Raise the competency of advisers

Recommendation 25

Raise the competency of financial advice providers and introduce an enhanced register of advisers.

Description

Government should continue the current process to raise the minimum competency standards for financial advisers.51

In the Inquiry’s view, the minimum standards for those advising on Tier 1 products should include:

  • A relevant tertiary degree.
  • Competence in specialised areas, such as superannuation, where relevant.
  • Ongoing professional development — including technical skills, relationship skills, compliance and ethical requirements — to complement the increased focus on standards of conduct and professionalism in Recommendation 24: Align the interests of financial firms and consumers in this chapter.

The standards should be reviewed regularly to ensure they take into account developments in the financial sector. In addition, compliance with the standards needs to be actively monitored. Transitional arrangements should be made to allow opportunity for advisers to upskill, and include recognition of professional experience.

In addition, ASIC should complete the establishment of an enhanced public register of all financial advisers, which includes those who are employees. The Inquiry considers that the register should include licence status, work history, education, qualifications and credentials, areas of advice, employer, business structure and years of experience.52

Objectives

  • Increase the likelihood of consumers receiving customer-focused quality advice.
  • Promote confident and informed consumer use of financial advisory services.
  • Facilitate consumer access to information about financial advisers’ experience and qualifications to improve transparency and competition.

Discussion

Problems the recommendation seeks to address

Competency standards

The Interim Report observed that affordable, quality financial advice can bring significant benefits for consumers.53 However, according to the Parliamentary Joint Committee on Corporations and Financial Services (PJCCFS), “the major criticism of the current system is that licensees’ minimum training standards for advisers are too low, particularly given the complexity of many financial products”.54 This affects confidence and trust in the sector and can prevent consumers from seeking financial advice.

A number of high-profile cases where consumers have suffered significant detriment through receiving poor advice, and a series of ASIC studies, have revealed issues with the quality of advice. For example, ASIC’s report on retirement advice found that only 3 per cent of Statements of Advice were labelled ‘good’, 39 per cent were ‘poor’ and the remaining 58 per cent ‘adequate’.55 Although these cases and many of these studies occurred before the FOFA reforms to improve remuneration structures, this is not the only issue. Adviser competence has also been a factor in poor consumer outcomes. ASIC’s review of advice on retail structured products found insufficient evidence of a reasonable basis for the advice in approximately half of the files.56

Under the current framework, ASIC guidance sets out the minimum knowledge, skills and education for people who provide financial advice to comply with the Corporations Act 2001 and licence conditions. The training standards vary depending on whether the adviser is dealing with Tier 1 or Tier 2 financial products.57 As a minimum, current education standards are broadly equivalent to a Diploma under the Australian Qualifications Framework for Tier 1 products, and to a Certificate III for Tier 2 products.

Register of advisers

As the PJCCFS stated, “the licensing system does not currently provide a distinction between advisers on the basis of their qualifications, which is unhelpful for consumers when choosing a financial adviser”.58 ASIC currently has a public record of financial advice licensees and is notified of authorised representatives. However, ASIC has little visibility of employee advisers, or access to the type of information that an enhanced register could hold, such as length of experience and employment history. ASIC argues that transparency about advisers through an enhanced register is an important piece missing from the regulatory framework.59 Most stakeholders support introducing such an enhanced register.

Conclusion

The benefits of improving the quality of advice are significant. To achieve this, the Inquiry believes that minimum competency standards should be increased and the current Government process to review these standards should be prioritised.

In advance of the completion of the Government process, some adviser firms have recently announced they are increasing their own qualification requirements. However, low minimum competency standards have been a feature of the industry for a substantial length of time, and change is needed across the board. Many stakeholders are highly concerned about the low minimum education standards of financial advisers, with most supporting lifting education requirements to degree level.

Internationally, Singapore and the United Kingdom are seeking to raise minimum competency standards.60 The Inquiry is of the view that Australia should set high standards in comparison with peer jurisdictions. Although the Inquiry does not recommend a national exam for advisers, this could be considered if issues in adviser competency persist.

For individual advisers and firms, the cost of undertaking further and ongoing education would be significant. However, this is a necessary transition to move towards higher standards of competence and would deliver long-term benefits for consumers. The cost would be mitigated by an appropriate transition period.

Raising the minimum competency standards may increase the cost of advice for consumers. However, various cost effective market developments are emerging, such as scaled or limited advice and using technology to deliver advice.61 The Inquiry encourages advisers to develop new models for delivering advice more cost effectively to sit alongside existing comprehensive face-to-face advice models.

The requirement for higher education standards may cause some existing advisers to exit the industry and may deter some from entering, potentially causing an ‘advice gap’ for some consumers. Transitional arrangements to give advisers appropriate time to upgrade their qualifications would help manage this risk. Raising standards would also increase confidence and trust in the industry, encouraging more individuals to choose financial advisory services as a career path, and increasing the supply of financial advisers.

The Inquiry has not made a recommendation in relation to mortgage brokers. However, it considers that ASIC should continue to monitor consumer outcomes in this area and the performance of the industry in relation to its obligations under the National Consumer Credit Protection Act 2009.

In relation to the register of advisers, the Inquiry supports the establishment of the enhanced register to facilitate consumer access to information about financial advisers’ experience and qualifications and improve transparency and competition. Further consideration could be given to adding other fields, such as determinations by the FOS62. The register should be designed to take account of possible future developments in automated advice and record the entity responsible for providing such services.


51 Government is currently considering mechanisms to raise minimum education requirements.

52 Government has recently announced an enhanced register: Cormann, M (Minister for Finance and Acting Assistant Treasurer) 2014, An enhanced public register of financial advisers, media release, 24 October, Canberra.

53 Commonwealth of Australia 2014, Financial System Inquiry Interim Report, Canberra, page 3-63.

54 Parliamentary Joint Committee on Corporations and Financial Services 2009, Inquiry into financial products and services in Australia, Canberra, page 87.

55 Australian Securities and Investments Commission (ASIC) 2012, Report 279: Shadow shopping study of retirement advice, ASIC, Sydney, page 8.

56 Australian Securities and Investments Commission (ASIC) 2013, Report 377: Review of advice on retail structured products, ASIC, Sydney, page 12.

57 Tier 2 products are generally simpler and better understood than Tier 1 products and are therefore subject to lighter training standards, including a lower educational level. Tier 2 includes basic banking products and general insurance products. Tier 1 covers the remainder, including superannuation, managed investment schemes, life insurance, securities and derivatives.

58 Parliamentary Joint Committee on Corporations and Financial Services 2009, Inquiry into financial products and services in Australia, Commonwealth of Australia, Canberra, page 90.

59 Australian Securities and Investments Commission 2014, Second round submission to the Financial System Inquiry, page 46.

60 Monetary Authority of Singapore (MAS) 2013, MAS issues response to consultation on recommendations of Financial Advisory Industry Review, media release, 30 September, Singapore. In the United Kingdom, the Retail Distribution Review increased the minimum education standards for advisers to the equivalent of the first year of tertiary education: Financial Conduct Authority 2014, Data provided to the Financial System Inquiry, 24 October 2014.

61 Investment Trends data shows that 85 per cent of planners say they currently provide scaled advice to new clients. Around half (46 per cent) of these planners say they intend to provide even more single-issue advice (either scaled and/or transactional) over the next 12 months. While new advice and advice reviews over web chat is currently a niche, many advisers are interested in utilising this technology to engage with clients: Investment Trends 2014, May 2014 Planner Business Model Report, Investment Trends, Sydney. Based on a survey of 1,038 financial planners.

62 Issues that would have to be addressed in achieving this include that determinations are currently made only against licence holders.