcoming the additional licensing exemptions provided by regulation 7.1.29, the Law Council considered that certain ‘dealing’ activities and custodial or depository services provided by lawyers should also be exempted from licensing requirements. According to the Law Council, these omitted activities were provided by lawyers ‘in the ordinary course of activities of a lawyer’, were ‘reasonably regarded as a necessary part of those activities’ and should not ‘on a public policy basis’ be regulated under the Act.[56]

3.81      At the hearing, Ms Lisa Simmons for the Law Council, said lawyers’ principal concern was to ensure that where lawyers were required to hold and deal with trust money and controlled money, they would not have to be licensed. Ms Simmons said this was an activity that would most likely fall within the definition of providing a custodial and depository service and so require a licence. However, she indicated that draft regulations released in March 2003 for comment would resolve difficulties with this aspect of lawyers’ concerns once the regulations were made.[57]

3.82      Mr Keith Harvey, Lawyer, agreed with the Law Council and proposed that regulation 7.1.29 include a licensing exemption for the provision of custodial and depository services where:

• an accountant or lawyer holds documents such as share certificates, bank bills or life policies in safe custody for a client; and
• a trustee of any trust holds any kind of financial product on trust for beneficiaries.[58]

Activities associated with ‘dealing’

3.83      The Law Council proposed amendments to the licensing regime so that the following ‘dealing’ activities would not fall within licensing requirements:

• dealing undertaken by a lawyer when acting as a client’s attorney;
• arranging sales of securities in certain instances;
• dealing undertaken by a lawyer when acting as the executor or trustee of a deceased’s estate;
• arranging cover notes of insurance in conveyancing transactions.[59]

Provisos in the regulation

3.84      Subregulation 7.1.29(1) only provides an exemption for eligible services where they are provided in the course of conducting an exempt service and:

• it is reasonably necessary to provide the eligible service to conduct the exempt service; and
• the eligible service is provided as an integral part of the exempt service.

3.85      The Law Council argued that the provisos of ‘reasonably necessary’ and ‘integral part’ be made alternatives and questioned the rationale of requiring satisfaction of both criteria before the licensing exemption should apply. In this regard, it thought the legislation should adopt a similar approach to that in the United Kingdom which allowed a licensing exemption for regulated activities if they could ‘reasonably be regarded as a necessary part of other services provided in the course’ of a profession or business. The UK exemption did not have the additional test that the activities be an ‘integral part’ of the services provided.[60]

3.86      To demonstrate the difficulties this would create, the Law Council cited the example of a lawyer acting for a client in the acquisition of a company. It said that the advice on due diligence, the terms of the contract of acquisition, the regulatory approvals and related tax issues would fall within the ‘financial product advice’ exemption under the Act and under regulation 7.1.29(3)(c). The Law Council questioned whether the following activities undertaken by lawyers would meet the conditions to qualify as an ‘eligible service’:

• execution of the acquisition contract as attorney for a client; and
• receipt, holding and temporarily investing the consideration for the acquisition paid to the lawyer by the client.

In this regard, the Law Council asked:

Will these ancillary services, which are activities undertaken within the ordinary course of activities of a lawyer, be taken to be reasonably necessary and an integral part of the provision of advice on the acquisition?  The first test, that the service be ‘reasonably necessary’, is likely to be satisfied. The second test, that the service be ‘an integral part of’ may not be satisfied in respect of each of the additional activities listed above.[61]

3.87      At the hearing, Ms Simmons elaborated on this point and stated that:

I think the ‘an integral part of’ test is actually quite a hard one to satisfy. The way the regulation in 7.1.29(3)(c) is framed, it refers to the fact that it is advice being provided. So for anything that you do that is not advice, you would query how that could be an integral part of the advice that is being provided. For instance, if you are executing the contract or you are providing some other sort of service, it is very difficult to see how that could be an integral part of the advice.[62]

3.88      Slightly at odds with the Law Council, the NTAA thought the term, ‘reasonably necessary’, in subregulation 7.1.29(1) could present problems. It argued that the term could be so narrowly interpreted as to ‘defeat the whole purpose’ of the regulation. It recommended the substitution of ‘appropriate’ so the provision would read:

...it is appropriate to provide the eligible service in order to conduct the exempt service.

The Committee’s views

3.89      The Committee notes that the definition of custodial and depository services in section 766E of the Act casts a very wide net. It consequently believes that a case has been made out for the exemption of these services when provided by lawyers and accountants in certain instances. The Committee agrees with the first limb of the specific proposals made by Mr Harvey but believes the second limb may be framed too widely.

Recommendation 4

The Committee recommends that the Corporations Act 2001 should be amended or regulations drafted to provide an exemption from the licensing requirements for the provision of custodial or depository services by an accountant or lawyer where, in the ordinary course of the conduct of their business, they are required to hold documents in safe custody for their clients.

3.90      As far as the other issues raised by the Law Council, Mr Harvey and the NTAA are concerned, the Committee urges the Government to give these due consideration so that appropriate licensing exemptions can be finalised as soon as possible before the end of the transition period on 11 March 2004.

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