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Jurrasic dinosaur

The FASEA framework did not seem to make any allowances for accountants operating under a limited Australian financial services licence. Malavika Santhebennur finds out if the regime remains viable and what this treatment means for the future of accountants authorised to provide advice in this manner.

When the Financial Adviser Standards and Ethics Authority (FASEA) released its legislative instrument on relevant degrees, qualifications and course standards in December last year, the SMSF Association was quick to point out FASEA had ignored accountants who hold a limited Australian financial services licence (AFSL) to advise on SMSFs.

In its submission to FASEA, the industry body states the standards authority had effectively laid out a one-month time frame by the end of 2018 for existing accountants to consider applying for a limited licence or authorised representative status.

“Disregarding a legislated section of the financial advice framework appears to be contrary to FASEA’s purpose to set education, training and ethical standards for all financial advisers who provide personal advice on relevant financial products to retail clients,” the submission says.

When the accountants’ licensing exemption was scrapped from 1 July 2016, the industry was offered a new limited AFSL regime to enable professional accountants who hold a public practice certificate to provide a range of SMSF advice services and class-of-product advice.

The exemption previously allowed a recognised accountant to establish and wind up an SMSF without being licensed under the AFSL regime. But limited licensees were not allowed to provide full financial product advice, including product recommendations, in a broad range of areas.

Kath Bowler

“Most people don’t want to see planners, they don’t trust planners. And accountants who potentially could give them some valuable pointers legally aren’t able to give that advice. So I think the people missing out here are the consumers.”

Kath Bowler, Licensing for Accountants

The SMSF Association has called on FASEA to establish education and training requirements that are suitable for those who operate within the limited licence framework. This may include reducing the amount of FASEA-related units that need to be completed by existing limited licensee advisers. Furthermore, the industry body has asked for units that are specifically related to the advice they provide.

The omission of education standards specific to limited licensees begs the question of whether the limited licensing framework is still viable in light of the new education requirements for advisers.

Use-by date for limited licensing?

Self-managed Independent Superannuation Funds Association managing director Michael Lorimer says the limited licensing regime has never been viable because those who operate under it are too restricted in what they can advise on.

Lorimer also argues accountants advising under a limited licence can never satisfy the best interest duty.

“If I’m advising you under a limited licence, which only allows me to swim between two flags and not outside, which could be the best for the client, and I recommend you do something within those flags, what outcomes are going to be achieved?” he asks.

“So it was never going to work. And I think the limited licensing system was a worse alternative to the previous accountant’s exemption, which was probably never necessary to start with anyway.”

In his conversations with practitioners, Lorimer has discovered many accountants servicing SMSFs in their practice sought a limited licence after the exemption was scrapped because of a belief they would need a limited licence or would need to be an authorised representative under a limited licensee to continue providing the services they did in the past for their SMSF clients.

However, delving deeper, he discovered these accountants were not providing investment advice, nor were they recommending clients start pensions or withdraw money. They may, however, be providing advice from a tax perspective where they advise on tax ramifications from commencing a pension, or the tax ramifications of accessing benefits when a client turns 60.

“The more of those conversations you have, the more you understand that, really, what the vast majority of these people are doing is answering clients’ questions and telling them what the tax consequences are of doing certain things and then attending to the compliance aspects,” he says.

“None of which needs a limited licence or a full licence.”

He reiterates his stance about the shortcomings of the limited licensing regime in light of FASEA’s stipulated requirements for advisers, stating the framework has no flexibility whatsoever, regardless of what a licence allows them to do.

“I had the view for a long time that you’re either in the business of providing services that necessarily require you to be licensed or you’re not. You’re not somewhere in between. So you’re either 100 per cent or you’re zero,” he explains.

According to Lorimer, advisers who opt for a licence should choose the full licensing path and comply with everything required within this regime under the Corporations Act, including issuing detailed statements of advice.

“I spoke to a group just recently who did go down the limited licensing path, didn’t get their own licence, became authorised representatives under the limited licensing framework, and in 18 months haven’t issued a single statement of advice,” he says.

“What that probably means is there’s a whole bunch of situations where they possibly should have issued a statement of advice, but they’ve gone out of their way from a practice perspective to make sure that how they deal with their SMSFs isn’t in an advice capacity.

“So why on earth would you get a limited licence?”

He urges professional bodies to invest heavily in educating their members on what they are permitted to do under the Corporations Act.

Licensing for Accountants founder and chief executive Kath Bowler points to many failings of the limited licensing regime, including the fact it does not recognise SMSF advice is an extension of tax and accounting work. Bowler says it is not a replacement for compliance services.

“Accountants are still going to offer compliance services to their clients and, for clients needing that extra service, they want to be able to offer it,” she says.

“Accountants with limited licensing have kept this type of licence because they want to be accountants, they don’t want to be financial planners. So there’s just a complete lack of recognition of what their role is and how that fits in.”

The FASEA framework suggests accountants working under a limited licence must choose between advice and compliance rather than offering advice services as an extension of the compliance services.

Bowler believes the limited licensing regime is viable in the short term because accountants are well placed to assist clients with complex SMSF structures and businesses.

She adds though, in the longer term, the limited licensing structure needs to change to accommodate the fact servicing an SMSF is an extension of business and accounting services and to recognise the role accountants play for clients at the lower end and higher end.

“Those that have the limited licence, the compliance requirements are quite onerous and potentially don’t need to be as onerous if they’re already a member of the professional body and running businesses,” she says.

She also identifies there is uncertainty around whether accountants can provide contributions and pension advice without a licence, and says it seems excessive to require a licence to give advice just in these areas.

“Is it achieving the objective of consumer protection or is it actually harming that because now you’re basically leaving consumers to their own devices and not giving them any guidance?” she says.

“Most people don’t want to see planners, they don’t trust planners. And accountants who potentially could give them some valuable pointers legally aren’t able to give that advice. So I think the people missing out here are the consumers.”

Predictions of exodus

SMSF Association chief executive John Maroney says accountants advising on SMSFs are in the unenviable position of having to meet all of FASEA’s requirements, similar to a fully licensed adviser, even if they do not deliver broader advice services.

“We think that could encourage some accountants to stop providing SMSF advice and we think that will be a negative for SMSF trustees because that’s where a lot of them are getting advice from at the moment,” Maroney says.

“I think that will effectively reduce the number and range of potential advisers in the SMSF advice space.

“Also, it will mean a drain of knowledge from the sector because if people decide just to focus on other parts of their accounting business or if they decide to retire, that’s going to leave a gap in the availability of advice from knowledgeable and experienced accountants and we think that’s a risk for the sector.”

He says it is difficult to predict how many accountants may exit the SMSF advice space as a result of licensing and educational requirements, but expects those accountants whose SMSF advice business is marginal to decide to exit this space due to increased costs.

“Most of our members are continuing to stay members of the association and so intend to continue working in the area,” he says.

“But I think over the next 12 to 18 months as people start looking at the exam requirements and looking at what bridging courses they need to do, that will probably cause some of them to decide to cease their involvement or reduce their involvement.”

Chartered Accountants Australia and New Zealand senior policy adviser Bronny Speed confirms many chartered accountants operating under the limited licensing regime are SMSF specialists, and already would have completed a raft of education qualifications, special designations, compliance with codes of ethics, continuing professional development requirements and mentoring.

However, Speed says they also had to adapt to the limited licensing requirements following the scrapping of the accountants’ exemption.

“So it means for accountants, yes, we will see an exodus. And if there’s an exodus in advice for some chartered accountants, that’s not a good thing for the public,” she explains.

“For mums and dads and small businesses out there, chartered accountants provide the backbone of services for those people.

“Any exodus of chartered accountants is likely to significantly reduce the overall level of training and experience in the industry and be completely contrary to overall objectives of the new legislation.”

She foresees an exodus of accountants from activities that require a licence or a limited licence, adding they may continue with activities within superannuation that do not require a licence.

“They’ll do what they can as tax agents or what they can as chartered accountants, which is what many members are doing already,” she says.

KnowIT Digital director Wayne Wilson claims the FASEA education framework will “detonate” limited advice accountants.

Wilson says it can be very difficult to draw a distinction between what advice accountants can provide with and without a licence.

“I think what we’ll see is more than half of the approximately 600 limited licensees will just hand back their licence,” Wilson predicts.

“Some will just make one person in their practice be the go-to person for all SMSF matters and the specialist, and keep just one person licensed under a limited AFSL.

“A few might say if they have got to go down this path and there’s no point being a limited AFSL, they’re better off to be operating under a full-scale AFSL.”

He believes owning a limited licence is unviable due to the onerous nature of having to fulfil the same compliance obligations as someone with a full AFSL, while only being permitted to work in a small component of the industry.

Conversely, Bowler thinks there will be no exodus in the short term because providing SMSF services for clients is a lucrative business, which is why many accountants have remained in the space despite the hurdles and the compliance obligations.

She points out one SMSF client alone may generate up to $50,000 per year of income for an accountant to provide tax and accounting services.

“So you don’t want to not service that smaller segment of SMSF clients because they’re valuable for the business,” she says.

She speculates this might be the reason there was an influx of accountants applying for inclusion on the financial adviser register at the end of 2018, with firms helping accountants to become authorised to provide advice before the end of the year.

“It’s very difficult to see how it’ll play out because there’s such a strong need for the accountants to offer an SMSF service by certainly the mid and larger firms,” she says.

“FASEA is a very big hurdle and it’ll be interesting to see what will happen.”

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