Financial product advice and financial advisers
2.1
This chapter discusses the committee's consideration of:
-
'general advice' and 'personal advice' as currently defined in
the Corporations Act 2001;
-
the protection of titles such as 'financial adviser' and 'financial
planner';
-
the register of financial advisers; and
-
licensing of financial advisers.
General advice
2.2
In this section, the committee discusses suggestions to change the definitions
of 'general advice' and 'personal advice' which are categories of 'financial
product advice' defined in the Corporations Act 2001.[1]
The section also covers current definitions, proposed changes and views from
the banks and financial service providers.
2.3
ASIC's Moneysmart website describes 'general advice' and 'personal
advice' in the following way:
The type of financial advice you need depends on your life
stage, the amount of money you have to invest and the complexity of your
affairs...You can get general advice about financial products or investing...General
advice does not take into account your particular circumstances, such as your
objectives, financial situation and needs. For example, you may receive general
advice when you attend a seminar about investing.
If you want a recommendation that takes your personal
situation into account, you need personal advice...For this kind of advice, it's
important that you only talk to someone who is a licensed adviser...The cost of
the advice will depend on the scope and kind of advice you receive.[2]
Current definitions
2.4
'General advice' and 'personal advice' are types of financial product
advice. Financial product advice is defined in the Corporations Act 2001
as:
A recommendation or a statement of opinion, or a report of
either of those things, that:
- is intended to influence a
person or persons in making a decision in relation to a particular financial
product or class of financial products, or an interest in a particular
financial product or class of financial products; or
- could reasonably be regarded
as being intended to have such an influence.[3]
2.5
The Corporations Act 2001 defines 'personal advice' in section
766B(3) as financial product advice given or directed to a person (including by
electronic means) in circumstances where:
-
the person giving the advice has considered one or more of the
client’s objectives, financial situation and needs; or
-
a reasonable person might expect the person giving the advice to
have considered one or more of these matters.[4]
2.6
'General advice' is defined in section 766B(4) as financial product
advice that is not 'personal advice'.[5]
The sales-advice conflict
2.7
The committee's 2009 inquiry into financial products and services in
Australia highlighted the sales-advice conflict arising from significant
structural tensions that are central to the debate about conflicts of interest
and their effect on the advice consumers receive. The committee noted that:
On one hand, clients seek out financial advisers to obtain
professional guidance on the investment decisions that will serve their interests,
particularly with a view to maximising retirement income. On the other hand,
financial advisers act as a critical distribution channel for financial product
manufacturers, often through vertically integrated business models or the
payment of commissions and other remuneration-based incentives.[6]
2.8
The Financial Services Council (FSC) represents Australia's retail and
wholesale funds management businesses, superannuation funds, life insurers,
financial advisory networks, trustee companies and public trustees. The FSC
submitted to the committee that it:
...supports a holistic framework which includes a revised
advice framework, removing the ambiguity between personal advice and general
advice (proposing the relabelling of general advice to ‘general information’)
and linking competency to the different advice segments.[7]
2.9
Some submitters and witnesses to the current inquiry informed the
committee that problems with the sales-advice conflict are still in existence
and need addressing. The Financial Planning Association of Australia (FPA)
informed the committee that some consumers mistake the use of the word ‘advice’
to be a standard definition when in fact there is a significant legal and
technical difference between ‘general’ and ‘personal’ advice. The FPA also
suggested that the definition of 'financial product advice' makes it difficult
for consumers to distinguish financial advice from marketing material or
product sales.[8]
2.10
ASIC's Report 384 – Regulating Complex Products, identified
similar issues to those described above:
Our research has indicated that marketing information plays a
particularly strong role in product distribution and may influence investors’
decision making more than other product disclosure. In particular, when
investors approach product issuers or other intermediaries responsible for
selling products directly, rather than going through advisers, the information
contained or implied in product issuers’ marketing information is often the
first, and may be the only, information that investors use to decide whether or
not to invest in that product.[9]
2.11
The FSI interim report also reported on issues related to definitions of
'advice', noting that:
At times, consumers also lack access to affordable advice. In
addition, some submissions question whether general advice is properly labelled
and whether consumers understand its nature, given general advice often
includes sales and advertising information.[10]
2.12
In its final report, FSI confirmed that consumers may misinterpret or
excessively rely on guidance, advertising, and promotional and sales material
when it is described as ‘general advice’. Additionally the use of the word ‘advice’
may lead consumers to believe the information is tailored to their needs.
Often consumers do not understand their financial adviser’s
or mortgage broker’s association with product issuers. This association might
limit the product range an adviser or broker can recommend from. Of recently
surveyed consumers, 55 per cent of those receiving financial advice from an
entity owned by a large financial institution (but operating under a different
brand name) thought the entity was independent.[11]
Proposals for change
2.13
The Financial Systems Inquiry sought views on renaming 'general advice'
as ‘sales’ or ‘product information’ and restricting use of the term ‘advice’ so
that it only be used in relation to 'personal advice'. In its final report the
FSI recommended that ‘general advice’ be renamed and that advisers and mortgage
brokers be required to disclose ownership structures.[12]
2.14
The Customer Owned Banking Association told the committee that in their
view, the boundary between 'personal advice' and 'general advice' is clear
legally but very context specific, and that distinguishing between them can be
problematic in practice.[13]
2.15
The Insurance Council of Australia supported a comprehensive review of
the terminology, with the goal of separating out the disparate elements
currently covered by the definition of 'general advice'.[14]
2.16
The Self-Managed Super Fund (SMSF) Professionals' Association of
Australia (SPAA) informed the committee that they had been advocating the
removal of 'general advice' for some time and noted that:
We believe, if you are a personal adviser, you are personally
accountable and you should be able to provide professional advice. But we do
not believe you should be able to be a provider of information sales product
and be able to call yourself an adviser if that is all that you do; you must be
a professional adviser in the first instance.[15]
2.17
The committee heard that alternative terms for 'general advice' could
include:
-
'general information' which could include product information;[16]
-
'general or product information' which could be limited to the
provision of factual information and/or explanations relating to financial
products;[17]
and
-
'general financial information' which would include factual
information about a product or a service.[18]
2.18
The Financial Planning Association of Australia (FPA) recommended that
'personal advice' be renamed 'financial advice' and suggested the following
meaning for 'financial advice':
Any recommendation made personally to a consumer on which
that consumer could reasonably be expected to act in relation to an investment
or financial decision, including but not limited to, any recommendations relating
to shares, debentures, collective investments, futures or options contracts,
life insurance, superannuation, property or other financial instruments,
transactions or investments.[19]
Views of banks and financial
service providers
2.19
The FSC submitted to the committee that it supports removing the
ambiguity between personal advice and general advice (proposing the relabelling
of general advice to ‘general information’) and linking competency to the
different advice segments. The FSC also suggested a third category called
'factual information', which would be distinct from personal advice and general
information.[20]
2.20
The Australian Bankers Association (ABA) acknowledged that 'general
advice' is not widely understood to be financial advice by many customers. The
ABA submitted that 'there is merit in giving further consideration to different
and more appropriate terminology and labels which more closely reflects the
true nature of information that is legally termed "general advice".'[21]
The ABA suggested that consumer testing and research be undertaken as part of
the process to develop alternative terminology.[22]
The committee notes that while the final report of the FSI recommended that 'general
advice' be renamed, it did not suggest a specific term to replace it. Instead
it recommended a non-specific 'consumer-tested term', suggesting that:
Consumer testing will generate some costs for Government, and
relabelling will generate transitional costs for industry — although these are
expected to be small. The Inquiry believes the benefits to consumers from
clearer distinction and the reduced need for warnings outweigh these costs.[23]
2.21
The Customer Owned Banking Association supported more clarity for
customers, but raised some concerns about the proposed changes.
Financial product advice is a recommendation, or something
that the consumer perceives to be a recommendation, about a financial product.
So the very legal definition of financial product advice is selling something.
You could change that. We do not oppose the idea of making things a little
clearer. But just how you do that and stick with the current architecture for
the way the whole thing is put together is problematic.[24]
Committee view
2.22
The majority of the evidence received by the committee supports a change
to the term 'general advice' to ensure that it more closely describes the
nature of the information communicated which as the FSI report highlights,
often contains sales and advertising information. The committee notes that
industry associations including the FPA, FSC, ABA and SPAA have acknowledged
the need for change. Increased consumer awareness of the fact that they are
being sold a product may act as a defence against unwittingly accepting
marketing as advice, thereby playing a valuable role in the system of defences.
2.23
The committee therefore recommends that there should be a change to the
term 'general advice' to make the nature of the information communicated
clearer to consumers and investors. The committee considers that the term
'product sales information' would more closely reflect the nature of the advice
that is currently given under the term 'general advice'.
Recommendation 1
2.24
The committee recommends that the term 'general advice' in the Corporations
Act 2001 be replaced with the term 'product sales information' to better
reflect the nature of that information.
2.25
The committee also notes the suggestion by the FPA that 'personal
advice' be renamed as 'financial advice' with the following meaning:
Any recommendation made personally to a consumer on which
that consumer could reasonably be expected to act in relation to an investment
or financial decision, including but not limited to, any recommendations
relating to shares, debentures, collective investments, futures or options
contracts, life insurance, superannuation, property or other financial
instruments, transactions or investments.[25]
2.26
The committee has not received a significant body of evidence on the
proposal to change 'personal advice' to 'financial advice'. However, the
committee considers that the proposal is likely to provide a clearer system for
consumers and therefore is worthy of further consideration by the government.
Recommendation 2
2.27
The committee recommends that the term 'personal advice' in the Corporations
Act 2001 be replaced with 'financial advice' to better reflect the nature
of that advice.
Recommendation 3
2.28
The committee recommends that to provide 'financial advice' an
individual must be registered as a financial adviser.
Financial advisers, financial planners and a register of financial advisers
2.29
This section discusses proposals to restrict the use of the terms
'financial adviser' and 'financial planner' as a way of signalling competence
to consumers. Alternative defences are also discussed, including establishing a
register of financial advisers.
Proposal to protect the titles
'financial adviser' and 'financial planner'
2.30
Bankers Trust Financial Group (BT) advocate that the terms 'financial advice'
and 'financial adviser' should be clearly linked to the provision of 'personal
advice'.[26]
BT supports limiting the use of the term 'financial adviser' to those who
provide 'personal advice' and who meet the relevant training and competency
standards to provide 'personal advice'. BT suggested that:
Individuals who either do not provide Personal Advice, or who
do not meet the relevant professional standards, would be unable to hold
themselves out as Financial Advisers. This would strengthen the distinction
drawn above by clearly labelling the title of the individual providing the
information or advice, and ensuring only a qualified and authorised individual
is able to hold themselves out as being a financial adviser.[27]
2.31
The FPA submitted that it is common for individuals to interpret 'general
advice' as 'personal advice' because it is relevant to their circumstances at
the time it is provided. The FPA suggested that to ensure consumers can easily
distinguish between the various roles and services in the financial services
sector, providers of general or product information should be prevented from
using the titles 'financial planner' or 'financial adviser'.[28]
2.32
The Australian Bankers Association also supported consideration of the
legal meaning of the terms 'financial planner' and 'financial adviser' and more
clearly linking the term ‘financial adviser’ with the provision of 'personal
advice'.[29]
2.33
Mr Paul Moran drew the committee's attention to the difference between
stewards who act on behalf of their clients and agents who may serve a third party:
There needs to be a recognition of the differences between
those financial planners who act as stewards on behalf of their clients, and
those financial advisers who act as conflicted agents serving both their client
and a third party financial product provider – and the public should know how
to recognise these different players.[30]
2.34
Mr Robert Brown submitted that statutory separation of product sales
from 'personal advice' is flawed unless it ensures that legislatively endorsed
‘financial planners/advisers’ cannot receive any form of ethically conflicted
remuneration including commissions, ‘asset fees’ and any other forms of product
bonuses and incentives.[31]
2.35
The Professional Standards Councils (PSC) undertook a survey on the
current role of professionalism in the financial services industry and found
that there was no common understanding of the terms 'financial adviser' and
financial planner':
...certain interviewees differentiated between types of
financial advisers – those who had completed specific training requirements,
and those who had not. Some respondents believed that financial advisers are
professionals, but financial planners are not, whilst others saw the reverse.
Still others believed both financial planners and financial advisers are
professionals. Whilst a significant proportion of interviewees believed that
neither financial planners or financial advisers constitute a profession.[32]
2.36
The PSC informed the committee that as part of the regulation of
professions, legislative protection of a title or term is often sought by those
qualified to assist consumers in distinguishing between professionals and
non-professionals.[33]
The PSC also noted that there was an active campaign by some associations to
encourage government to legislate for ‘protection of title’ (financial planner
and/or financial adviser), but that in their view, there is no agreement
amongst the industry as to whether it is appropriate or warranted.[34]
Alternatives to the protection of
title
2.37
While the above discussion has focussed on protection of title for
'financial adviser' and 'financial planner', the PSC also drew the committee's
attention to an alternative approach called 'protection of function'. The PSC
argued that:
In the spectrum of regulation governments typically prefer
the ‘protection of function’ approach because it does not confer titled benefit
but does influence the individuals (through education and standards) that can
be authorised to perform a function or service. It might be argued that [the]
Corporations Act takes this approach with regard to financial advice by
stipulating the education and oversighting requirements for the function of
financial advice to be performed. It might also then be argued that the current
concerns of the government and public indicate that this approach may have
failed.[35]
2.38
The committee was advised of industry led approaches designed to allow consumers
to identify qualified financial advisers, including the use of the Certified
Financial Planner (CFP) designation, an internationally recognised designation
held by 150 000 financial planners in 24 countries. The FPA submitted
that:
To gain CFP certification, a planner must have completed an
undergraduate degree, masters degree or PhD and have successfully completed all
of the units of study in the CFP Certification Program. To enter the CFP
program, at least three years of financial planning experience is also
required.[36]
2.39
The Commonwealth Bank of Australia and AMP have announced that they will
require some financial advisers to be Certified Financial Planners.[37]
The committee noted that in New Zealand individuals who provide advice on high
risk and/or long term investment products (including financial planning) have
to be registered, and also separately 'authorised' by the Financial
Markets Authority under the Financial Advisers Act 2008.[38]
Committee view
2.40
The committee notes that the PSC has recommended the clear separation of
professional and non-professional roles, including differentiated titles
(protection of title) and obligations for providing professional advice (protection
of function).[39]
2.41
The committee considers that both approaches are complementary defences
and would assist consumers better understand the nature of the information and
advice that they are receiving, and that only suitably qualified people could
legally provide financial (personal) advice.
2.42
The committee is concerned about problems that have occurred in the
financial advice industry and the lack of progress in addressing the problems
since the committee's previous inquiry in 2009. The committee considers that the
government should bring forward legislation to protect the titles 'financial
adviser' and 'financial planner'. The legislation should provide that 'financial
adviser' is a recognised title and that in order for an individual to be
eligible to use the title that individual must:
-
be providing 'personal advice' (or 'financial advice' as
recommended above) under the provisions of an AFS licence regulated by ASIC as
set out currently in the Corporations Act 2001; and
-
be a member of a professional body operating under a Professional
Standards Scheme approved by the Professional Standards Councils. Advisers may
choose to be a member of more than one professional association as is currently
the case. Only one such body (to be nominated by the adviser) will have the role
of providing oversight of professional obligations and associated advice to
ASIC in respect to initial registration and ongoing compliance. An adviser
sanctioned by that professional association having oversight should not be able
to seek registration via a different professional association. ASIC decisions
in relation to refusing registration or deregistering financial advisers should
be subject to appropriate merits review by the Administrative Appeals Tribunal
(refer to the report overview and Chapter 4 for the committee's recommendations
to require membership of a body and approval by the PSC); and
-
be registered as a financial adviser through listing on the
register of financial advisers, and continue to meet all the requirements to be
on the register as a professional adviser.
2.43
The committee also considers that the same legislative or regulatory
power should be used to protect the title 'financial planner' through
preventing its use. The committee is of the view that to prevent confusion for
consumers, there should only be one term in used in Australia, and that is the
term ‘financial adviser’. While the committee acknowledges that there are other
terms in use in overseas jurisdictions, including the internationally
recognised designation ‘Certified Financial Planner’ (see earlier discussion at
paragraph 2.37), clarifying and protecting the title 'financial adviser' will
be another measure designed to protect consumers. Consequently, the committee
view is that to provide financial advice in Australia a person must be
registered as a 'financial adviser'. The committee notes that attaining
certification as a Certified Financial Planner represents a level of education
and experience and does not conflict with the requirement to use the title
'financial adviser' in the domestic context.
Recommendation 4
2.44
The committee recommends that the government should bring forward
legislation to protect the titles 'financial adviser' and 'financial planner'
and require that to be eligible to use the title 'financial adviser', an
individual must be registered as a financial adviser.
Register of financial advisers
2.45
This section discusses the development of a public register of financial
advisers, and the role that such a register could play in ensuring that
financial advice provided to consumers and investors is only provided by
suitably qualified professionals. A register of financial advisers provides
protection of function and would operate as a complementary defence to the protection
of titles.
2.46
The committee has considered evidence to suggest that there is a high
degree of support for the creation of a register of financial advisers.[40]
Industry Super Australia and the Australian Institute of Superannuation
Trustees suggested that:
Such a register will provide ASIC and consumers with
transparency about advisers’ qualifications and employment history. The
register will not only enhance ASIC’s capacity to monitor financial advisers
(including employee advisers) but will enable the benchmarking of key metrics
in financial planning in its progress towards professionalism.[41]
2.47
The Finance Sector Union submitted that having a list of financial
planners available to the general community which details all currently
‘licenced to practice’ financial planners would assist consumers to make
educated choices and would serve as a way of monitoring regulatory training
expectations.[42]
2.48
The FPA informed the committee that an adviser register would assist
consumer awareness of the qualifications held by individual financial planners
and financial advisers.[43]
The FPA further submitted that:
The development of the new Adviser Register (as per the
Government’s commitment) will deliver a superior outcome with more certainty
than developing a list of advisers via a national exam. The Government has
proposed its Adviser Register will be a legal requirement for all
representatives, employed and authorised representatives, not just limited to
those who sit an exam.[44]
2.49
The development of the register of financial advisers is supported by
banking institutions including BT Financial Group.[45]
The Financial Services Council submitted that a national public register of
personal advice providers could be leveraged to record competency and training.[46]
The ABA informed the committee that:
...a new financial adviser register should enable consumers to
be able to validate the details of a financial adviser. A register should also
enable improved practices for industry and better oversight of financial
advisers by ASIC.[47]
2.50
The Financial Ombudsman Service (FOS) supported the concept of a
register and noted that similar registers have been implemented in Asia.[48]
2.51
On 27 November 2014, the government released an exposure draft of
regulations to implement the register through the Corporations Amendment
(Register of Relevant Providers) Regulation 2014. An associated consultation process invites feedback
from stakeholders. The regulations amend the Corporations
Regulation 2014 to enable
ASIC to establish and maintain a public register of financial advisers and for
Australian Financial Service licensees to collect and provide information to
ASIC concerning financial advisers that operate under their licence.[49]
Committee view
2.52
The evidence received by the committee is generally in favour of the
establishment of a register of financial advisers, albeit predominantly in the
context of increasing transparency as opposed to protecting function. The
committee is of the view that a register can perform both functions. The
committee notes the government announcement on 24 October 2014 that an enhanced
register of financial advisers will be established by March 2015. The register will
include:
-
the adviser's name, registration number, status, and experience;
-
the advisers' qualifications and professional association
memberships;
-
the adviser's licensee, previous licensees/authorised
representatives and business name;
-
what product areas the adviser can provide advice on;
-
any bans, disqualifications or enforceable undertakings; and
-
details around ownership of the financial services licensee and
disclosure of the ultimate parent company where applicable.[50]
2.53
The committee is suggesting that an adviser who has had their membership
of a professional association withdrawn because of a failure to meet continuing
professional development obligations would be listed on the register for the
purposes of transparency as a suspended adviser. An adviser who has membership
of the association withdrawn due to breaches of the code of conduct or who has
been sanctioned by ASIC for breaches of the provisions of the AFS licence,
would be listed as banned. The scope of an adviser's competence to provide
financial advice may also be listed on the basis of advice from the
professional association, the AFS licence holder or ASIC.
2.54
The committee considers that the register of financial advisers is
another element in the systems approach to ensuring consumer protection, as
discussed in Chapter 1 in relation to the James Reason model. The register
of financial advisers will provide members of the public with access to
information about financial advisers and public accountability, which will work
in conjunction with other elements to help reduce the risk of adverse outcomes
for consumers.
2.55
The committee considers that as the register is designed to be part of a
broader system intended to strengthen the standard of advice to consumers,
removing elements of the register, or not fully implementing it will reduce its
effectiveness. In particular, the committee considers that for the register to
deliver adequate public accountability, the register must include information about
any bans, disqualifications or enforceable undertakings against a financial
adviser. The status of an adviser (practising, suspended or banned) should also
be clearly stated to provide transparency for members of the public and for
legal clarity for the adviser and potential AFS licence holders who may be
considering employing the individual.
2.56
The committee further considers that the register should act as part of
the defence of function, in that being registered is a requirement to practice
as a financial adviser. In order to maximise the effectiveness of the register
and its operation with other parts of the system to protect consumers, the
register should include all of the elements originally proposed in the
government's announcement of the register on 24 October 2014, and discussed
earlier in this chapter. The committee considers that ASIC should be responsive
to advice received from a professional association in relation to their
oversight of an individual adviser. ASIC should be provided with sufficient
powers so that an adviser can only be added to the register on advice from the relevant
professional association that the adviser has completed the Finance
Professionals’ Education Council approved professional year and registration exam
consistent with the information and criteria as set out in the recommendation
below.
Recommendation 5
2.57
The committee recommends that the register of financial advisers:
- include the information fields detailed in the government's
announcement of the register on 24 October 2014;
- have a unique identifier that follows every individual adviser
throughout their career;
- only list financial advisers on the register when a professional
association (which has been approved by the Professional Standards Councils)
advises that the adviser has completed the requirements of the Finance
Professionals’ Education Council approved professional year and passed the
registration exam;
- record any higher qualification awarded by a professional body
to the adviser;
- annotate any censure or limitation placed on a financial
adviser by a professional body, Australian Securities and Investments
Commission or Australian Financial Service Licence holder; and
- highlight that an adviser is no longer authorised to provide
financial advice if the adviser has their membership of the nominated professional
body suspended or revoked.
Licencing of financial advisers
2.58
This section discusses the committee's consideration of proposals to:
-
change licensing arrangements for financial advisers so that each
financial adviser has an individual license; and
-
increase fees to organisational licensees to reflect the scale of
their financial advice operations.
Current licencing arrangements
2.59
To provide financial advice in Australia a financial adviser must hold
an AFS licence or be authorised as a representative of another person who holds
an AFS licence. The licensing process is a point-in-time assessment of the
licensee, not of its owners or employees.[51]
2.60
The committee has considered arrangements for licensing of financial
advisers in a number of international jurisdictions. In most cases, organisations
are required to hold licences. Requirements for every financial adviser to be
individually licenced are less common. Some examples of the financial adviser
licensing arrangements in overseas jurisdictions appear below.
2.61
In New Zealand, organisations or individuals who provide financial
advice have to be registered on the Financial Service Providers Register:
People who provide advice on high risk and/or long term
investment products (including financial planning) will have to be registered
on the FSPR, and also separately 'authorised' by the Financial Markets
Authority under the Financial Advisers Act 2008.
Authorisation ensures the individuals are suitably qualified
and experienced. Advisers will apply for authorisation at the same time
as they submit an application for registration online.[52]
2.62
In most Canadian provinces, there is no legislated standard in place for
financial advisers. With the exception of Quebec, people who call themselves
financial planners are not required to obtain any credentials.[53]
2.63
Financial planners in the United States are regulated as 'investment
advisers' under the Investment Advisers Act of 1940 (‘Advisers Act’). Firms
that are investments advisers for the purposes of the Advisers Act must be
registered.[54]
2.64
In Singapore, for a person to act as a financial adviser, they must be
authorised to do under a financial adviser's licence. Employees who provide
financial advice are required to be representatives of the licensed
corporation.[55]
Licensing individual advisers
2.65
The committee has considered the possibility of requiring that all
individual advisers be licensed before they are able to provide financial
advice.
2.66
Professor Justin O'Brien and Dr George Gilligan suggested that the
framing of professional obligation must take into account empirical evidence concerning
the failure of existing codes of conduct, and the dangers associated with the
licensing regime limited to entities rather than attaching to individual
advisers.[56]
2.67
Dr George Gilligan informed the committee that in his view:
...there is a certain imbalance between the privileged position
that participation in the financial sector allows through the mechanism of the
licence—which is a gift of the state—and what might be termed the civic duties
and obligations that potential carries with it. We think the balance has
shifted too far towards an almost automatic expectation of assuming a licence.
This has been compounded because of the organisational context—many of the
financial planners and advisers in Australia are employed by large organisations,
so there is a diminution of accountability and transparency in relation to the
activities of individuals who are selling products or recommending products to
consumers.[57]
2.68
Chartered Accountants Australia and New Zealand supported considering
the possibility of individual licensing for financial advisers, but noted
concerns that individual compliance costs may act as a disincentive for
individual licensees.[58]
CPA Australia expressed similar concerns.[59]
2.69
CPA Australia and Chartered Accountants Australia and New Zealand
identified barriers to individual licensing including:
-
the breadth of the AFS licence framework which limits the
capacity to tailor obligation to particular types of financial services;
-
complexity and cost of compliance;
-
the length of product disclosure documents and statements of
advice;
-
the cost of professional indemnity insurance; and
-
the overlap with other regulatory requirements such as tax and anti-money
laundering.[60]
2.70
CHOICE indicated that it was comfortable with retaining licensing at an
organisational level, so long as a register of individual advisers is
implemented.[61]
2.71
The Association of Financial Advisers informed the committee that moving
to individual licensing would be a fundamental change to the Corporations
Act:
With the best interest duty, there are now obligations at the
adviser level. So we have seen some transition in that direction. But we are
conscious that the benefits of the licensee model are a group that is held
accountable for the conduct of advisers within that group and that then ensures
that consumers have better access to a larger organisation to pursue
complaints. So there are many arguments for and against it. Changing the whole
construct of the Corporations Act at this point in time is probably not
something that we are supportive of.[62]
2.72
The Department of the Treasury informed the committee that there are
some advantages to licensing entities, including that they have many more
mechanisms to compel good behaviour and are closer to consumers, which reduces
the compliance costs on the system.[63]
Committee view
2.73
The committee has examined suggestions that each financial adviser be
individually licensed rather than licensing organisations. The committee notes
that the key objective of this suggestion is increased individual accountability.
Whether the AFS licence holder is an individual or an organisation, the key
issue is compliant and ethical conduct by both the individual and the
management of the organisation. The committee is of the view that the dual
oversight of an adviser by a professional association (with the power to advise
ASIC to suspend or ban the adviser for breaches of the code of professional
conduct) and ASIC through the AFS licence provisions will provide
accountability for individual conduct. The committee notes that implementation
of FSI recommendation 24, providing ASIC with the power to ban management for not
creating a culture of compliance with AFS licence provisions,[64]
will provide additional defences in the system.
2.74
The committee also notes that licensing at the organisational level,
with arrangements for individual advisers to act as representatives of the
licensee, is a common approach in overseas jurisdictions.
2.75
The committee considers that the costs of moving to compulsory individual
licensing at this time are not justified given the implementation of systemic
defences such as the register of financial advisers and other recommendations made
in this report have the potential to address relevant issues currently
experienced in the industry.
2.76
The committee notes however, that should these measures fail to improve
standards, future consideration should be given to individual licensing as a further
defence of consumer outcomes from financial advice.
Licence fees
2.77
The committee considered limited evidence in relation to the cost of
fees associated with AFS licenses. ASIC provided information on the current AFS
licence fees:
The fees to apply for an AFS licence are set out in the
Corporations (Fees) Regulations 2001. Effective from 1 July 2014, it costs
$1567 for a body corporate, partnership or non-body corporate trustee to apply
for an AFS licence. It costs $871 for a natural person to apply for an AFS
licence.[65]
2.78
Dr George Gilligan suggested to the committee that the costs of participating
in the financial advice industry should reflect the scale within the market. He
suggested that an individual practitioner in western New South Wales, for
example, should not be expected to pay the same amount as a major bank or a
major insurance company operating in an urban centre.[66]
This view was supported by CHOICE.[67]
Committee view
2.79
While the committee has not received a large body of evidence on proposals
to alter fees associated with licenses, it considers that the idea is worthy of
further consideration, as it would better reflect the cost of regulating those
financial advice activities.
2.80
The committee notes that the FSI considered fees imposed by ASIC, as
well as calls for a broader review of ASIC's fees to better reflect the cost of
regulating parts of the financial service industry. The committee notes that
the final report of the FSI recommended providing ASIC with stronger regulatory
tools.[68]
Recommendation 6
2.81
The committee recommends that the government consider proposals to increase
fees for organisational licensees to reflect the scale of their financial
advice operations, in the context of a broader review of ASIC's fees and
charges.
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