Licensed to Kill....
Dire predictions of Advisers deserting the financial services industry in the face of the legislative review may or may not be accurate. But from the draft Bill presented to Parliament it appears that the regulator will have the power of life and death over small adviser enterprises.
There have been no approximate compliance cost estimates provided by the FMA, either direct or indirect, and the potential for compliance expenses killing off one and two-person adviser companies is very real.
If the intent of the MJW report is adopted and commission levels are reduced, the reports of advisers leaving the industry become more credible. In this regard, we await the outcome of the FMA’s investigation into so-called ‘churn’.
Of course, advisers are a resilient lot, and many will seek shelter in larger corporate structures, dealer/aggregator groups, and larger institutions such as banks and insurance companies.
The net result may well be a reduction in the choice of advice sources for the consumer.
And the potential is there for FSLAB is to facilitate the killing off the SME adviser sector.
Suggestions that the initial response will see a flurry of RFA-type adviser-owned SME companies applying for licenses have been accepted philosophically by the FMA. This contrasts with earlier indications that supervising and monitoring a smaller number of it larger licensees underpinned their preference for entity licensing.
In the absence of any cost factors, it would be imprudent to assume that the original intention of the entity licensing regime has been abandoned. Fewer licensees makes life considerably more manageable for the FMA.
This raises the spectre of a great British institution. Those of the appropriate vintage will recall the excellent BBC series “Yes Minister” – beloved by audiences but despised by British Civil Servants as being too close for comfort.
FSLAB presents the NZ regulator with the perfect Sir Humphrey Appleby scenario.
Licenses to be considered, reviewed, and monitored; processes to be examined, analysed, and discussed; procedures to be outlined, defined, and tested; reports to be prepared, submitted, and presented; investigations to be initiated, evaluated, and critiqued; committees to be established, time-lines to be developed, strategies to be contemplated – the list goes on.
This is Sir Humphrey’s dream – a veritable infinity of permanent activity with the regulatory body developing its own momentum, identity, and sense of purpose supported by its own periodic strategic review processes and documentation.
But as Murray Weatherstone has asked on several occasions on various platforms and seminars – “What is the problem that the FMA is seeking to address?”
We are constantly reminded that the FMA is a ‘risk-based regulator’. In other words, the “risk” of the consumer suffering adverse financial experience is minimal at the Big End Of Town (BEOT) so efforts are concentrated on the SME sector, where the perceived risk is greater.
If only this were true.
Experience from the Australian licensed entity regime since 2004 has repeatedly produced incidents of spectacular compliance breaches from players at the BEOT.
This has now grown to such epidemic proportions that a Royal Commission of Enquiry has been established to scrutinize the errant behavior of Vertically Integrated Organisations (VIOs), and others, in the Australian Financial Services Industry.
To quote Sir Humphrey – “This is serious – very serious indeed!” (From which you can safely imply – it’s serious.)
However, in keeping with the spirit of the Old School tie, the retired judge heading the Enquiry has indicated that there will be no punitive fines or onerous remedial measures visited upon the BEOT players. It would of course be unthinkable to do anything else – otherwise the Commission of Enquiry might produce something useful – an outrageous suggestion!
No, the Enquiry will wend its weary way through various processes, hearings, and meetings while the VIOs put their respective houses in order again and all will be well – until the next time.
Forcing a client’s best interest obligation on VIOs in Australia makes no more sense than forcing the prioritizing of clients’ interests on their NZ counterparts.
VIOs are commercial retail sales organisations charged with enhancing shareholder value by, among other means, maximizing the sale of their products and services. This does not easily reconcile with clients’ best interests, prioritizing clients’ interests, or whatever wording the legal fraternity cares to invent for the concept. It might coincidentally succeed in satisfying the selected definition but that is merely a by-product of the retail sales transaction and is remote from the primary objective.
It then becomes nonsensical to equate this sales activity to advice and attempts on both sides of the Tasman to disguise, obfuscate, and otherwise conceal sales activity behind the cloak of advice create inherent and irreconcilable conflicts of interest.
The ultimate victim of such fancy footwork is the consumer.
While the lawyers, bureaucrats, and regulators indulge in a tautological danse macabre to accommodate the commercial activities of the BEOT, financial advisers in the SME sector face the possibility of being ‘terminated with extreme prejudice’.
Suggestions of a ‘level playing field’ remain an admirable, but as yet unachieved, goal.
Time will tell how the legislative review will pan out and with submissions due to the Select Committee by 23rd February – only days away now – it is vital that the voices of reason are heard above the clamour of special interest lobbyists, and others with agendas that relegate the interests of consumers and advisers alike.
This is not a diatribe aimed at any individuals in the various organisations involved in the review process, indeed the accessibility of officials has been a significant difference between the New Zealand and Australian experiences.
But it is most certainly a comment on the system that has given rise to potentially replicating the catastrophic outcome of a similarly structured regulatory regime in Australia.
Doing the same thing and expecting different results…etc??
A check back in 12 months will be an interesting exercise.