Explanatory Memorandum(Circulated by authority of the Minister for Revenue and Financial Services, the Hon Kelly O'Dwyer MP)
Chapter 1 Background
Outline of chapter
1.1 This chapter provides background to and an overview of the Corporations Amendment (Professional Standards of Financial Advisers) Bill 2016 (Bill).
Context of amendments
1.2 The Bill makes amendments to the Corporations Act to raise the education, training and ethical standards of financial advisers by requiring relevant providers to hold a degree (or higher or equivalent) qualification, pass an exam, undertake a professional year, undertake continuous professional development and comply with a Code.
1.3 In recent years, numerous cases of inappropriate financial advice have had a negative impact on consumers' confidence in the financial services industry. This lack of trust has become a barrier to consumers seeking financial advice.
1.4 The financial services industry, consumer groups, the Government, and the Australian Securities and Investments Commission (ASIC) have raised concerns with the existing education and training requirements for financial advisers.
1.5 Currently, the Corporations Act imposes a general obligation on a licensee to ensure that its representatives are adequately trained and competent to provide financial services.
1.6 ASIC's Regulatory Guide 146 Licensing: Training of financial product advisers (RG 146) sets out the minimum knowledge, skill and education standards for financial advisers and provides information on how advisers can meet these standards.
1.7 The minimum standards required to provide personal advice on relevant financial products are:
- Australian Qualifications Framework level 5 ('Diploma' level) course units;
- specialist knowledge about the specific products an adviser provides advice on, and the markets in which they operate; and
- generic knowledge requirements, including training on the economic environment, the operation of financial markets and financial products.
1.8 Concerns have been raised that the current standards in RG 146 are not commensurate with the level required to ensure appropriate technical and professional competence. Further, in some instances, the existing minimum education and training standards have not been applied consistently across the industry, and the rigour and quality of some training courses is questionable.
1.9 In addition, the current educational framework for financial advisers does not include specific mandated requirements for:
- monitoring and supervising a new adviser to enable the adviser to develop the requisite minimum skills to provide sound financial advice;
- continuous professional development; or
- ethical and conduct standards.
1.10 Two reports have recently been completed that examined the professional standards in the financial services industry:
- on 19 December 2014, the Parliamentary Joint Committee on Corporations and Financial Services (PJC) reported on ways to lift the professional, ethical and education standards in the financial services industry; and
- the FSI released on 7 December 2014 made recommendations on lifting the competency of financial advisers to improve the quality of financial advice.
1.11 These reports found issues with the current education, ethical and professional standards of financial advisers, and recommended improvements.
1.12 On 25 March 2015, the Government released a consultation paper and called for submissions on ways to lift the professional standards of financial advisers. In releasing the paper, the then Assistant Treasurer noted that the PJC Inquiry and FSI 'make clear that the current regulatory arrangements are no longer sufficient to ensure high quality consumer outcomes and to maintain public confidence in the industry. It is now time to put in place an enduring framework that raises the professional, ethical and education standards of advisers.'
1.13 Submissions closed on 7 May 2015, with the Government receiving over 50 submissions.
1.14 In its response to the FSI released on 20 October 2015, the Government agreed that the education, training and ethical standards for financial advisers needed to be raised in order to improve consumer outcomes and increase public confidence in the sector.
Summary of new law
1.15 The Bill includes the following amendments to the Corporations Act:
- new education and training standards (education standards) that must be met by individuals who provide personal advice on relevant financial products to retail clients (relevant providers);
- transitional arrangements that apply to existing advisers;
- a new requirement that relevant providers comply with a Code of Ethics (Code);
- an obligation on an Australian Financial Services Licensee (licensee) to ensure that its relevant providers comply with the new education standards, and are covered by a compliance scheme (Scheme);
- a restriction on the use of the titles 'financial adviser' and 'financial planner' so that they can only be used by persons who are relevant providers;
- amendments to the content requirements for the register of relevant providers (Register);
- the provision of appropriate sanctions where a relevant provider or licensee fails to comply with the new obligations; and
- recognition of a new standards body (Body) which will set the details of the new education standards and develop the Code.