Australia: contrasting competence requirements proposed

In Australia, RiskInfo reports that existing financial advisers will be required to a hold a degree equivalent qualification by 1 January, 2024 if they wish to continue to practice, according to new proposals released by the Financial Adviser Standards and Ethics Authority (FASEA).

In the proposals which have been released for consultation, advisers would be able to continue practicing from the start of 2024 if they:

  • hold a qualification that is on the FASEA approved register;
  • have completed an Australian Quality Framework level 7 (AQF), or bachelor degree level, qualification that is on the FASEA approved register;
  • have completed a course that offers at least 8 units at AQF level 8, or post-graduate level, covering fields that include ethics, professional attitudes and behavioursfinancial planning and advice processes, and technical requirements.

To give an example of the scale of work required, eight units at AQF level 8 requires about two years study part-time. 

While I am a fan of the view that competence needs to be considered within the framework of the financial advice business offering the service (because competence requirements vary, depending on scope of service, and degree of automation), the run of play is to increase the broad base level of competence requirements wherever someone wishes to hold themselves out as a financial adviser - whatever their actual scope of services offered. That approach is justified because even if scope is narrowed for an engagement, a consumer talking to someone labelled a 'financial adviser' may reasonably expect that the adviser has the breadth of experience necessary to place the service offered in context for them.

Companies that wish to offer much narrower services, using staff that are not qualified as financial advisers, but a more just 'process helpers', or salespeople, may be free from these requirements. But consumers may be confused if they could be called financial advisers.

Latest Goodreturns piece

My latest piece on goodreturns is here, which is the follow-up post to the one a fortnight ago,about advisers thinking about their plans. Plus there is this piece written by Susan Edmunds based on some informal comments I made about the need for a change in the law. Of course, only some advisers lack client files and good processed - not all.  The comments quoted in that article are clearly not the whole substance of the matter, but the issue around record-keeping and the application of the Code to everyone who gives financial advice are both essential ingredients for a new regime. 

Submissions Report on the Draft Exemption to Facilitate Personalised Robo-Advice

The submissions report on the draft exemption to facilitate robo-advice is well worth a read, especially the introduction, which shows that the FMA have taken the submissions into account and makes commitments to address the main issues. Assuming that those commitments are well-reflected in the actual regulations, this is a good example of the consultation process working well. Link

Insurance complaint ruling: wider market comparison expected

The FMA  recently complained about an AFA who provided both advice on a pension transfer and replacement of insurance. The Financial Advisers Disciplinary Committee have heard the case. The part of the decision which relates to insurance is particularly interesting: 

"There is nothing to suggest that his recommendation was supported by analysis, apart from an indicative illustration provided by AIA and the Respondent's emailed statement that AIA was the only insurer who would offer "take-over terms". We do not know whether a fuller analysis would have led to the same conclusion but would have expected a far broader examination of what market options existed for the relevant client, even if that involved different terms. Financial decisions of this type typically involve trade-offs and analysis of those would be an expected and basic element of advice of this type" 

Although I am duty bound to point out that I am conflicted - as I have a financial interest (indirectly) in Quality Product Research Limited, this looks like a strong indication that seeking options, proof of analysis, and comparing the market, are components of insurance advice that the FADC expect. 

There are also parts of the decision that relate to pension transfers which are also of interest, and also relevant to providing insurance advice, particularly where replacement is being contemplated.

Also, aspects of the decision in relation to the fee that the adviser proposed, which was only to be paid if certain actions were taken, is worth reviewing. The FADC did not find that the FMA's complaint was made out, and allowed that although the adviser did have conflicted remuneration it was adequately disclosed. 

You can read the decision at this link


Proposed Exemption to Facilitate Personalised Robo-advice - Code Committee Submission

The Code Committee Submission on the proposed exemption to facilitate personalised robo-advice is a very good document, well worth reading in full, with a highlighter in hand. Nevertheless, I shall quote some significant sections and add comments here, because the many good points deserve to be publicised and discussed. The Code Committee wisely avoids discussion of the merits of the FMA's proposed exemption, or power to grant an exemption, instead they stick to their role, which is to promote standards: 

"... the Code Committee’s position is that if an exemption is to be granted to facilitate personalised robo-advice then the terms on which any such exemption is granted must be consistent with the terms on which AFAs must operate and the purposes of the FAA consistent with the objectives of the exemption stated at page 13 of the Consultation Paper. This means exemption conditions must ensure that:

  • any personalised service provided through a robo-advice platform is subject to no less a set of minimum standards than would apply to an AFA providing a similar service;
  • permitting robo-advice is consistent with promoting the sound and efficient delivery of financial adviser services; and
  • public confidence in the professionalism and integrity of personalised robo-advice services and their providers is encouraged.

In our view, the above requirements are an absolute minimum. In granting an exemption to facilitate personalised robo-advice, the FMA must be confident that the level of consumer protection involved is no less than that which would be involved had the personalised service been provided by AFA"

You could argue one small piece of this, as a specialist in the field of insurance, for example, I have to speak up for the oft-neglected insurance sector. The current legislated standard for insurance is only that applicable to the Registered (but not Authorised) Financial Adviser, who is not actually required to meet Code standards - but rather the less well-defined section 33 of the FAA (and other law too, of course). But this would be a silly argument, we have a draft Bill which will bring insurance under a common set of Code standards shared by all financial advisers, so in practice I agree with the Code Committee on all the points above. In any case, the exemption draft is plainly aimed at investment business, and in such cases no quibbles should be possible. Robo-advice should meet current Code standards. If not, why not? The Code Committee proceeds to offer suggestions of the draft exemption paper: 

"The Consultation Paper does not provide any evidence that the FMA has taken any learnings from the experiences of those overseas jurisdictions into account in formulating its thinking. Given the likelihood that many of the personalised robo-advice platforms that will be made available to the New Zealand public are likely to comprise New Zealand applications of overseas platforms, we believe it would be helpful for the FMA to document its observations of those overseas experiences."

I expect that the FMA has considered other jurisdictions. I share the Code Committee's view that sharing what they have learned would be helpful. Perhaps we shall see that in some expanded commentary on the next version of the paper, or it could be released between now and then as a separate document to give context. The central part of the Code Committee's argument, however, is this:

The consultation discusses possible limits that might be imposed on the provision of personalised robo-advice if an exemption is to be granted. The limits discussed include limits
on the possible scope of any personalised robo-advice service that might be permitted, and financial limits. The Code Committee believes this is an inappropriate approach to take in the granting of any exemption. Either the provision of personalised robo-advice is consistent with the purposes of the FAA and is able to be delivered subject to the same minimum standards as apply under the Code, or it is not.

The emphasis is added by me. For the Code Committee, you should meet AFA standards, and if you do, there is no need for limits. This is the reverse of the FMA's apparent position, which we might infer as something like 'you cannot meet all the standards, so we will limit the risk'. But the Code Committee has firm feedback on the proposed limits on robo-advice on page 7 and 8 of the document: 

a) Limiting the scope of a robo-advice service in the manner proposed at pages 7 and 8 of the Consultation Paper is an approach we have not observed in any overseas jurisdiction
that currently provides for the regulation of robo-advice.

So it seems that the Code Committee has done some research of its own and finds no international validation of limits

b) The only limits placed on AFAs in providing personalised services are those driven by the AFA’s competency and abilities, as provided by the Code. A similar approach should apply to personalised robo-advice. 

There is a strong consumer protection argument here. Also, consistency with the law : competency is the standard used now, why not keep using it? Indeed, it isn't very confidence building for consumers to see a regime which could be interpreted as saying in effect, that small financial services contracts should not be subject to as high standards as large ones. Consumers with smaller investment funds, or smaller insurance needs, often depend on them far more than consumers with greater resources. 

c) The proposal that the exemption ‘would be limited to personalised robo-advice on products which are easy to exit’ is hard to reconcile with a product list that includes KiwiSaver and credit contracts. Even if limits on the possible scope of a robo-advice service were to be imposed, we believe that basing the filter mechanism on such a concept is ill-conceived.

Indeed, many of us in the insurance industry think we know what the writer of the report means when they put this awkward description of 'easy to exit' into the document. We suspect that what is intended is more like 'has less risks on exit', for example: I have asthma and dodgy knees. It is very easy for me to cancel my insurance, and very hard to get those conditions covered on the same terms. That, we think, is a problem the writer of the draft is not yet confident a robo-advice service could tackle. When we make our submission on the draft we will ask for clarification. 

d) Imposing limits on the scope of permitted robo-advice services is likely to undermine the efficacy of those services. In particular, by limiting the products on which personalised robo-advice services might be provided, it seems unlikely that robo-advice could ever be seen as a suitable option for the provision of investment planning services. Imposing any of the limits discussed would result in consumers accessing a more limited range of outcomes through robo-advice than would be the access if receiving services from an AFA, which would be a negative regulatory outcome.

Indeed, again. 

e) Placing any financial limit on either the value of a product or on the aggregate investments that might be advised on through a robo-advice service, would discourage investment in
the system necessary to deliver robo-advice services. Imposing such limits is likely to compromise the ability of a robo-advice service to reliably deliver suitable outcomes on a standalone basis, requiring human advisers (or self-help solutions) to plug the gaps, undermining the objectives of the exemption.

Although investments is not my main focus, I suspect that no robo-advice provider will be excited about the idea of their service being limited to just $5 million per year. That tiny limit provides almost no incentive for innovation outside the existing providers of funds. The only service that can be encourage is one offered by an incumbent fund manager. I am glad they will be able to do so, but I should like others to be able to do so as well. 

Separately I shall write on the issue of the proposed limits as they apply to life insurance, leaving them out of this post because the focus here should be on the Code Committee's work. Also, it is worth continuing to emphasise - creation is hard, criticism is easier. I am grateful for the work of the people that wrote this paper and recognise that the debate could not get to this point without it.

How do Robots Calculate Best Interests?

This article has the best title: "How do robots calculate best interests?" It's a good article, you can read it at this link,  it is about the US Fiduciary Rule, which requires advisers to put their clients’ interests before their own. But I'd like to ponder the question posed in the title, by first asking: how do you put the client's interests first. I recently reviewed the file of a case where a client and an adviser are now at loggerheads: they each thought the scope of service meant something different. That was instructive for me.

The review was something of a journey - the adviser has, in the strict legal, and even ethical sense, done nothing wrong. They have never meant to cause any harm. They were thorough enough, according to their scope. Yet the client is deeply unhappy, and it is easy to see how. It was never clearly explained how the adviser was going to look after them. The client lacked the knowledge to question that. 

But you have an opportunity to avoid this unhappy outcome of miscommunication. You may define your scope in words the client can clearly understand, and in ways that are measurable - so that when you review the file in a year you can easily prove that you met your scope. Not as a compliance exercise, but so you can take business off the people who don't define their service properly. 

Angus Dale-Jones Highlights Code Committee Obligation to Listen

Angus Dale-Jones, chairperson of the Code Committee, tells advisers that "We need advisers' ideas and suggestions to help get that right, so please participate in consultation.” he also stressed the legal obligation to listen to any person it reasonably considered to be a representative of the industry. In this goodreturns article

Code Committee Announcements, and Adviser Reaction

Firstly, congratulations to the Code Committee members. You can check out at list over here, if you haven't already done so. While there will certainly be rewards for Code Committee membership, there is a strong service component to membership, and so thank you to the Code Committee members for being prepared to participate in that. 

Like many of the advisers commenting on the Code Committee membership I am disappointed that there doesn't appear to be a specialist in insurance advice, nor, in fact, an adviser of any kind that does not work solely for one product provider. As a consumer I have always believed in comparison shopping and independent advice. Disappointed, but not altogether surprised. Not surprised because advisers typically run small businesses, and by that  I mean any business with 50 or fewer staff, or where, say, more than 25% of the revenue comes from the efforts of that one person. It is hard to leave this precious business to spend variable amounts of time on the work of the Code Committee. Plus, you can see already, that the work is public, and likely to come with a fair quantity of criticism. My thoughts are particularly with Angus Dale-Jones, who, as chairperson of the group, will front a lot of the issues and will therefore wear a lot of the flak. There will be flak. 

The lack of a good insurance advice participant need not be fatal. The Code Committee is the core of a process which needs to take input, and be seen to be taking input, from the wider marketplace. The problem of committee composition is one that I am sure has been difficult to work through. Trade-offs would have been made. I hope that the committee can take into account the compromises that were made and compensate for them during the consultation process - and get the views that aren't your own through the committee process. 

Strategi Likes Clients

Indeed, we all like clients. But specifically, Strategi likes the word 'client' preferring it to 'customer'. I agree, and many others do too, so why the particular interest in this statement. Well, here at Chatswood we like data, and Strategi took the trouble to identify which laws, regulations, and authorities choose which word. Link

Putting Client Interests First

How do you put customers interests first? Strategi has this guide for AFAs, based on compliance with current Code Standards. Taking a ground up approach to demonstrating how you put clients first in your business may be a great way to conduct a thorough review of your systems and processes. Here is an imagined process for insurance advisers looking to meet the requirements for Client First: 

Vision: what represents a good outcome for the client in your process? How might you test that with clients? How do you know that is working for them? How does your service compare with other similar services? What evidence can you find to support your vision of a great insurance advice service for customers? How often does your board or management team review that process? If you are a sole trader, what training or education, or collegiate industry groups provide you with ways to review the process? 

What possible conflicts between the client's interest and your own interest can occur? Make a list and consider each potential conflict: scale, frequency, what interests compete and describe them. Consider Code Standard one and five. What methods for resolving the conflict exist? Can you eliminate it? Can you disclose it? How will you ensure that you place the client interest before your own in the advice process? Under what circumstances would a conflict become too hard to manage - and you therefore choose to withdraw from the engagement.