Reforms to financial services have been ongoing for well over a decade and, as most accountants know, one of the most significant for their profession has been the Future of Financial Advice (FOFA) reforms. Whether or not these measures delivered has been exposed to some extent by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Below is an excerpt from the Institute of Public Accountants’ (IPA) submission to the interim report on this subject.
The underlying objective of the FOFA reforms is to improve the quality of financial advice while building trust and confidence in the financial planning industry through enhanced standards which align the interests of the adviser with the client and reduce conflicts of interest. The reforms also focus on facilitating access to financial advice, through the provision of simple or limited advice. The reforms also include the introduction of a requirement for advisers to act in the best interests of clients and a ban on conflicted remuneration, including commissions, volume payments and soft-dollar benefits.
Is there evidence of market failure?
As stated above, the policy objective of FOFA was to provide affordable and competent advice to Australian consumers. According to Australian Securities and Investments Commission (ASIC) Report 224 (December 2010), a survey at the time suggested that 60 per cent to 80 per cent of adult Australians have never used a financial adviser. In the eight years since this report and the introduction of FOFA, which was meant to increase the number of Australians accessing financial advice, we find that the numbers have not changed.
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in Background Paper 6 (Part A), Some Features of the Australian Financial Planning Industry, 2018, stated: “Public information indicates that between 20 per cent and 40 per cent of the Australian adult population use, or have used, a financial planner or adviser.”
The Productivity Commission (PC) observed that 48 per cent of Australian adults indicated having unmet financial advice needs (“Draft Report: Competition in the Australian Financial System”, January 2018), even though the number of financial advisers has grown by 41 per cent from 2009 to 2018.
The PC report found that the five main types of advice sought by consumers were:
- Superannuation and retirement advice.
- Loan and investment advice.
- SMSF advice.
- Other services, such as estate planning.
- Tax advice.
ASIC “Report 562: Financial Advice: Vertically Integrated Institutions and Conflicts of Interest”, January 2018, reviewed financial institutions’ approved product lists and found that they comprised 21 per cent in-house products and 79 per cent external products. However, as a result of receiving personal advice from the licensee’s advisers, 68 per cent of the total funds invested by customers were placed into in-house products, with 32 per cent of such funds invested in external products. The ASIC report went on to state the review found that overall, customers were not better off from the advice and that their best interests were not served. Of advisers, 44 per cent (both aligned and non-aligned) operated under a licence controlled by the 10 largest financial institutions.
Investment Trends’ “2017 Financial Advice Report” found demand for advice from financial planners is at a record high, with numbers of people intending to access advice increasing since 2013. However, financial planners are not able to turn this demand into actual clients, with planners typically losing three clients for every two they gain. According to the report, one of the main problems is the substantial difference between the amount Australians are willing to pay for advice ($750 on average) and planners’ estimated cost of delivering advice ($2500 on average). Over nine in 10 potential planner clients are open to conducting review meetings with someone other than their planner if it meant a reduction in fees.
Under the Corporations Act, generally, before the financial service is provided, a retail client must be provided with a financial services guide that contains information about remuneration, including commissions or other benefits to be received by an adviser. If personal advice is provided, the retail client also generally receives a statement of advice from an adviser which includes information about the advice and remuneration and commissions that might reasonably influence the adviser in providing advice. Before a product is provided, a retail client must further receive a product disclosure statement which must also include information about the cost of the product and information about payments that may impact on returns. By this stage the cost of advice has become more than some consumers are willing to pay.
Based on the Hayne royal commission, PC, ASIC and Investment Trends reports, the IPA contends there is sufficient evidence of continued market failure despite the FOFA reforms coming into operation; and that government intervention is warranted. For this reason the IPA is proposing a new form of licence which would essentially allow qualified accountants to provide limited personal financial advice.