The best thing about lawyer Michelle Levy’s consultation paper for her Quality of Advice review, published by Treasury on Monday, is that she is not tinkering, but thinking big, and she also wants to get rid of the cursed Statement of Advice.
The worst thing is that she doesn’t think big enough.
The regulation of financial advice in Australia has been a disaster and a debacle, swinging from not enough to too much of the wrong sort.
Over-compliance has made financial advice far too expensive and largely useless.
The controversial centrepiece of Levy’s ideas is that the duty of a financial adviser to act in the best interests of their client should be replaced with a requirement to provide “good advice”.
It’s controversial because consumer advocates wonder whether this means advisers will sometimes act against their client’s best interests, but still comply with the law because it’s good advice, whatever that means.
In her consultation paper, Levy writes: “‘Good advice’ is advice that would be reasonably likely to benefit the client, having regard to the information that is available to the provider at the time the advice is provided.
“This proposal is aimed at reducing regulatory complexity and burden while improving the quality of advice.”
Nice aim, and if it helps to get rid of the ridiculous documents that clients are handed by their advisers, to be vastly unread, I’m all in favour of it, although it’s a bit hard to see how, exactly, it would do that on its own.
In fact, Michelle Levy wonders whether clients want written advice at all: “In my view”, she says, “the law should encourage and allow providers to provide advice in the way that best suits their customers”. Agreed!
But what would best suit the customers? This is not a question asked often.
A short history lesson
The financial advice industry came into existence as the marketing and distribution arm of the investment industry, which paid commissions for the sale of their products. In the early days, the “advisers”, as they laughingly called themselves, added the investment products to the life insurance policies they were selling.
People thought they were getting advice when, in fact, they were getting sales, without being told that. The result was the Hayne royal commission, followed by humiliation and fiasco, and the exit of all of the banks from financial advice with their tails between their legs.
AMP battles on, a bit like the black knight in Monty Python (“it’s just a flesh wound”), trying to make a profit out of advice, so far without success.
The industry really only exists now because of the failure of super funds to provide a seamless retirement solution.
Lump sums dominate
Super funds – industry and retail – have regarded themselves only as saving machines that hand a lump of money to members when they retire and say goodbye and good luck.
The newly enriched retirees then serve themselves up to a financial adviser because it’s the first time they have possessed this much money and don’t know what to do with it. For a while, those advisers were skimming 10 per cent and shoving unsuspecting lambs into financial slaughterhouses that invested the money until it was gone, or simply ran off with it.
Then “conflicted remuneration” was banned. At the same time, a series of reforms were introduced to improve (increase) the information that clients were getting.
It has been a kind of “belt and braces” approach – not only were conflicts of interest removed, but clients were buried under a mountain of paperwork designed to counter the conflicts of interest, papers that they would never read but which increased the cost of the advice to a $5000 flagfall, and then a meter that runs forever.
Almost all financial advice clients are retirees with a lump sum. It’s true that a lot of 40-year-olds are now getting financial advice, but those numbers are still tiny.
If super funds suddenly shifted to providing retirement income instead of compounded savings that culminated in a lottery win, the financial advice industry would disappear in a puff of smoke.
But it’s too late for that. Super funds realise their mistake and are slowly turning their Queen Marys towards focusing on retirement incomes, but it’s slow and their members are sceptical.
They have been encouraged by super fund marketing to salivate over the retirement lump sum for too long, so that’s what they want – to take a cruise or two before settling into life on a part-pension and whatever the financial adviser gives them.
A lack of trust
As I see it, the fundamental problem is that the regulation is based on the proposition that financial advisers cannot be trusted.
Most can be trusted, but enough have been such scoundrels that the assumption of legislators has been that they must all be treated as scoundrels because the political blowback of a big scam is horrendous.
So the question that must be answered before the next stage of compliance reform is: Has the removal of commissions and other conflicted remuneration made financial advisers trustworthy?
Or to put it another way: Is the number of scoundrels now small enough that regulation can be handled by a vigorous copper rubbing out and locking up the bad eggs, so the other would-be crooks are too frightened to cook up a scam?
I suspect we may be close to that point, although we’d need a more vigorous copper than the current Australian Securities and Investments Commission.
Monday’s Four Corners about the appalling Greywolf scams, about which complaints were made to ASIC but not followed up, suggest that this regulator has too much on its plate.
ASIC is regulating both the advice and the investment products advised on, as well as corporations and directors, business registration and names, consumer affairs, liquidators, auditors and insurers. It’s way too much.
A good starting reform would be to take the regulation of financial advice (not products) off ASIC and create a separate, specialised regulator who does nothing but keep an eye on advisers.
It should have been done years ago, when the regulation of banks was taken off the Reserve Bank and put into the newly created APRA.
In my view, the whole aim of reform in this area should be to achieve the sort of trust in our financial advisers that we have in our dentists. We lie down, open wide, and let them do mysterious things in our mouths, even when it’s the first time at that dentist. But it’s OK because we trust dentists, as a class.
The ban on commissions, plus a broad requirement to provide well-defined “good advice”, minimum education standards and a very active specialist regulator that isn’t ASIC rubbing out the scoundrels, might do the trick.
Alan Kohler writes twice a week for The New Daily. He is also editor in chief of Eureka Report and finance presenter on ABC news
The New Daily is owned by Industry Super Holdings
