The collapse of Storm Financial, in amongst other advisory scandals, led to the introduction of the Future of Financial Advice (FOFA) by the previous Federal Government. FOFA’s key objective was to improve the trust and confidence of retail investors in the financial services sector and ensure the availability, accessibility and affordability of high quality financial advice. The most significant component of FOFA was to put a legal responsibility onto advisors to act in the best interest on their clients. Other reforms included:
After the 2013 Election the Federal Government began moves to wind back some of the more controversial reforms, on the basis of reducing compliance costs and the regulatory burden on the sector. However late last year the Senate repealed these measures, and we are back with the original version of FOFA. About the same time as the Government was trying to repeal measures, two advisory scandals came to light (Macquarie Wealth and Commonwealth Bank) prompting a Senate committee to look at unethical practices. The Senate report also mentioned ANZ’s custodian unit, and UBS’s 2011 enforceable undertaking (EU) for not sending statements of advice (SOAs) to retail clients, and recommended ASIC (the responsible watchdog) to be “far more intrusive and less trusting”. Since the report and in some instances as part of the EU with ASIC; Macquarie has been required to improve induction processes for new advisers, improve adviser training, strengthen record keeping requirements, and improve compliance within their business models. Similarly UBS was required to lift its game regarding disclosure to clients and required to review and improve its business practices. Monetary penalties coupled with the damage to these businesses reputations are spurring the industry into cleaning up its act. One method to clean things up has been from a regulatory point of view. The Parliamentary Joint Committee (PJC) report released in December aims to raise adviser education and professional standards including a “professional year” and “registration exam” in order for an adviser to be listed on the ASIC national adviser registry. ASIC’s advisor registry is expected to be up and running by next month. It will not only allow customers as well as employers to assess the suitability of any financial advisors, but also highlight details of a planner’s licensee and parent company. The other method industry is taking is to view compliance as a cost, and remove costly segments to a business model. In this context, retail investors bring additional disclosure and regulation, and to this end are becoming too costly to provide bespoke advice to. UBS last year began a motion to end ties with clients that had less than $500,000 invested with them (a wholesale investor test). They expanded that this year to clients with less than $1million invested in the firm. Macquarie and other large players in the industry are considering a similar move. Ironically, it would seem that instead of FOFA enabling retail investors to access and obtain affordable high quality advice, the opposite has happened. Retail investors are going to find it harder to get advice if financial services providers continue to restrict their client base. This problem is likely to be amplified because the banks along with AMP own 80% of the financial advice industry. This may mean new or small investors will not be able to seek affordable personal advice, and therefore limiting their ability to create real long-term value. It would seem going forward that more investors may opt to be treated as wholesale (or sophisticated) in order to obtain a more diverse investment opportunity set. With property prices experiencing growth of 8.24% year on year, rates at a low 2.25%, money printing offshore (quantitative easing/zero cash rates in the major economies), stocks hitting all time highs in the US, and 8 year highs here it may not be hard to qualify as a sophisticated investor under the current rules*. Poor record keeping, lack of regulation and a lack of appropriate compliance procedures may also put sophisticated investors at risk, but without the law on their side. Sophisticated Access recognises these problems and is working with industry toward building sophisticated investor best practice. Our more secure, online registry Cygura, gives investors greater control over their certificate and who they wish to share their status with. This helps sophisticated investors with meeting regulatory requirements and allows them to participate in timely deals. With firms increasingly looking to cull their retail clients in response to increased regulatory burden, and a legacy system for sophisticated investors with holes, it may be up to the investor to take charge and demand a better way. *See section 6D or 7 in the Corporations Act (2001) for more details. The general test is for an investor to have income over the last 2 years of $250,000 or net assets of $2.5m. This needs to be certified by a qualified accountant, and the Qualified Accountant’s Certificate is valid for up to 2 years.
