The Parliamentary Joint Committee on Corporation and Financial Services1 (the PJC Enquiry) held further hearings in
Canberra last Friday, 28th August. It was the day for the Treasury, professional and industry associations including the
Financial Planning Association, IFSA and the Insurance Council of Australia to be heard.
The members of the committee seem to recognise that Australia has a robust, world class system of financial services regulation. Nonetheless, the focus of the committee through its terms of reference is the extent to which that system is
failing its responsibilities for consumer protection.
The media has reported widely about the submissions made to ASIC and Treasury to the PJC enquiry. Reflecting on those
submissions and the testimony given last Friday, the following themes emerge.
Financial Literacy and Client Responsibility
Current policy and laws assume that a client is fully competent to understand and evaluate all advice and disclosures
and their impact on the client. Experience has proven this assumption is fallacious.
In the light of experience and testimony, a regulatory regime focussed on disclosure as a primary mean of consumer
protection is flawed.
Once a client has taken an appropriate decision, they should be bound to accept the outcomes of their decisions. Consumer protection comes from the creation of an appropriate source of information from which a client can take an informed decision of what is in their best interest. When clients abdicate their responsibility as decision makers (e.g. when the client says, "I will do what you tell me because I trust you") achieving quality advisory outcomes become impossible to achieve. Current law does not make the client assuming decision making responsibility an explicit assumption of the role of the client in the engagement.
The appropriateness of advice must be tested on a client by client basis. The meaning and efficacy and enforceability of s.945A of the Corporations Law 2001 is deficient and needs further development.
Estplan observation - As part of their internal risk management processes advisers need to test and respond to the ability of their clients to understand their advice. Client inability to decide should be a risk flag to the adviser about either cognitive ability of the client or service inappropriateness by the adviser. Managing this risk is a key challenge for financial advisers.
Fees and Commissions
It is the inclusion of a permanent commission in a financial product that is the greatest concern (The Institue of Actuaries of Australian Testimony).
Commissions, as a cost of sales, places "advisers" as an agent of a product vendor rather than the professional representative of the client. This appears as the source of concern about conflict of interest between adviser, client and
remuneration.
Remuneration that is:
1. agreed by client and advisor, and
2. scaled to the services delivered, and
3. terminable when delivery of those services ceases to be preferred and is not considered objectionable.
Advice that is not correlated to the value delivered to the client or remuneration unable to be turned off when the client
adviser relationship ceases is objectionable.
Consumers need financing options for advice as the underlying cost of initial advice will regularly be in the $3000 -
$5000 range.
Estplan observation - financing advice costs through assignment of a portion investment returns may be an acceptable
way of bridging the front end cost of advice down providing the financing cost is then explained to the client. The
explanatory processes of the current regime should provide a sufficient process for this purpose.
Duty to client
Whether an adviser has a fiduciary duty to a client is currently a function of the contract of engagement between
adviser and client.
Professional standards need to be enforced in the wholesale as well as retail financial services markets.
The low claims risk and current professional standards of stockbrokers needs to be recognised (SDIA testimony).
The function of the professional adviser remunerated by the client and the financial product and service intermediaries
remunerated by the vendor, need to be distinguished.
Estplan observation - The processes of product advocacy, product evaluation and personal client advice need to be
distinguished from each other and be delivered by distinct services or personnel. Product and Service vendors must have
the responsibility for paying the cost of their distribution channel. Product distribution and intermediation need to be
distinguished from client centred, professional advice. Professional client advisers need have no concern about fiduciary
responsibility as long as they are paid by the client. Clients need financing options for professional fees that allows them
to receive appropriate advice for their circumstances at a front end cost they can afford.
Broad marker recognition is needed of the true cost of client centred professional advice.
By Michael Perkins September 2009
1 See http://www.aph.gov.au/Senate/committee/corporations_ctte/fps/hearings/280809.pdf for more details.
