Setting New Standards to Create a New Mindset

While the Life Insurance Framework has been occupying the headlines, financial advisers also face some significant changes in the area of education and professional standards with new legislation set to pass Federal Parliament later this year.
While the legislation will set minimum standards for both new and existing advisers it will have longer term impacts according to a number of commentators.
As Jason Spits writes in this article, these will include higher barriers to entry to the sector which in turn will both keep out some and attract others as well as lifting consumer perceptions of advice as a profession.
While much remains to be revealed, including the new body that will set standards, the consensus view is that education and professionalism in financial advice is about to undergo a change which will define the profession for years to come.

It is a common refrain which grates with many advisers, but unfortunately has a ring of truth to it – that financial advisers are poorly trained and qualified at a low level – and thus by extension are not as trusted as other advice professions.

This thought was given voice in an interview on Sydney radio in December 2015 when even the Assistant Treasurer, Kelly O’Dwyer, mistakenly stated there was little stopping anyone hanging out their shingle and start providing financial advice.

While O’Dwyer overstepped the mark in the minds of many, the minimum standard of Regulatory Guide 146 (RG146) does sit uneasily in the public mind which is why moves to finally introduce new higher levels of education and professional standards have been welcomed.

They have been a long time coming with the first calls to lift standards starting with a Parliamentary Joint Committee in 2009 and then restated over the years by the Australian Securities and Investments Commission (ASIC), both sides of Federal Parliament and any number of consumer and media groups following a product or advice failure.

“These pieces of legislative change are part of a broader narrative around financial advice and the hardest component to get in that narrative is community sanction, where people give advice and advisers a privileged place in society,”

A lasting impact with consumers

While it has been three years since the introduction of the Future of Financial Advice (FoFA) reforms, the new legislation – the Corporations Amendment (Professional Standards of Financial Advisers) Bill 2015 – redefining education and professional standards is likely to have a deeper and more lasting impact than FoFA and the Life Insurance Framework (LIF) that is also due to pass Federal Parliament later this year.

Griffith University, Associate Professor and Head of Finance and Financial Planning, Griffith Business School, Mark Brimble says this is because the changes to education and professional standards will provide community approval to financial planning and advice.

“These pieces of legislative change are part of a broader narrative around financial advice and the hardest component to get in that narrative is community sanction, where people give advice and advisers a privileged place in society,” Brimble said.

“The changes will also build a professional culture across the board instead of in pockets throughout the industry.”

Financial Planning Association (FPA), Chief Executive, Dante De Gori believes the new standards will also set a higher benchmark for quality and a higher barrier to entry, transforming the perceptions of advice in the coming years.

“We expect the impact of the new legislation will move beyond education, while also recognising education alone will not solve all the issues around the quality of advice. Yet, it is the entry barrier we need to have,” De Gori said.

“All professions have this, and while we have an entry barrier at present the FPA has long argued it is too low and needs to be higher.”

“The degree level qualification will be an entry barrier and people look at professions and their entry barriers and we want financial planning and advice to be equal to that examination and bring the occupation onto a professional benchmark.”

Lifting barriers to entry

As someone involved with undergraduate education in financial planning and advice, Brimble testifies to the impact a low barrier to entry has on those entering the profession and their community.

He states that about 45% of students entering financial planning courses at Griffith University are school leavers and many were unaware that a higher education and professional pathway into financial advice existed.

“From our conversations with students and their key influencers – family, friends and so on – in many cases they did not realise there was a professional pathway and only knew of financial planning from mainstream media coverage,” Brimble said.

“In the past, when some of these students realised how low the current entry standard is compared to law or accounting they have discontinued their studies in financial planning in favour of something else or quit university all together and opted for the lower route into the industry.”

“This is an important part of the narrative around higher standards, not just to the consumer, but to students as well so we can attract the best and brightest into the profession.”

The long term impact is that adviser’s will have a role in reshaping the perspective of consumers by focusing on their needs, not markets, investments or products,”

Altering adviser behaviour

Association of Financial Advisers (AFA), General Manager, Member Services & Campus AFA, Nick Hakes sees the consumer confidence and perception issue surrounding advice as one of the long term impact of the new legislation but also believes it will in turn shape what advisers do in response to those improved perceptions.

“In the short term advisers who invest in their education and practical skills will be able to do more things, like offer estate planning advice, or respond to changed market conditions such as the new remuneration model under LIF. The long term impact is that adviser’s will have a role in reshaping the perspective of consumers by focusing on their needs, not markets, investments or products,” Hakes said.

“We also see the new standards shifting adviser education to the behavioural aspect of advice and dealing with clients on trigger issues of importance to them and we encourage advisers to get started on this path now because it is something they will have to do before the proposed 2019 deadline. At the same time, it never ends, consumers will decide the future state of our profession so it is important advisers think about this on an ongoing basis.”

Change will not be overnight

How long it will take for these changes to start washing through the financial advice sector is hard to gauge according to De Gori who points to FoFA and that its impacts are only starting to be felt three years after its initial introduction.

He said the transition timeframe will stagger some of the impacts as advisers move across to the new standards by 2019 but believes the new legislation will mark the start of a new period for advisers.

“As soon as the legislation is in place a signal will be sent, that advisers will have higher standards that are on par with other professionals,” De Gori said.

The change will be reflected in advisers and their behaviour but it will not be overnight, it will be a generational change and in many parts of the industry is has already begun,” De Gori added pointing out that other professions have also progressed over the years.

“Other professions have not started at their current high points and financial planning is relatively young compared to those professions but it is on a fast track approach and has had rapid evolution in the past 10-20 years.”

Brimble says the push by the Federal Government to introduce legislation shows this evolution has not been smooth or consistent and the current moves are a result of more convergence of thinking around the nature and quality of advice.

He claims there have been missed opportunities in the past 15-20 years but now a greater consensus and expediency exists around making changes to products and advice, spurred on by a series of catalysts within the advice area.

“There has been uneven progression between associations, licensees and regulators as well as opportunities to progress standards before the Government came in over the top and opted for legislation,” Brimble said.

“With the benefit of hindsight the industry may have pursued this more quickly and now it appears it may not be in place before the next Federal election.”

Despite this, he said advisers and planning groups are already aware of what the new minimum standards will be and may opt for those, or even higher standards before the changes are implemented.

A measurable difference?

However, will they actually make a long term difference and can advisers expect to see less negative news coverage once the new standards are in place?

Definitely, according to De Gori who states that research conducted by Investment Trends, CoreData and the Financial Planning Standards Board shows that trust and confidence issues rank in the top three reasons why people do not seek financial advice.

“We want to move away from the stories that claim a hairdresser is more highly qualified than a financial planner or adviser.”

“Will the new education and professional standards change that view? I believe it will,” De Gori said.

“There are many people who already use an adviser and this will not change their perception but there are many more people without financial advice who have a perception of the profession and this will change that view.”

“We want to move away from the stories that claim a hairdresser is more highly qualified than a financial planner or adviser.”

Hakes also expects a change in perception as advisers wrestle with the ethical considerations of their profession as well, looking at ‘what they could do’ compared with ‘what they should do’. He states this type of attitude comes from a peer driven culture of knowledge, behaviour and accountability which is drawn to higher standards of education and professionalism.

“If we just look at standards as tool of policing then they usually appear at the end of the process when things go wrong. However, if the focus is on professionalism and culture first then standards are something advisers can aspire to, not run from them,” Hakes said.

“Our accountability is not to regulation or law only but to the public good and that is where we should derive our behaviour.”

RG146: The history of a training standard

Financial advisers with good memories may well recall the introduction of the Financial Services Reform Act (FSRA) in 2001. Much like the FoFA reforms more than a decade later the FSRA introduced a number of important changes defining the conditions under which advice could be provided.

Importantly, the FRSA introduced Policy Statement 146 (PS146) later renamed to RG 146 which prescribed adequate levels of training, competence, and experience for those giving financial product advice to retail investors.

While it was an important development in the training of financial advisers, it was focused on ‘financial product advice’ instead of on advice best suited to the needs of a client, an issue which was specifically addressed by FoFA.

Why RG146 won’t cut it anymore

So, why is RG146 being replaced by legislation and a new standards setting body?

Firstly, it is important to remember that RG146 is still the current benchmark for all advisers entering and working in the industry and adherence to it is mandatory for the more than 20,000 registered financial planners and advisers in Australia.

At the same time, it has not been updated by ASIC – which currently has oversight in this area – since September 2012 when ASIC first proposed lifting the minimum standards with a wide ranging review of RG146.

The corporate regulator has also stopped updating the register of approved RG146 courses and education providers, urging those seeking training to check with education providers as to whether courses meet the standards described in RG146

In particular, RG146 sets the bar too low compared to other advice professions where an undergraduate degree level qualification has been the minimum entry standard for many years. In comparison, financial advisers are required to complete only a diploma and advanced diploma, a situation which has been come under criticism whenever poor advice is raised in the media.

This legislation came about following the release of a series of consultation papers by ASIC which sought to retain RG146 as a base level standard with the introduction of training on product and client related issues that would shift from the diploma level to the advanced diploma level and onto the bachelor level by the start of 2019.

In these papers, released in mid-2013, ASIC also first stated its case for a national registration exam and despite receiving widespread support from the advice sector, as well as further impetus from a number of Parliamentary and Senate inquiries, RG146 still remains unchanged.

Setting a new standard: the shift to new legislation

On 3 December 2015 the Federal Government announced it would introduce new legislation to raise the education, training and ethical standards of financial advisers.

The announcement followed the Government’s response to the Financial System Inquiry, which called for an increase in standards, following a similar call from Parliamentary Joint Committee in late 2014.

On that day in December the Government also released the exposure draft legislation for a one-month consultation period, with a number of industry groups – including the FPA and AFA – making submissions.

The Federal Government’s stated aim at the time was to have the legislation framed for consideration by Parliament in early 2016 and the establishment of a new standard setting body, set out in the legislation, by 1 July 2016. At the time of going to press the final legislation had not been released with doubts around the stated timeframes.

While the legislation will require advisers to adhere to a code of ethics it has not suggested which code and has instead put forward the creation and adoption of a model code of ethics for multiple professions in financial services.

The known-knowns: what the Government has announced

While much of the detail of the proposed changes will be contained in the final legislation, some will not be released until an independent standard setting body is set-up and builds out the timeframes, pathways and standards not explicitly covered in the legislation.

However, the proposed legislation contains the following changes:

  • New financial advisers will require a relevant degree and will also undertake a professional year and pass a national registration exam to enter the advice sector.
  • Existing advisers will move through a transition process and will need to complete appropriate degree equivalent training, or have a recognised transition pathway determined by the independent standard setting body, and pass a national registration exam.
  • All advisers will be required to undertake continuing professional development (CPD) and be party to a code of ethics.
  • The new education and training requirements will be effective from 1 July 2017, with the code of ethics requirements coming into force from 1 July 2019.
  • The Government will recognise an independent industry-established standard setting body, operational from 1 July 2016, that will develop and set education standards, professional year requirements, continuing professional development requirements and develop a comprehensive code of ethics for financial advisers.

The known-unknowns: what details have yet to be released

Both the FPA and AFA made submissions to the Federal Government stating the timeframe given to do so was unusually short – at just a month, over the 2015-2016 Christmas/New Year Period. More importantly the two groups highlighted a number of areas which have not been settled and will remain up in the air until after the legislation passes through Parliament.

Chief among these is the transitional arrangements for existing advisers with the legislation stating they will have to achieve an undergraduate degree level qualification by 1 July 2019. The FPA rejected this as impractical and impossible stating it was “…physically impossible for any individual to be able to complete a bachelor degree within 2 years (i.e. between 1 July 2017 and 30 June 2019), let alone doing so working full-time”.

The transition arrangements also ignore the current qualifications and training, experience, and ongoing education of existing financial planners and overlooks any prior learning below a degree level, effectively negating any RG146 level training and experience off the back of that training. The FPA and AFA stated the recognition of prior learning should be excluded from the legislation and left in the hands of the new standards setting body that will be created after the passing of the legislation.

Additionally, while the legislation will require advisers to adhere to a code of ethics it has not suggested which code and has instead put forward the creation and adoption of a model code of ethics for multiple professions in financial services.

The legislation also does not restrict the term ‘financial adviser’ or ‘financial planner’ to those people who had met the new education and standards framework but would still require those who have already achieved high levels of education and professionalism to take the national registration exam.

The non-specific nature of this code has been noted by the FPA, as well as the possibility that it may create conflicts with or be of a lower standard than codes of ethics and conduct held by the members of professional associations. However, the legislation has not made it mandatory to be a member of a professional association despite many of them possessing codes of ethics and conduct that are in line with the high standards set by the Professional Standards Councils.

The legislation also does not restrict the term ‘financial adviser’ or ‘financial planner’ to those people who had met the new education and standards framework but would still require those who have already achieved high levels of education and professionalism to take the national registration exam.

The practicalities of getting many thousands of advisers to undertake undergraduate degree level training as well as ongoing Continuing Professional Development (CPD) and meeting the standards of any code of ethics, and sitting an exam within a two-year timeframe has yet to be debated.

Yet that situation alone may boost calls to exempt planners who have reached the RG146 standard, conducted ongoing CPD and maintained a clear record with regulators, professional associations and insurers from having to sit the exam.