PJC Report on Education and Advice Standards

Background

After years of instability, the advice industry appears to be settling into the new Future of Financial Advice (FoFA) regime. However, one element of advice reform which has lagged behind the rest has been the education and conduct standards considered necessary to truly elevate the industry into a profession.

While the Australian Securities and Investments Commission (ASIC) attempted to progress this element of the debate in 2011, releasing Consultation Paper 153 – Licensing: Assessment and professional development framework for financial advisers, and again in 2013 with Consultation Paper 212 – Licensing: Training of financial product advisers, the focus on education requirements was overshadowed by the more immediate need to implement the FoFA legislative reforms, and ASIC’s proposals were placed on hold.

In July 2014, amidst the FoFA merry-go-round, a new Parliamentary inquiry was initiated by Shadow Treasurer, Chris Bowen. Initially intended as a strike against the Government’s FoFA amendments and its failure to respond to the Commonwealth Bank advice scandal, the inquiry’s terms of reference were adjusted to focus less on past events and more on the adequacy of current advice qualifications and professional standards.

Specifically, the PJC was asked to consider proposals to lift the professional, ethical and education standards in the financial services industry, including:

• The adequacy of current qualifications required by financial advisers
• The implications, including implications for competition and the cost of regulation for industry participants of the financial advice sector being required to adopt:
  • Professional standards or rules of professional conduct which would govern the professional and ethical behaviour of financial advisers, and
  • Professional regulation of such standards or rules
• The recognition of professional bodies by ASIC

Submissions closed on 5 September, 2014, and public hearings were conducted in Sydney and Melbourne during October. The PJC’s final report was issued on 19 December, after Parliament had risen for the year, and was subsequently tabled on 9 February, 2015.

Assistant Treasurer, Josh Frydenberg, has since welcomed the report, and acknowledged the very important role financial advisers play in Australia.

“The Committee’s report makes it clear that the current regulatory arrangements dealing with training of financial advisers are no longer sufficient to adequately protect consumers and maintain public confidence in the industry,” Mr Frydenberg said.

He called on the industry to capitalise on this positive momentum and put in place an “…enduring framework to improve the qualifications and competence of financial advisers, and to enhance the financial advice industry’s professional standards and ethics”.

Recommendations

The PJC’s report contained 14 recommendations to increase the professional, ethical and education standards applied to financial advisers. The key changes are summarised below…

General/Personal advice

Recommendations one, two and three of the report relate to the terminology used to define the delivery of financial advice. The PJC has recommended that:

• The term ‘general advice’ be replaced with the term ‘product sales information’
• The term ‘personal advice’ be replaced with ‘financial advice’
• Only those individuals registered as a financial adviser be allowed to provide ‘financial advice’

Details

The primary driver for these recommendations, as noted in the PJC’s report, was to protect consumers from the ‘sales-advice’ conflict that exists in the market, due largely to vertically integrated businesses. This conflict was best described by an earlier inquiry into financial products and services, which stated 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.’ (2009 PJC inquiry into financial products and services in Australia)

In making its recommendations to change the terms ‘general’ and ‘personal’ advice, the PJC noted the findings of the Financial System Inquiry (FSI), which 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.

The PJC argued that while not the sole solution to protect consumers from conflicted advice, 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.

The Committee noted that while it had not received a significant body of evidence on the proposal to change ‘personal advice’ to ‘financial advice’, the change in terminology was likely to provide a clearer system for consumers, and therefore was worthy of further consideration by the Government.

Implications

The majority of submissions made to the PJC on advice terminology supported the need for less ambiguous terminology. Many recommended that consumer testing be conducted before settling on the appropriate alternative for ‘general advice’.

New advice networking group, XY Adviser, recently issued a response to the PJC report, stating they agreed with the recommendation to change the language surrounding advice:

‘We strongly support this idea, as it helps clients understand the process they are going through when speaking to an adviser. Clients should know when they walk into an adviser’s office with a particular problem, that the problem they walked in with can be handled by that particular adviser. Clearing up what each adviser does is a great start. For example, if I want my skin checked for sun damage I go see a dermatologist, not a podiatrist’ XY Adviser stated.

One section of the industry that may be adversely impacted, however, is the superannuation sector. Some exemptions currently apply for organisations providing ‘intra-fund’ advice to clients; that is, advice on simple transactions and/or recommendations based on the specific fund in which the client is currently a member. It is not clear whether intra-fund advice will need to be re-classified, to fall under either ‘product sales information’ or ‘financial advice’, or if those providing this service will need to be registered financial advisers.

Restriction of the term ‘financial adviser’/Adviser registration

As set out above, the PJC has recommended that only those individuals who are ‘registered’ financial advisers should be allowed to provide ‘financial advice’. Further, the Committee has called on the Government to bring forward legislation that protects the titles ‘financial adviser’ and ‘financial planner’, so that they can only be used by registered individuals.

In order to become ‘registered’, a person needs to be:

• A provider of personal (financial) advice under an AFSL
• A member of an approved professional association (see: Ethics and professional association membership)
• Identified by the professional association as having met the mandatory professional entry requirements, and having completed the registration exam and assessable components of the ‘professional year’ (see: Minimum educational standards and registration exam)

Each ‘registered’ financial adviser will be listed on ASIC’s public adviser register and given a unique identifier which is retained by the individual, regardless of their licensee or professional association membership.

Details

The PJC said it was concerned about the lack of progress the industry had made in addressing the issues identified in its 2009 review into financial products and services. By restricting the use of the titles ‘financial adviser/planner’ to only those included on a public register, the Committee argued that consumers would have the ability to clearly identify those advice providers who were licensed, appropriately qualified, and who were governed by a code of ethics.

To further protect consumers, the Committee suggested that an adviser who no longer met one of the registration criteria continue to be listed on the public register for the purposes of transparency. For example, 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 as a ‘suspended’ adviser. An adviser who has their 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 their AFSL, would be listed as ‘banned’.

Implications

The Financial Planning Association (FPA) has long lobbied for the enshrinement in law of the terms ‘financial planner/adviser’. General Manager of Policy and Conduct, Dante De Gori, said the recommendation made by the PJC that you can only use the term ‘financial planner/adviser’ if you are on the register, combined with the proposal that only people who are members of a recognised professional association can be on the register, effectively enshrines the terms and is therefore a welcome policy position.

Minimum educational standards and registration exam

As expected, the Committee has recommended that the minimum educational standard for financial advisers should be increased to a degree qualification at Australian Qualification Framework level seven.

In addition, all graduates would be expected to complete a ‘professional year’, under the supervision of their professional association, before being able to sit the adviser registration exam. This professional year would include structured mentoring, to help drive the ethical application of knowledge obtained through study.

Finally, the PJC recommended that all practitioners complete ongoing professional development, administered through their professional association.

Details

The PJC noted there exists a high level of concern that RG 146 (the current minimum educational standard for financial advisers as dictated by ASIC) does not deliver appropriate standards. The potential for RG 146 requirements to be met through the completion of a short training course, possibly only requiring a few hours of study, was, the Committee noted, a common concern. In contrast to financial advice, other professions – such as engineering, accounting and law – have a training requirement of upwards from three years.

In light of the evidence presented by numerous stakeholders during the inquiry, the PJC determined that a tertiary degree would be the most appropriate minimum training level for financial advisers.

The PJC also accepted the view, expressed in a number of submissions and by witnesses, that increasing minimum training requirements is not sufficient on its own to comprehensively improve consumer outcomes.

To address these concerns, it recommended all graduates undertake a professional year during which certain core competencies and theory requirements would be assessed by a relevant professional association.

Under the PJC’s proposal, the final threshold test, prior to a person’s registration as a financial adviser, would be a registration exam. The exam would provide a way to mandate a minimum national standard and level of technical competency.

Once registered, advisers would then be required to undertake continuing professional development (CPD). The PJC said there was widespread support for this element of its education proposal, particularly from the industry’s associations, who would likely be involved in the administration of ongoing CPD.

Implications

One of the key concerns expressed by risk focused advisers in relation to mandatory minimum competencies and associated assessments is that the courses will be too broad to effectively assess the specific skills of a risk specialist adviser. In recent weeks, dealer groups Synchron and Bombora have called for a separation of risk specialists and financial planners.

As Wayne Handley, Founder of Bombora, explained: “All of the professions to which the financial advice sector aspires have specialisations. Look at accounting, law and medicine – they all have specialist practitioners. Consumers clearly understand that the professionals they deal with are either generalists, or specialists, which means they can make an informed decision about who to see when they have a particular need.”

Ethics and professional association membership

While acknowledging that there are many financial advisers who operate to very high ethical standards, the Committee said it believes that for far too long there has been a significant minority of financial advisers being driven by self-interest. It is the Committee’s view that professional ethics should be a driver of the behaviour of financial advisers.

For this reason, the PJC has recommended that all registered financial advisers must be members of an approved professional association, and subject to that association’s code of professional conduct.

Details

In its submission, ASIC advised the Committee to consider that the financial advice industry has a significant amount of work to do to improve the culture of financial advisers, and to move from operating as a sales-based culture to a profession exercising independent judgement in the best interests of their clients.

Based on this and other submissions, the PJC has determined that the most appropriate way of establishing an ethical, accountable culture within financial advice is to require that every financial adviser become a member of a professional association that is approved by the Professional Standards Councils. This means registered advisers will be working under the auspices of at least one compliant code of ethics.

Implications

Currently, none of the major financial advice associations are approved by the PSC. The FPA has given its support to the accreditation process recommended by the PJC, and earlier this year confirmed it was ‘well down the path’ to achieving accreditation by the PSC.

It is also not currently compulsory for financial advisers to belong to an industry association. Nor is it clear, according to the PJC, to what extent the associations’ codes of conduct are followed, investigated and enforced.

ASIC figures suggest that there are approximately 18,000 financial advisers operating in Australia. The FPA says it has more than 8,000 practitioner members, while the Association of Financial Advisers (AFA) has a little under 3,000. But as there are numerous practitioners who hold multiple memberships, it is difficult to pinpoint exactly how many advisers have no professional association affiliation.

The AFA and FPA have confirmed they are well positioned to handle an influx of members if the recommendation is accepted, however the long term impact of this proposal on the associations’ cultures and administration is difficult to quantify.

New body to oversee education requirements

In order to ensure that all degrees in financial advice meet a similar standard, and that there is one centrally administered curriculum and standardised framework, the PJC has recommended the establishment of an independent Finance Professionals Education Council (FPEC).

The FPEC would:

• Be controlled and funded by professional associations which have been approved by the PSC
• Comprise a representative from each approved professional association, an agreed number of academics, at least one consumer advocate and an ethicist
• Receive advice from ASIC about local and international trends and best practices to inform ongoing curriculum review
• Set curriculum requirements for core subjects and sector specific subjects (eg: self-managed superannuation fund services, financial advice, insurance/risk, or markets)
• Develop a standardised framework and standard for the graduate professional year to be administered by professional associations
• Develop and administer, through an external, independent invigilator, a registration exam at the end of the professional year
• Establish and maintain the professional pathway for financial advisers, including recognised prior learning provisions and continuing professional development

Details

The PJC said it believed having multiple bodies administering the educational requirements for financial advisers was not in the best interests of consumers. However, a single body which is responsible for maintaining educational, professional and ethical standards does not currently exist within the financial advice sector.

Rather than require an existing regulatory body, such as ASIC or the PSC to take on this function, the Committee proposed the introduction of a new body, to be controlled and funded by the industry’s professional associations. This body would be charged with the responsibility of setting and administering a single adviser competency framework.

While noting the existence of the FPA’s Financial Planning Education Council, established for a very similar purpose, the PJC determined that a wider representation of industry stakeholders was needed.

Among the duties of the FPEC would be to set the transition requirements and prior learning/experience criteria for existing advisers to move into the new regime.

Implications

The PJC has recommended that the FPEC be funded and controlled by the industry’s professional associations. This may lead to an increase in membership fees, although no association has yet to comment on this.

The other issue, as already noted, is that none of the major financial advice associations currently have PSC approval, and therefore cannot put forward a representative for the FPEC. In its transitional arrangements timeline (see below), the PJC has recommended the FPEC be established by 1 July, 2015, because “…swift and decisive action is required in order to raise the professional, ethical and education standards of financial advisers”. This is likely to put significant pressure on the major financial advice associations to gain PSC approval within six months, in order to participate in the discussion about minimum education standards and prior learning criteria.

The PJC has acknowledged this discrepancy within its report, and suggested that a transitional position could be adopted, in which representation on the FPEC should be open to professional associations that have individual members (as opposed to corporate members) working in the financial services sector who intend to establish a Professional Standards Scheme under the PSC.

Transitional arrangements

In framing its recommendations, the PJC said it had been mindful of the need for transitional arrangements, but was firmly of the view that swift and decisive action is required in order to raise standards. On this basis, the Committee has recommended that the Government require implementation of these reforms within three years of response to the report.

Details

Acknowledging the significant transformation that would need to be undertaken by the industry if its recommendations were accepted, the PJC has provided a recommended transition timeline.

The FPEC will be charged with the responsibility of setting prior learning criteria, to give professionals transitioning from related fields, or existing advisers without a degree, a pathway into the new requirements.

However, the PJC has flagged that all advisers would still be required to complete a modified professional year and pass the registration exam in order to be registered by ASIC.

Implications

The AFA has expressed concerns that the specifics of the transitional arrangements were not fully scoped by the PJC, given the level of detail provided for other recommendations.

AFA COO, Phil Anderson, said while the industry should transition to higher standards, it was vital that this was done with minimal disruption to the day to day activities of existing advisers already in the field working with clients.

In summary

As Mr Anderson noted in his address at this year’s AFA GenXt Roadshow, the PJC report received unanimous support from both sides of Parliament. “The Government is likely to favour the recommendations made by the PJC as a way to resolve the outstanding issues surrounding FoFA,” Mr Anderson said.

The FPA’s CEO, Mark Rantall, is similarly confident that the majority of the recommendations will be accepted by the Government, and has urged the industry to “…line up behind some of these important changes and to lift, once and for all, the standards of advice in this country”.

The Government says it will now consult with industry on the PJC’s recommendations up until the end of June this year.

Emily Saint-Smith is riskinfo’s Senior Journalist.

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