Last month we launched our new policy platform document, Affordable Advice, Sustainable Profession. In the first of a five-part series, we look deeper into the context and recommendations for each part of our agenda for policy reform, starting with Regulation of Financial Advice.

Following a review of the feedback questionnaires for our FPA Together event series, it’s clear that regulation continues to be the most important concern for our members. This qualitative finding is also backed up by the numbers from our 2019 members survey, with cost of regulation emerging as the number one challenge for members. So it’s fitting that we kick-off this series of focus articles by further exploring our recommendations on Regulation of Financial Advice.

The many costs of complex regulation

In developing these recommendations for regulatory reform, it was important to unpack just how and why it is that costs of regulation have ballooned over the years. These costs fall into two broad categories: the upfront costs for mandatory fees, charges, industry levies and insurance premiums and the ongoing overhead financial planning businesses must meet to comply with regulation.

Upfront costs: pay to play

The exact amount each financial planner must pay for upfront regulatory costs will depend on their business model. What is clear though, is that these costs have been increasing at a significant rate in recent years. To take one example, in 2018 the ASIC levy for financial planners increased 26 per cent over ASIC’s estimate. Instead of an expected levy of $907 per planner, this rose to $1,142.

In addition to meeting costs for being an authorised AFSL representative, registering with the Tax Practitioners’ Board (TPB) and the Financial Adviser Register, financial planners are likely to be paying additional cost recovery fees in the future to the new single disciplinary body and a compensation scheme of last resort which were both proposed by the Royal Commission and are currently under discussion by the Government, as well as an industry funding model for FASEA.

The Government’s practice of recovering the cost of regulation from the industry being regulated is to be expected. Introducing a single set of fees will go some way to ensuring these upfront fees and levies for financial planners are commensurate with the real cost of regulation. By making regulatory fees and levies more simple and transparent, our profession can also expect better decisions-making when it comes to fee increases.

The cost of regulatory compliance

As well as satisfying ASIC guidance on compliance, financial planners must also meet the compliance demands of their AFSL. In response to ASIC Report 515 on how institutions oversee their advisers, released in 2017, many licensees have added long and expensive compliance reviews to their advice processes, on top of standards already required by the Corporations Act. There are also standards set by the TPB and FASEA that are different to the AFSL standards. For example, there are best interest duties laid out in all these standards but there is both inconsistency and overlap between them.

With the many reforms introduced by FASEA, there has been a shift in focus towards individual accountability for financial planners, in addition to their AFSL requirements. These include personal obligations to meet ethical and education standards. While personal obligations are a key part of professionalisation, this adds to the risk of duplicating compliance requirements. This increasingly complex web of regulations is significantly increasing the cost of compliance for financial planners.

An agenda that aims high

While recognising these costs are a significant burden for financial planners, it’s also the case that strict and fit-for-purpose regulation is essential for avoiding misconduct and safeguarding clients. All the ideas put forward in the Affordable Advice, Sustainable ProfessionPolicy Platform are intended to streamline the regulatory framework without in any way compromising the effectiveness of regulators or consumer protections.

Bringing together oversight, registration, fees and standards under a single entity would create many advantages for our profession and for Australians seeking high-quality affordable financial advice. Self-accountability to a regulator would also see professional financial planners only held responsible for what they do, not the conduct of other members of the industry as has often been the case.

With a more streamlined, straightforward and cost-effective regulatory framework to support best practice, ethical conduct and professional standards, financial planners and their clients would both reap the benefits. With reduced regulatory and compliance costs, financial planners would have greater flexibility to provide services at a scale and for a fee that matches individual needs

The practical way forward

While a single entity approach might be one the Government could take if they were starting from scratch, it seems unlikely that this will happen in the near future. However, recent comments from Senator Jane Hume, Assistant Minister for Superannuation, Financial Services and Financial Technology suggest that she recognises the extent of the regulatory burden financial planners are experiencing and is aligned with our view that a simpler way forward is necessary and important.

When addressing a Licensee Summit last month, Senator Hume said the government is working on a plan to “reduce the number of regulatory burdens on financial advisers.” “How many regulators can go into a financial adviser’s office and audit them in a one-year period is quite extraordinary,” she said. “I am actually surprised some financial advisers don’t spend their lives being audited. We actually want to reduce the number of organisations that can infiltrate and impose on a financial adviser’s business so they can get on with what they do best.”

Perhaps Senator Hume’s comments give us cause for hope that the Government welcomes these new recommendations on regulation of financial advice, and that practical action will follow.

You can download the Policy Platform in full from the FPA website at https://fpa.com.au/advocacy/fpa-policy-platform. We welcome comments and conversations on this document from members on our FPA Community Portal https://community.fpa.com.au.