Explanatory Memorandum(Circulated by authority of the Minister for Revenue and Financial Services, the Hon Kelly O'Dwyer MP)
Chapter 7 Regulation impact statement
7.1 On 20 October 2015, the Government announced as part of its response to the Financial System Inquiry that it would develop legislative amendments to raise the professional, ethical and educational standards of financial advisers. In committing to this objective and subsequent decisions on the details of the legislative amendment package, the Government was informed of the regulatory impacts of various reform options by the findings of two independent reviews and targeted consultations with industry stakeholders.
7.2 The independent reviews of the arrangements around professional, ethical and education standards of financial advisers are the:
- Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into proposals to lift the professional, ethical and education standards in the financial services industry (PJC Inquiry); and
- Financial System Inquiry Final Report, November 2014 (FSI).
7.3 The reform package has been constructed in close consultation with industry and consumer groups.
7.4 Treasury has certified that the independent reviews constitute a process and analysis equivalent to a Regulation Impact Statement (RIS).
7.5 The Australian Government Guide to Regulation identifies seven questions that a RIS should address. Following is a summary of the analysis of these questions that occurred as part of the independent reviews and stakeholder consultation process.
7.6 Over time, repeated instances of inappropriate financial advice have decreased consumers' confidence in the financial services industry. This reduction in trust acts as a barrier to consumers seeking financial advice.
7.7 The recent examples of unethical behaviour and inappropriate financial advice have contributed to the decreased trust in the financial services sector.
7.8 The Corporations Act imposes a general obligation on licensees to ensure that their financial advisers are 'adequately, trained and competent' and the Australian Securities and Investments Commission (ASIC) has issued guidance on the minimum training standards. However these standards are low, insufficiently comprehensive and out-of-date. They do not specify the duration or standard of training that advisers must undertake and advisers are currently able to satisfy the requirements by completing a short course with only a few hours of study.
7.9 Various inquiries, including the FSI and the PJC Inquiry have identified that the existing standards for financial advisers (which are set by Government) are too low and do not ensure that all financial advisers have the necessary skills to provide high quality advice to consumers.
7.10 In June 2014, the Senate Economics References Committee tabled a report on its inquiry into the performance of ASIC. The inquiry recommended that the PJC look into the various proposals calling for the lifting of professional, ethical and educational standards in the financial services industry.
7.11 In December 2014, the PJC reported on the inquiry into proposals to lift the professional, ethical and education standards in the financial services industry. The Committee considered the interim report of the Financial System Inquiry which noted that there were significant issues with the quality of financial advice, due in part to varying standards of adviser competence.
7.12 The FSI highlighted consumer outcomes as an important area for reform and focused on fair treatment of consumers. The report noted that the issues related to the competence of financial advisers are unresolved with the most significant problems relating to shortcomings in disclosure and financial advice, and an over-reliance on financial literacy.
7.13 The Committee's recommended approach included:
- clarifying who can provide financial advice by protecting the title and function;
- improving the qualifications and competence of financial advisers;
- enhancing professional standards and ethics; and
- implementing transitional arrangements.
Need for government action
7.14 There have been many regulatory interventions by the Australian Government in recent years to help improve trust and confidence in the financial services industry and the quality of information that consumers of financial services have access to . Government intervention is justified because of the significant costs to individuals, the community and/or taxpayers that can result from poor information on the benefits and risks of financial services, including complex financial advice provided to retail clients.
7.15 There are a few main sources of market failure which explain why government involvement is required. These sources of market failure are:
- licensees underinvest in education and training as the benefits only accrue in the long-term;
- it is difficult for industry to agree on minimum standards and coordinate action; and
- consumers lack information about the skills and competency of their financial adviser.
7.16 The FSI and PJC report highlighted five main deficiencies in the current education and training requirements which include:
- the current education and training requirements prescribed in the Corporations Act are low;
- the standards are vague;
- the standards are not holistic - they do not require all financial advisers to undertake ethical courses and there is only a cursory reference to continuous professional development;
- stakeholders have raised concerns that the training requirements are not in keeping with changing market conditions; and
- there is no central database with information about the quality of various education and training courses.
7.17 Furthermore, currently financial advisers are not required to adopt or comply with an overarching ethical Code. The PJC Inquiry outlines ASIC and industry concerns about the undesirable subcultures developing in many financial advice firms.
Policy options and net benefits
7.18 The PJC Inquiry and FSI consider and discuss a range of policy options to raise the standards of financial advisers in Australia.
7.19 The current system of professional standards for financial advisers, as outlined in the PJC Inquiry, provides minimum standards for financial advisers to meet. However, licensees and professional associations retain discretion to set higher education standards for their advisers.
7.20 An option considered was to retain the status quo. This would not impose additional costs on financial advisers or licensees. However, consumers would be unlikely to receive the benefits of higher quality financial advice.
7.21 The FSI recommended that the minimum standards for financial advisers providing advice to retail clients on relevant financial products should include: a relevant tertiary degree; competence in specialised areas, where relevant; ongoing professional development, including technical skills, relationship skills, compliance and ethical requirements; and relevant transitional arrangements to allow existing financial advisers to upskill, including recognition of professional experience. The FSI also noted that a national exam for advisers could be considered if issues with adviser competency persist and indicated enhancements to the register of financial advisers (the register) were needed.
7.22 The intention of these recommendations was to increase the likelihood of consumers receiving customer-focused quality advice, promote confident and informed consumer use of financial advisory services, and facilitate consumer access to information about financial advisers' experience and qualifications to improve transparency and competition.
7.23 The FSI recommendations looked to reduce the levels of poor advice being given to retail clients. The requirement to hold a tertiary degree or equivalent would impose costs on financial advisers and licensees, some of which may be passed onto consumers. Licensees would also face costs in ensuring their financial advisers have met the relevant standards, including having undertaken a professional year. These costs could be mitigated to some extent by the various cost effective market developments that are emerging, such as scaled or limited advice and using technology to deliver advice.
7.24 In assessing the current system of professional standards, the PJC Inquiry recommended that industry establish an independent, professional standards body that would be controlled and funded by professional associations. The PJC Inquiry recommended a model consisting of six core elements:
- financial advisers would be required to complete a degree at Australian Qualification (AQF) Level 7 and a structured professional year;
- financial advisers would be required to pass an exam before they are authorised to provide advice;
- financial advisers would be required to complete ongoing professional development;
- financial advisers would be required to become a member of a professional association approved by the Professional Standards Council and subscribe to a comprehensive Code of ethics;
- a new standards body would be established to set the education and training standards for financial advisers; and
- enhancements would be made to the register, established by the Government in March 2015, including that the register would list any breaches of the Code of ethics and any subsequent sanctions imposed by the monitoring body.
7.25 The PJC recommendations would assist in preventing the provision of poor advice to retail consumers. The new standards would also provide the opportunity for professional associations to build up the skills of their members. Stakeholders unanimously agreed that the professional standards of financial advisers needed to be lifted and supported the core elements of the PJC's model.
7.26 However, concerns were raised during consultation about the PJC's recommendation that all financial advisers would be required to be a member of a professional association as it guarantees professional associations an inflow of members and has the potential to restrict competition by creating a barrier to entry for new financial advisers.
7.27 As indicated in relation to the FSI, the requirement to hold a degree and pass a professional year would impose costs on both financial advisers and licensees, some of which may be passed onto consumers.
7.28 The PJC recommendation of the establishment and role of an independent body has been adopted with some modifications. The Government's response to the FSI indicated that the independent body will also be responsible for developing a model Code of Ethics. The independent body will have a board comprising of: an independent chair; three directors with experience carrying on a financial services business or providing a financial services; three directors with experience in representing consumers of financial services; one director with experience in the field of ethics; and, one director with experience designing educational courses or qualifications.
7.29 During consultation, industry supported the PJC recommendation for the establishment of the independent body, indicating that the Independent Council should be responsible for setting curriculum guidelines and requirements for new advisers at AQF level 7, developing a registration exam, developing a standardised framework for the supervised professional year including ethics competencies, establishing criteria and maintaining the recognised prior learning pathway for all existing financial advisers, and developing minimum standardised framework criteria for continuing professional development requirements.
7.30 Options for industry to provide initial seed funding for the Independent Council, with ongoing funding to be provided through a sustainable funding model, were also raised during the consultation period.
7.31 In the Government's response to the FSI on 20 October 2015, the Government announced that it was committed to ensuring that consumers receive professional and fair treatment from advisers and financial product and service providers. The Government's proposed standards, subject to transitional arrangements, require:
- new advisers, from the 1 January 2019, to hold a degree (at AQF level 7), undertake a professional year and pass an exam;
- existing advisers, from 1 January 2024, to have completed an appropriate AQF level 7 bridging course (or have completed a recognised transitional pathway determined by the standards body) and have passed an exam by 1 January 2021;
- all advisers, both new and existing, from 1 January 2020, to comply with the Code of Ethics; and
- the Government to establish a new standards body to set the curriculum and training requirements and approve the exam.
7.32 The FSI received over 180 submissions, complemented by extensive stakeholder engagement through meetings and roundtables.
7.33 The Parliamentary Joint Committee on Corporations and Financial Services (the Committee) received 39 submissions from a range of relevant stakeholders. Public hearings were held on three occasions at which stakeholders appeared before the Committee.
7.34 The Government consulted on a regular basis with industry stakeholders throughout the policy development process. This included five industry roundtables on the development of policy options and the exposure draft legislation.
7.35 During consultation, stakeholders presented views on the educational qualifications and Code of ethics standards that were integrated into the Government's framework to raise professional, ethical and education standards in the financial services industry (as indicated in the Government's response to the FSI).
7.36 On 20 October 2015, as part of its response to the FSI, the Government announced it would commit to reforms to raise the education, training and ethical standards of financial advisers.
7.37 A regulatory costing for the reform package has been prepared, consistent with the Government's Regulatory Burden Measurement Framework. These costs are summarised in Table 1, noting that the 2016 offsets for the chosen option will be found from within the Treasury portfolio.
7.38 For licensees, implementation and ongoing costs are associated with developing policies and procedures to ensure their advisers are complying with the new professional standards and ethical Codes. This will include updating their IT systems to track adviser education and ongoing professional development and ethical training.
7.39 New financial advisers will incur costs associated with gaining the relevant educational and ethical qualifications. These educational qualifications, in requiring a three to four year Bachelor degree which many individuals seek to gain of their own volition, may impose significant costs from both the course fees and the hours of study accumulated.
7.40 Individual existing financial advisers will incur costs associated with updating their educational and ethical qualifications.
7.41 It is estimated that the increase in annual compliance costs for the industry as a whole will amount to $165.1 million.
Table 7.1 : Regulatory burden and cost offset estimate table
|Change in costs ($ million)||Business||Community organisations||Individuals||Total change in costs|
|Total, by sector||$77.3||$0||$87.8||$165.1|
Note: Offsets will be found for 2016 from the Treasury portfolio
Implementation and Evaluation
7.42 The implementation of these reforms will begin as soon as practicable following Royal Assent.
7.43 The Government will incorporate the new standards body that will be responsible for implementing and monitoring the educational standards for financial advisers.
7.44 The new standards body will develop a model Code of Ethics. Professional associations and other independent third party monitoring bodies will develop compliance schemes to monitor and enforce advisers' adherence to the Code. These compliance schemes will be approved by ASIC.
7.45 Existing advisers will have until 1 January 2021 to pass the exam and until 1 January 2024 to complete the required bridging courses determined by the body. If they do not satisfy these transitional requirements, they cannot continue to practice as a financial adviser giving personal advice to retail clients on relevant financial products.
7.46 A review of the professional standards reforms will be commenced before the end of 2026 to consider whether the new industry arrangements for raising professional standards of financial advisers have provided better outcomes for consumers.