This article by our Chair, Air Commodore Robert Brown, was published recently in the financial services media.
“We have been talking about the trust deficit in finance for far too long. It is time to move beyond the rhetoric to real solutions. The community will welcome this; they have been waiting for a long time. Let’s get on with it.”
Senior public servants and politicians are often accused of using weasel words to soften or obscure their messages. Such an accusation could hardly be levelled against James Shipton, Chairman of the Australian Securities and Investments Commission, whose plain words in the Australian Financial Review (April 2018) are both appropriate and timely. They signal unequivocally the regulator’s expectation of the industry and (I suggest) reflect a widely-held view in the Australian community.
In response to this kind of commentary, leaders in the financial planning industry regularly claim that they have carefully built the self-regulated structures, safeguards, compliance processes, professional rules, ethical standards and incentives which act to minimise poor behaviour. These leaders tell us that they have struck an “appropriate balance” between the commercial interests of the industry and the best interests of consumers. And they claim that the industry’s problems are not structural or systemic; rather, they are caused by a few “bad apples” which regulators should work harder to remove. Therefore, it is argued, the industry should be trusted, financial planners should be called “professionals” and the terms “financial planner” and “financial adviser” are justifiably enshrined in legislation, thereby assuring the public that the profession of financial planning is looking after the best interests of consumers.
That sounds like a compelling argument. However, it is contradicted by a considerable amount of evidence and observation contrasting what the financial planning industry claims to do with what many of its participants actually do in practice. As a result, governments have been forced to respond to irresistible political pressure by regularly intervening in the so-called “free market” with a view to repairing its failures. The Future of Financial Advice legislation (FOFA) is a prominent example in a litany of well-meaning interventions over the last forty years, none of which has comprehensively addressed the conflicted remuneration practices that are the principal cause of the trust deficit to which the ASIC Chairman referred. FOFA came close to solving the problem, explaining why aspects of it were so strongly opposed by the industry. Unfortunately, the process of lobbying, followed inevitably by political compromises, has created a regulatory and compliance nightmare about which the industry incessantly complains (which is a bit rich since the industry’s poor behaviour and its lobbying against genuine, permanent and comprehensive reform caused the problem in the first place).
So why is the financial planning industry not trusted to behave in the way that traditional professions have been trusted to behave (more or less) since their inception? Could it be that much of the industry actually prefers to be regulated by government because existing regulations don’t work? Could it be that the boards of large financial institutions don’t really want to change the product selling culture that is so deeply embedded through the industry’s structure and conflicted remuneration? Could it be the industry’s claim that many clients will not pay a genuine fee for service for financial advice is driven by its desire to not let go of the remuneration arrangements that are directly tied to product sales? Could it be that consumers will pay a genuine fee for service if they truly believe that advisers are acting in their best interests? Could it be that the existence of insurance commissions has actually caused the claimed under-insurance problem in Australia? After all, commission has been the dominant remuneration methodology for over 100 years of life insurance selling, so why are Australians still underinsured? Could it be that the industry is deliberately avoiding its deeper structural problems by suggesting that all will be resolved by getting rid of a few “bad apples” (and often blaming its failure to do that on the regulator)? Could it be that the industry is creating diversions from the real solution by suggesting that advisers and consumers should become better educated? Could it be that financial planners want the right to call themselves professionals without accepting the public interest and ethical obligations that must accompany that descriptor?
I am under no illusions about the power and influence of the industry’s dominant product selling culture and the conflicted remuneration arrangements that drive it. This was amply demonstrated in an abject failure of self-regulation which occurred in my own profession of accounting in 2012. Initially, the profession’s independent standard setter, the Accounting Professional and Ethical Standards Board (APESB), showed the courage to defend the profession’s fundamental ethical principles for members offering financial planning services by publicly stating after a five-year consultation process that all conflicted payments, including commissions, asset fees, product/platform bonuses, rebates and any similar sales incentives, are inconsistent with membership of the accounting profession.
Given the profession’s time-honoured principles of independence, objectivity and conflict avoidance, this conclusion should have been uncontroversial; however, a storm of criticism followed. Why? Simply because for the first time, self-regulated ethical rules were to be introduced that would undoubtedly transform the culture of financial planning from product selling to advice. This was a truly horrifying prospect for many industry participants whose public rhetoric in support of ethical practices in financial planning should have should have led them to enthusiastically support the proposed standard. Relentless pressure was brought to bear from the financial services industry on the professional accounting bodies which subsequently prevailed upon the APESB to “adjust” the principles publicly announced in 2012.
By early 2013, the standard (APES230) had been watered-down to become an uncomfortably embarrassing set of rules that may be described as “optional ethics”. This allows accountants who offer financial planning services to adopt either a high standard of ethical practice based on the avoidance and removal of conflicted remuneration, or a low standard of ethical practice based on the discredited concept of disclosure of conflicted remuneration.
This flawed standard and the process by which it was developed is a case study in how not to do self-regulation and how to remove the trust on which a profession should build and sustain the value of its designation. Is it any wonder that some commentators are so sceptical about the willingness and ability of any profession to regulate itself in the public interest?
Nevertheless, I have always clung to the hope that the financial planning industry would eventually become a “conflict-free” profession by a process of self-regulation. That is the essence of any true profession and is its fundamental responsibility to the public it claims to serve.
Of course, governments can have an important role in articulating community expectations of behavior and foundational ethical principles. The proposed mandatory Code of Ethics issued in March 2018 by the Financial Adviser Standards and Ethical Authority (FASEA) does just that. The Exposure Draft accompanying the proposed Code states: “The Code is essentially a set of principles and core values. A principles-based model provides a powerful framework to shape and reinforce ethical conduct and encourages a deeper engagement by the individual with their duties to their client as well as wider society” and “these ethical obligations go above the legal requirements in the law and are designed to encourage higher standards of behaviour and professionalism in the financial services industry”.
The industry’s immediate challenge is to voluntarily build upon the principles and values in the Code. It should do that by voluntarily removing all of its conflicted remuneration arrangements (not just some of them) as proposed in 2012 by the APESB. Whether they like it or not, the industry’s leaders know this is the principal cause of the trust deficit and that it must be done if the industry is to become a profession.
If that were to happen, several positive things would occur, almost immediately. Many more Australians would seek financial advice; they would happily accept product recommendations; they would willingly pay fees for service, confident that the advice is being offered in their best interests; the need for complex regulation about which the industry loudly complains would be removed; the cost of doing business would drop substantially; young people would happily join and remain in the financial planning industry, satisfied that they were making a positive difference to the lives of their clients; financial planners would be trusted and accepted as true professionals; and the industry would confidently and profitably grow without the distractions and impediments of a tarnished reputation.
Could this be the industry’s final opportunity to transform itself into a true and trusted profession? I believe so, failing which financial planners will experience a whole new world of regulatory pain imposed by frustrated future governments that have lost patience with the rhetoric, obfuscations and deflections and are unwilling to allow unethical behaviour to continue unchecked.
At least for now, the future lies in our hands. So why don’t we just get on with it?
Air Commodore Robert Brown
ADF Financial Services Consumer Centre
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