Consumer protection: is it enough?

Only one in five Australians currently receives financial advice. With storm clouds over the global economy, it is imperative reforms are put in place to raise the professional, educational and ethical standards of financial advisers to encourage more individuals to participate.

While the Institute of Public Accountants (IPA) has always advocated for financial advice to be accessible and affordable, there must also be an assurance this advice is professional and of the highest ethical standard. The objective of recent parliamentary inquiries is to ensure consumers and their families are not only protected, but will also benefit from the provision of quality advice in the future.

The IPA believes action to enhance the protection of consumers should be directed primarily at reducing the incidence of licensee misconduct that causes loss or damage. Accordingly, the IPA encourages a ‘prevention’ approach to any proposed reforms to reduce such misconduct, including the raising of current minimum levels of adviser education, a co-regulatory model between professional bodies and regulators, stronger sanctions on those not licensed and other gatekeepers who may be responsible for any loss, the acceleration of financial literacy of consumers and the strengthening of current compensation requirements.

It is arguable consumers of financial advice currently receive protection and certainty at levels never seen before in this country. The introduction of the Future of Financial Advice (FOFA) reforms have helped consumers more easily understand what advice they are getting, who they are getting it from, how much they will pay and how they will pay for it.

However, there are certain areas within the financial services industry where consumer protection could be improved, particularly with respect to the following situations:

  • Retail clients need greater protection when receiving financial advice from those who are not licensed or authorised and who are perceived to have a growing influence on individuals establishing SMSFs.
  • The Australian Securities and Investments Commission’s (ASIC) enforcement activities need greater resourcing (we note the recent and ongoing cuts to ASIC funding) to cover advice to retail clients from those who do hold an Australian financial services licence (AFSL), or operate outside the scope of their licence/authorisation, and have limited or no compensation arrangements in place.
  • The minimum level of education standards required to hold an AFSL or be an authorised representative should be reviewed along with professional and ethical standards.
  • A more comprehensive statutory compensation scheme of last resort to provide a safety net in circumstances where the financial services provider becomes insolvent or is otherwise unable to meet outstanding claims for compensation, preferably to be integrated with existing schemes.
  • Stronger whistleblower protections are needed to encourage individuals within the financial planning industry to report misconduct or dishonest or illegal activity without fear of breaches of confidentiality or subsequent litigation and victimisation.
  • Part 23 of the Superannuation Industry (Supervision) (SIS) Act only enables the trustee/s of Australian Prudential Regulation Authority-regulated superannuation funds to apply to the minister for a grant of financial assistance where the fund has suffered loss as a result of fraudulent conduct or theft. As identified in the Parliamentary Joint Committee on Corporations and Financial Services inquiry into the collapse of Trio Capital, this provision does not extend to trustees of SMSFs, the biggest and fastest-growing segment of the superannuation industry today. In such circumstances, SMSFs would need to establish that the licensee had engaged in dishonest conduct in breach of section1041G of the Corporations Act. This provision of the SIS Act should be extended to SMSFs.
  • External dispute resolution (EDR) schemes, such as the Financial Ombudsman Service, cannot deal with disputes where the value of the applicant’s claim exceeds $500,000 and can only award compensation of up to $313,500 for investment complaints and $150,000 for insurance complaints. These thresholds should be increased to reduce the potential gap between claim and monetary award. This would result in more disputes being referred to the EDR schemes and fewer to the courts, making it a cheaper and quicker option for compensation claims.
  • Consumers can be significantly restricted in claiming compensation for loss as the legal obligations and rights placed on product issuers are significantly ‘under-weighted’ compared to those placed on the licensed financial advice community. The IPA recommends placing greater accountability on others in the value chain (such as product providers, directors and auditors) found to be responsible for the cause of loss.

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