Good news: Regulators DO trust some advisers
Best Practice Advice & Compliance

Good news: Regulators DO trust some advisers

March 25, 2012

by Tony Vidler.

Should Regulators trust some advisers to do the right thing? Or none of them?

This is the intriguing question which will be debated behind closed doors in NZ in the immediate future I am sure, following the latest round of financial services reform in Australia. The “Future of Financial Advice” (or FoFA as it has become known) has been a work in progress for three years, as Australian regulators do their latest bit to drive higher standards of client care and professional standards in their market.

Naturally there have been a number of contentious points there, and the usual mix of good intent mixed in with impractical rules, that have created debate and strong lobbying along the way.

One of the more contentious proposed rules from an advisory perspective has been the “opt-in” provisions. As is often the case, the rule-drafters have been driven to solve a genuine industry flaw (that of consumers paying ongoing costs for advice and/or service from within product fees or commissions, without necessarily being aware of it, or even receiving advice or service from those receiving the money). The method they chose to resolve the problem though was impractical, unfair and a logistical headache for adviser firms to implement – in the industry’s view.

“Opt-in” requires the adviser to obtain periodic ongoing written consent from clients that they want the adviser to continue the relationship and receive agreed remuneration.

In principle that seems a fair thing. Though in practical terms everybody knows that consumers are just humans, subject to the same whims and emotions in general terms. The levels of client satisfaction and desire to stay the course with anything can be driven as much by the state of the economy or investment markets, whether we won the Rugby World Cup, or whether our boss is a complete twit, as much as whether the adviser is doing the job that they agreed to do in the way it was agreed to be done.

Logistically, the seemingly simple matter (in theory!) of getting the clients to confirm in writing once per year that they are happy to continue paying fees for ongoing advice, would be difficult. People are busy, and just forget to follow through on things. People go away, get sick, or just don’t open their mail for weeks at a time. Clients – believe it or not – are often re-investing funds or sticking with the same product automatically year on year because they didn’t bother to read a letter in time. And of course included within the “opt-in” provisions was a big stick for the adviser who did not obtain the written client consent within the required timeframe – meaning that it would become far too dangerous for an adviser to continue receiving fees or carrying on the relationship if that written consent was not obtained each year.

Logically one would have to expect that over time advisers would be having to disengage from otherwise happy professional relationships simply because they had not obtained the required consent at the right time in any given year.That cannot be a good outcome for consumers generally.

After much lobbying and debate, the opt-in provisions were amended to a 2 year period, instead of being an annual requirement. That change was an improvement to be sure, but all the flaws with this method of achieving client consent and aligning the professional obligations with consumer benefits remain.

In the last week though there has been an interesting twist. Interesting – and beneficial – for those advisers committed to working to the highest professional standards, and who are willing to pay the price to do so.

It should send a shiver down the spine of the many advisers who do not belong to a professional association, or who think they are fine just motoring along obeying the basic rules of the road that the FAA delivered.

Why? “Opt-in” passed, and has been included in the legislation in Australia. What happens there – particularly in terms of improving the immediate consumer experience in financial services – will influence regulators thinking here.

The really interesting point though: there is an exception to the opt-in provisions in Australia. The exception is that financial planners (in the widest sense) who are signed up to an approved professional code of conduct managed (with rigour) by a professional association are given a class exemption from obtaining the opt-in consents from individual clients.

In plain english: if you are an adviser who belongs to a genuine professional association, with high standards and the ability (and will) to enforce them, then you are trusted to do your job well and are relieved of some of the rules aimed at fixing the cowboy end of the market.

This is an excellent outcome for the many thousands of advisers who have invested in higher education, voluntarily operated at higher standards than the laws required for many years, have exposed themselves to the risks of getting it wrong in working to the highest standards – and who have demonstrated their commitment to doing their work as best they can.

This principle of applying tough rules across the market, yet providing class exemptions for segments of the market that have already demonstrated they have earned the right to self regulate to a degree, is sensible and practical. It is also the best possible method of ensuring that advisers who do operate on the fringes in terms of the business practices or standards become aware that there is actually real business benefit in voluntarily operating at higher standards than the minimums required by law.

We can only hope at this stage that this principle gets imported from Australia – that there are ways of raising standards generally, while recognising and trusting those who have already demonstrated their willingness to work at the highest standards. That would be good news for the local market.

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