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Excessive Regulation – And What To Do About It

Air Commodore Robert Brown
27th March, 2018

(The following article authored by Air Commodore Robert Brown, Chair of the ADF Financial Services Consumer Centre, appeared originally in the financial services media).

It’s become commonplace to hear claims from financial planners that they are being squeezed out of business by the cost, complexity and demoralising consequences of excessive regulation and unrestrained compliance rules.

This issue was raised with me recently by a despondent senior planner who could not understand why the discipline he loves and to which he has been committed for decades is constantly under attack. He sees it as unfair when the community fails to recognise the professional work and good intentions of the majority. He perceives himself and most of his colleagues as honest and ethical professionals who are being placed under unwarranted public scrutiny and unnecessary regulatory control.

Are his claims valid? If they are, what has caused the problem? And what can be done to solve it?

My complainant suspects a disingenuous campaign driven by bias or vested interests in the media, government, the regulator and industry superannuation funds, designed to damage the legitimate aspirations of hard working small business people who are merely trying to make an honest living by assisting their clients.

If the issue were that simple, such a campaign would be easily rebutted and dismissed. However, what my complainant finds it hard to accept is that when things go publicly awry in the discipline to which he is so committed, democratically elected governments must be seen to act decisively (arguably excessively) in the wider interests of the electorate. If they don’t act, or if they are seen to act weakly, they are charged by the media and their political opponents with “failing to deal with the crooks”, “looking after their mates” or even “dancing to the tune of the banks”. Parliamentary inquiries, and independent reviews, even Royal Commissions, are demanded. Therefore, is it any wonder that the reaction of the political class is to act, invariably in the form of “reforming” legislation, in the vain hope of cleaning up the industry’s shortcomings, irrespective of the merits of doing so?

The sad reality is that much of this legislation is not the result of ill-informed campaigns or conspiracies by third parties. Rather, the industry has brought it upon itself through inaction and resistance to reform. Over many decades, the financial planning industry has been long on the rhetoric of a profession (copious references to trust, ethics and standards) and short on effective and comprehensive self-regulatory action to clean up its act once-and-for-all. Unsurprisingly, this has led to more poor behaviour, more scandals and more criticism, followed by more regulation and more compliance rules. This is not a politically partisan issue. Both sides of politics have felt the need to act decisively in response to deficiencies and “rip-offs” uncovered by the media, by inquiries and by their political opponents.

I accept that it’s sometimes politically difficult for industry leaders to publicly acknowledge reality, but the fact is that unlike traditional professions of accounting, law and medicine, the discipline of financial planning is still not widely trusted by the public. Of course, individual planners will quite properly claim that they are trusted by their clients and that they act in their clients’ best interests at all times. No doubt, they do. However, the dilemma for governments is that for every planner who acts ethically, it appears there are many more who don’t. That includes qualified accountants, some of whom continue to damage their profession’s “most trusted adviser” status by engaging in distinctly unprofessional activities.

Of course, only a small minority of financial planners will ever be the subject of formal complaints and action by the regulator. While the malpractices of this group are the high profile causes of the financial planning industry’s poor public reputation, the general mistrust of the industry is sourced in its systemic, deeply embedded and fundamentally conflicted product distribution structure, so tellingly referred to by some as the “value chain”. As a result, an industry has been created which tells the public that it can be trusted to act in their best interests and then doesn’t. This hypocrisy is based on a contradiction that cannot be reconciled, ignored or resolved by appealing to the discredited notion of disclosure.

And it’s not good enough to use rhetorical generalities and fine words in codes of ethics about how honourable and trustworthy the industry is and then continue to lobby governments to compromise laws or to maintain the status quo. As commercially inconvenient as it may be, the industry must transform itself by removing the conflicts of interest that cause the bad behaviour, including all commissions, asset fees and similarly conflicted remuneration arrangements. There is no other option. It’s Ethics 101.

If the industry doesn’t do that, it faces a bleak future of trenchant criticism, political attacks, inquiries and even a Royal Commission. This will not just occur under progressive governments. Conservatives will do it too, as will any government when under pressure to be seen to act strongly. Witness the recently passed legislation to establish a government controlled (industry-funded) body to mandate education and ethical standards with an admitted cost to the industry of $165 million. Not bad for a conservative government committed to the removal of “red tape”.

However, if a self-regulated evolution were to be managed to the highest professional standards by the industry itself, incomes of practitioners would grow steadily and predictably, as would the values of their financial planning practices. They would grow because those practices would become trusted professional entities with substance and longevity, not just product sales distribution outlets heavily reliant on the whims of product manufacturers, the directions of dealer groups, approved product Lists, the size of funds under management, the volatility of percentage-based income streams and the vagaries of an unpredictable stock market.

As a result, much of the excessive regulation would become irrelevant. It would fade in significance as the industry improved its public reputation and community trust. And the regulatory roadblocks which my complainant condemned so loudly would all but disappear. Financial planning would become the trusted profession that the Australian community urgently needs and deserves. This would not have been achieved through legislation and regulation (frankly, an impossible dream), but through the profession’s own actions and on its own terms.

Air Commodore Robert Brown
Chair
ADF Financial Services Consumer Centre

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