Regulators in other nations are just as fierce in their agenda for advisers, reports Zoe Fielding.
Wave after wave of reform have rolled through the Australian financial advice sector over the past couple of decades – and it isn’t over yet.
It may be cold comfort for local advisers to know, but similar tides of change are sweeping advice sectors around the world as regulators move to increase the quality and availability of financial advice to consumers.
Understanding how reforms are changing major world markets makes it clear that Australia is part of a global phenomenon: and there’s not going back.
Impact on Australian financial advisers
In their reform, domestic regulators’ aim to lift the quality of advice and protect consumers from bad advice. Removing so-called “bad apples” from the industry is a part of this.
For the most part, regulatory amendments have achieved these goals, but they require a burden of paperwork and procedures that advice businesses must follow, and extra requirements for individuals.
Spearheading this period of regulatory change were the federal government’s future of financial advice reforms, which become compulsory in 2013. More than 60 per cent of financial planners believe the FOFA reforms harmed their business, compared with just 26 per cent who say it has had a positive effect, a survey by Vanguard Investments Australia found.
Keeping up with regulatory changes is the number one challenge for Australian advisers, Vanguard reported in its Upheaval and opportunity: Insights from our global survey of financial advisers. Dealing with new fiduciary duty requirements is the third-biggest challenge.
Global trends in financial advice reforms
British advisers said keeping up with regulatory change was their biggest challenge, while advisers in Canada rated it second, and those in the US said it was their third biggest concern, reported Vanguard.
Across all areas it was found that regulators had common purpose. Worldwide, the focus of reforms in financial advice are:
- fee disclosure and treatment of commissions
- protecting terms such as “independent”, “financial adviser” and “financial planner”
- fiduciary or best-interests duty
- codes of ethics
- education standards
- facilitating advice provision through alternative channels (such as robo-advice).
Fees and commissions
Australia is one of only four countries to have already banned commissions on investment products. The others are Britain, South Africa and The Netherlands.
There are moves to ban commissions and improve fee disclosure in Canada, while the US has toyed with the idea.
Sweden, Hong Kong, New Zealand, Singapore and Germany have explicitly ruled out a total ban.
In Britain, commissions were banned from a 2012 review. And The Financial Conduct Authority there has recently suggested commissions organised before the review, which were grandfathered under the reforms that followed, should also be turned off.
The fall-out from the ban, along with other regulatory changes introduced into the sector, has seen some advisers leave the industry. Those who have remained have responded mainly by introducing fee-based services that position advisers as financial coaches, helping clients achieve their lifestyle goals rather than purely offering investment advice.
Regulators in some countries that have stopped short of banning commissions have instead chosen to restrict the use of terms that suggest advisers’ independence.
Germany, for example, has a special designation for advisers who give “fee-based investment advice” and people using this name cannot accept commissions or other third-party remuneration.
Similarly, financial planners and advisers in Singapore can only use the term “independent” if they receive no commissions or other benefits from product providers, have no restrictions on the investment products they can recommend, and operate without conflicts of interest.
Fiduciary duties and codes of ethics
Australia is the only country to have imposed a broad-based best-interests duty on financial planners, although several other jurisdictions are pressing ahead with plans to do so.
The US Department of Labor is on its way to adopting stringent fiduciary duty requirements for financial planners and advisersafter a series of delays and challenges.
In Canada, two provinces – New Brunswick and Ontario – are working towards imposing a fiduciary duty on advisers, while all other provinces and territories have scrapped the idea as being unworkable.
Advisers in other countries may act as fiduciaries but they are not generally required to do so by law.
Codes of ethics tend to be voluntary for advisers around the world. Many do follow guidelines set out by industry associations, and certified financial planners are expected to comply with a code of ethics.
Australian advisers will be required to comply with a code of ethics, modelled by the Financial Adviser Standards and Ethics Authority, from January 1, 2020.
The authority will also oversee Australia’s regulations on education, which come into force on January 1, 2019. These set minimum entry standards that include an approved degree in financial planning, one-year work experience, and passing an exam.
Germany, Singapore and Britain have also set mandatory education requirements for financial planners, although many other countries – the US included – have not.
In addition to regulatory reviews targeting financial planners and advisers, several countries are looking at the way they govern automated financial advice.
New Zealand and Singapore, for instance, are working on regulations that will aid the development of robo-advice.
These technologies may stand alone as businesses in their own right or be adopted by traditional financial planning firms wishing to provide clients with a lower touch, online service.