Future of financial advice
It is my great pleasure to speak at this year’s annual conference of the Stockbrokers and Financial Advisers Association. It's wonderful to have so many stockbrokers and financial advisers here that support our economy.
I believe you are an exemplar of what the Prime Minister has described during the election as the hard working ‘quiet Australians’.
You probably got your foot in the door through your first stockbroking or financial advising job. You got some experience and then you struck out on your own and started a business, or moved to a great firm. Along the way, you probably met someone great and started a family. You probably saw opportunities to develop your business so you innovated and expanded, creating more jobs in your community.
Your aspirations and endeavour are what motivates the Morrison Government. We will back you, so we hope you will back us in this new term of government.
I wish to thank Brian Sheehan in particular for extending the invitation to me to speak. He has asked me to speak to you about financial advice, professional standards and what the Government is doing.
But before we delve into that topic, let’s take a moment to reflect on the context in which the professional standards legislation was developed.
The critical role of financial advisers
The financial advice industry has been an important part of the wider Australian economy, generating billions in revenue and employing tens of thousands of people.
The industry serves a critical role for consumers.
Access to affordable, quality financial advice is a benefit to consumers.
Access to high-quality and affordable advice is vital for Australians as we have one of the largest pools of superannuation savings in the world at $2.7 trillion. This is projected to more than treble by 2040.
A professional, dynamic and well-functioning financial advising industry generates competition for Australian savings.
It would help Australian families to achieve their financial goals.
It would help Australians plan and enjoy comfortable and secure retirements.
It would help Australians build financial resilience to help deal with life’s setbacks, including illness, injury and even death.
It can help Australians make informed decisions by providing guidance with financial planning, insurance and product recommendations.
As the population ages and client needs shift, financial advice will play an even more important role than ever before.
An evolving landscape
However, the landscape is evolving and we all need to adapt.
Most of the major banks are in the process of selling their wealth management arms.
We're also seeing a change in the composition of advisers in the industry as financial advisers have been exiting institutionally affiliated and owned businesses to work for privately owned firms.
Technology, like in all other industries, is playing a role in the financial advice sector. Technology based advice products, such as 'robo-advice', may offer consumers the opportunity for relatively cost-effective financial advice.
While robo-advice remains a relatively new development, the Government is introducing reforms to facilitate the entry of such FinTech-led advice models in the market.
For example, the Government has introduced legislation to establish a world leading financial services regulatory sandbox, building on the existing ASIC sandbox. The enhancements will allow more businesses to test a wider range of new financial products and services without a licence from ASIC for a longer period of time.
Further FinTech innovations are entering every area of the market. Mortgage brokering, stock trading, financial advice, digital superannuation and digital banking. This digital revolution will continue. This is a mega-trend that will impact your industry.
The remuneration models for many in the industry are also changing.
For example, the Hayne Banking Royal Commission has recommended an end to the grandfathering of conflicted remuneration.
He argues grandfathered conflicted remuneration can entrench clients in older products even when newer and better products are available on the market. Grandfathering has now been in place for over five years, providing industry with sufficient time to transition to the new arrangements.
It is therefore now appropriate for grandfathering to end. The Government is in the process of implementing the Hayne recommendation.
It should be noted that many banks and other financial institutions, in response to Hayne, have already off their own bat banned grandfathered conflicted remuneration – to the extent that they can.
All of this is occurring against the backdrop of moves to provide greater certainty for consumers through enhanced regulation of the financial services sector. The Government's challenge is to find the right balance between consumer protection and ensuring that consumers have access to affordable financial advice.
The professional standards legislation
My appointment as Assistant Treasurer under the Morrison Government last year was not the first time I’ve been involved with financial sector reform.
As some of you might be aware, some seven or eight years ago, after the completion of the Post-GFC banking inquires (and what then became the Ripoll Report), I spoke of the industry being at a crossroads.
There was an urgent need for greater professionalism, greater depth in educational standards and the need for a defined professional body to look into these areas.
I note progress in these areas by the sector had been slow. The financial services industry needed to speak and act with one voice, but it did not.
The slow pace of change meant the Government eventually had to step in. This resulted in a number of significant changes in the regulatory landscape of the financial advice industry, some of the most recent include:
• the Banking and Financial Services Royal Commission
• the establishment of the Australian Financial Complaints Authority and
• the professional standards reforms and FASEA, which is my focus in today’s address.
On professional standards, whilst acknowledging that the financial services industry was making some moves towards reform, the Government eventually had to step in. The professional standards reforms came into force from 1 January with the intent of raising the education, training and ethical standards of financial advisers.
This came about due to repeated instances of inappropriate financial advice decreasing consumer confidence in the financial advice industry and followed a further inquiry by the Parliamentary Joint Committee on Financial Services.
Any reduction of trust acts as a barrier to consumers seeking financial advice. This hurts consumers and hurts the industry.
The PJC's inquiry into proposals to lift the professional, ethical and education standards in the financial services industry and the Financial System Inquiry identified that the existing professional standards for financial advisers were too low and did not ensure that all financial advisers had the necessary skills to provide high-quality advice to consumers.
This was, by the way, an outcome from the Ripoll inquiry and what we have today has been a long time coming.
The Royal Commission has also raised important questions about the ability of the industry to appropriately manage conflicts of interest and ensure appropriate customer outcomes.
It is in this context the Government's professional standards legislation established a series of professional, ethical and educational requirements that will apply to financial advisers, and provided for the establishment of a standards body (FASEA) that will define many of the new standards.
FASEA is independent from Government, and is led by a board comprising industry, consumer and specialist representatives. That is, the FASEA board is independent of me as the Minister responsible for the financial sector. Nevertheless, many of you saw that I recently replaced two directors of the FASEA Board.
While I work closely with them, it is important in the long-term FASEA remains independent.
While it might sound appealing in the short-term to have the Government control FASEA, there is no guarantee that in the long-term a future Government will have the best interests of the consumers of financial advice (and the best interests of the financial advising industry) in mind.
FASEA is charged with developing the financial adviser professional standards, which includes:
• new educational requirements
• a new code of ethics
• a professional year requirement
• an examination, and
• a requirement to undertake continuing professional development activities every year.
These standards were developed through 2018 and early 2019, and FASEA has now issued the final standards, some of which apply from 1 January 2019.
Existing advisers are being recognised by the new standards
In developing the standards, I have personally worked with FASEA to ensure that the new standards does not unreasonably burden existing advisers in the industry.
That is why existing advisers are being better recognised by the standards as being different to new advisers entering the sector. This is, in large part, to recognise your wealth of experience in the industry. There will also be recognition of prior learning you have undertaken.
Following extensive stakeholder feedback, FASEA’s final education standards now provide for significantly greater recognition of prior education than the draft standards published in early 2018.
Industry raised concerns that professional designations previously completed by existing advisers, such as FPA’s Certified Financial Planner (CFP) course and the AFA’s Fellow Chartered Financial Practitioner (FchFP) course were not recognised by FASEA for the purposes of advisors meeting educational requirements.
FASEA’s educational standards now set clear standards for recognition of prior learning to be granted under specific circumstances, including the recognition of CFP and FchFP courses.
Further, if you have completed between four to seven units of a relevant degree, this represents two credits.
The changes to FASEA’s educational requirements will mean that many existing advisers will only have to complete between one and four units of study to meet FASEA standards.
And, you will have until 1 January 2024, almost five years, to do so.
FASEA will also expand the list of approved degrees beyond those listed in the draft guidance in September 2018, as applications are received and assessed – so a larger number of existing advisers will hold an “approved degree”.
FASEA’s process for approving courses for the education standard is ongoing and I note that several courses that are highly relevant to stockbroking have recently been approved, including the Securities Institute Australia’s Diploma of Financial Markets and the University of Western Sydney’s Master of Financial Advising.
In response to industry feedback, FASEA has reduced the requirement for continuing professional development from a proposed 50 hours per annum to a final standard of 40 hours per annum for all advisers.
This standard aligns more closely with other comparable professions which have continuing professional development standards, such as tax agents.
FASEA also has responsibility for administering the financial adviser examination, which all new advisers will be required to complete from this year, and all existing advisers will be required to complete by 1 January 2021.
The exam standard has been updated to allow prospective and existing advisers to resit the FASEA exam an unlimited number of times, and the exam has been revised from closed-book to open-book.
In relation to the standard for a “professional year” of work and training for new advisers, FASEA has reduced the required time from a proposed 1800 hours to a final standard of at least 1600 hours, consisting of 100 hours of structured training and 1500 hours of supervised work activities.
I am well aware that stockbrokers are concerned that their views about the new standards are not being adequately heard, and on a number of occasions I have reminded FASEA of the importance of listening to all parts of the financial advice industry.
As a consequence, back in March this year I formally requested the FASEA Chair establish an industry consultation committee.
FASEA is currently developing a model for this committee and I look forward to it being operationalised and becoming an effective mechanism for listening and acting on the views of stakeholders from across the sector.
Following discussion with SAFAA, I have also asked the SAFAA executive to raise with FASEA its proposal for incorporating an Australian version of the Series 7 exam as an alternative pathway for meeting FASEA’s education standard—as a better, more globally aligned approach for your industry.
As the Assistant Treasurer, I reserve the right to intervene as necessary.
Stakeholder consultation is key to the successful implementation of the professional standards. We are making sure you are a part of the conversation.
An industry consultation committee, comprising a wide range of industry representatives, would provide a forum for the stockbroker association to have a ‘one voice’ conversation with FASEA.
I am also encouraged to hear that SAFAA has been speaking with FASEA regarding the new Code of Ethics with plans to continue discussions on the Code’s guidance.
Conclusion
Let me conclude by saying that reform is well and truly upon the industry.
I flagged that the industry was at a crossroads many years ago and the Government's reform agenda has now chosen a path.
The change will be great, but I am confident that together, we can make the financial advice industry thrive. We're all committed to a vibrant, transparent and professional industry and Government is looking forward to working with your industry to deliver just that.
Central to this is a professionalised financial advice industry that has restored the trust of consumers through a lift in standards.
The industry serves a critical role for consumers and we cannot afford to let Australian consumers down.
Thank you and I hope you enjoy the rest of the conference.