Investment Regulation Will It Help

For years, we have advocated that the investment advisory industry needs to be properly regulated.  Now that it is finally getting close, perhaps it is time to look at what is going on.

Currently, unless someone is stupid enough to promote investments that have not gone through the registration process with the appropriate authorities, there are relatively few penalties that rogue advisers face.  There are supposedly around 10,000 people in the industry offering investment or insurance advice.  Of these, around 1400 belong to the Institute of Financial Advisers (IFA).  This professional body has an adviser disciplinary process.  The Society of Independent Financial Advisers does not have a complaints procedure in place. 

Over the past few months when we have been asked to review investments that have not been made through ourselves, the advisers associated with the severely impaired portfolios were not members of a professional association where there was a complaints procedure in place.  There were some advisers who were bank employees, and complaints have now been made to the bank and the banking ombudsman.

The proposed new regulations will see advisers fall effectively into one of two different categories.  By 2010 regulation will be in place.  The details have not yet been finalised.  Essentially, all advisers who wish to advise on and sell Category 1 products will need to become an Authorised Financial Adviser (AFA).  Category 1 products are investment products other than term deposits and other simple products.  Category 1 products include life insurance and income protection products sold after 31 December 2008. 

AFAs can be authorised directly with the Securities Commission or they can join a Qualifying Financial Entity (QFE).  We would expect providers such as the banks, and some large groups such as Spicers and Money Managers will apply to be Qualifying Financial Entities.  The QFE would then take on the responsibility of making sure that the adviser was compliant.

At this stage a Code Committee has just been appointed.  The Code Committee will determine the minimum competency standards for an AFA.  At this stage, the indication is that an AFA will need to hold Level 5 National Certificate in Financial Services, have produced an Adviser Business Statement, and be able to prove they meet all the regulatory standards.

In our opinion, the minimum education standard if it is set at only Level 5 of the National Certificate in Financial Services, is far too low.  Given that the Code Committee does not have any practicing independent financial planners on it, the chances are that what it puts in place will favour product providers.  Product providers naturally want to sell product, and as much product as possible.  Hopefully, David Russell (former head of Consumer) will keep things in check, as surely the aim of regulation is to improve consumer outcomes. 

It will be interesting to see if investment advice really does improve under regulation.  It seems that the advisers operating under a QFE, may not have the level of qualifications and experience that those who are licensed directly with the Securities Commission as an AFA will be required to have.  This is possibly no different than what the current situation is.  Unfortunately, it is no guarantee that problem investment products are not sold, or that appropriate products only are used.  It will not stop the greed and deception problems that occurred with a number of finance company offerings.  What it may do, is encourage a QFE to put strict limits on the maximum exposure of a product within a client’s portfolio.  This would have substantially reduced the problems that the ANZ bank is now dealing with.