The Fallacy of the Level Playing Field

From time to time, in almost every aspect of commerce and business, certain words and phrases take hold and become accepted as conventional wisdom.

One striking example in the Financial Services industry regulation space is the concept of "The Level Playing Field".

Research indicates that the phrase first appeared around 1977 in the context of the US Banking industry in an attempt to analogise sporting fair play that avoids having a slope in the playing surface that might give one team an advantage.

A laudable and worthy concept in the best traditions of even and equal competition, and highly relevant to participants in the financial services industry - or so it seems.

In the heat of battle, and in pursuit of the level playing field, Regulators and the Banking Lobby in Australia and NZ may have created a serious dilemma for themselves.

By obliging Vertically Integrated Organisations - a fancy term for product providers that sell their own products - to follow regulations around best interest principles (Australia) and client interests first (NZ), these companies are being placed in an impossible situation.

And the assumption in the level playing field concept that VIOs and non-aligned, independent-from-contractual-obligation financial advisers are doing the same thing is fundamentally flawed.

A competent and independent Financial Adviser looks for products to fit the client; those retained by a VIO are looking for clients to fit the product.

This means that VIOs and Financial Advisers are carrying out different functions for different reasons, with different motivations, purposes, and outcomes.

It therefore follows that far from being opposing teams on the same level playing field, the functionaries are not even playing the same game!

But the unintended consequences have now emerged with the Australian Regulator preparing an all-out onslaught against one set of VIOs - the Banking Wealth Management sector - the outcome of which doesn't look positive for them, or for the industry as a whole.

But how has this eventuated?

Firstly, the FSRA 2004 adopted the entity licensing route that created the Dealer group licensees, thus relieving individuals of legal liability for the advice proffered to consumers. This alone has caused more damage, angst, and misdeeds than any other financial services regulation, and the industry thought leaders generally express a preference for having anyone providing life insurance and/or investment advice to be suitably qualified and responsible for their actions.

Secondly, NZ is about to follow the same potentially disastrous entity licensing route. But that's the Government's decision and we have to live with it. The Ministry's recently released Exposure Draft makes several references to the level playing field, perhaps in the vain hope that by mentioning the idea, the myth will somehow become reality.

So why is this level playing field concept a fallacy?

Well, for a start, to be a truly level playing field, the proportionate cost of compliance would have to be the same for the major institution as it is for the sole trader or SME distribution entity. In other words, if a sole trader earning $100k p.a. in fees and commissions paid $6k p.a. to be compliant, VIOs should be up for 6% of their income also. Otherwise, imposing same/similar fees is patently unfair - akin to a flat 10% income tax rate for rich and poor alike.  Current scale fees in Australia and NZ do not accurately or fairly reflect proportionate costs.

Thirdly, by applying the client first and/or client best interest concepts, the Regulators are effectively requiring VIOs to provide open Approved Product Lists in Australia. This is fine - as long as all VIOs are willing to retain the services of those who operate in the same manner as non-aligned financial advisers. I suspect that this may not be the preferred model for all VIOs, in which case these organisations should be free to sell their products without the burden of obligatory "best advice" principles, and without the ability to claim that their people are offering financial advice.

Likewise in NZ, how can every client's interest be put first if every client is offered the same product solution? That would indeed be a remarkable feat of product design bordering on the truly genius. 

Finally, for NZ, if only the stakeholders would come to their respective senses and insist that every individual providing life insurance and investment/retirement planning advice is suitably qualified and legally responsible, the complexity would evaporate from the regulatory environment overnight.

Regrettably, I suspect the ship of common sense has already left port, but surely it's no too late to desist from obfuscating the status of VIO employees by referring to them as "Financial Advice Representatives" - there is no way on the face of this earth that this title clarifies anything for the consumer any more than AFA or RFA did.

The illusion that a level playing field is being created remains firmly in place and, like most illusions, remains elusive - apparently beyond the reach of the regulatory authorities in both Australia and NZ.