Say what now?
Defence of financial planners?
But aren’t they evil bankers and salespeople?
Didn’t we just conclude a Royal Commission into their misconduct?
Isn’t ASIC banning them left, right and centre?
What’s to defend?
It hasn’t been an easy last 12 years or so for financial planners. The last 12 months have been
particularly excruciating. Don’t forget, you “caused” the heavy losses sustained by superannuitants and
retirees (pre- and post-) during the GFC. That’s right, you recommended your clients invest in
superannuation and managed funds; you know, those same very arrangements which returned double
digit figures (in some cases in excess of 20% p.a) during the decade or so prior, but which all of a
sudden were the devil, because of the actions of a handful of self-proclaimed “Masters of the Universe”
some 10,000 kilometres away on Wall Street. Margin lending (and gearing for that matter) went from
the doyen to the doghouse. If you implemented a gearing strategy in 2005, you were a genius in 2007.
Clients loved you. They got their friends, families and neighbours to engage you to effect the same
money-making strategy! But a year later, you were incompetent, self-interested, conflicted, unethical,
immoral, and downright negligent, if not criminal.
So the legislature responded in the only way it knows how: more regulation. If Financial Services
“Reform” (FSR) in 2002 wasn’t enough, we devised another acronym: FOFA. The “Future” of Financial
Advice. Future, hey? Something about the “best interests duty” and not being allowed to receive
“conflicted remuneration” (financial planners caused the GFC, remember?). If those rules weren’t
enough, we expressly wrote into the legislation that planners’ income streams (and therefore their
livelihoods) are presumed to be unlawful.
And the best part? Because of actions not of their causing, financial planners became subject to a set
of laws (the “best interests duty)” which objectively assesses whether, objectively, the elements which
could only be properly determined by the planners themselves (the ones who know the clients and have
the relationships with them), have or have not been met. In other words, completely out of planners’
control, because it has to be objective: that is, pursuant to the imprudent “innocent third party bystander”
concocted by the legal fraternity in the days where lawyers got paid by the word.
And, not only that, we’ll also make sure that the question of whether or not their source of living – their
remuneration – is prohibited (“conflicted remuneration”), is objectively determined. Again, outside of
planners’ control.
FOFA can only be described as an ignominy. I should know – I was involved with the early forms of the
legislation during gestation. What is FOFA, ultimately? Apart from an intractable, undecipherable,
confusing mass of legislation, regulation and regulatory “guidance”, it’s basically the forum through
which product and platform providers’ revenue streams could be maintained, at the expense of financial
planners. Planners got lumped with all the restrictions and obligations. Existing platform revenue
streams were preserved under the pretence that “grandfathering” provisions were required as a matter
of law.
Grandfathering? You mean those very elements which are since being phased out, almost entirely?
So why did we have them to begin with? Oh, it was necessary to grandfather existing arrangements
between platforms and dealer groups, we were told, because to prohibit them would amount to an unjust
acquisition of property in contravention of the Commonwealth Constitution. One of the big wigs in town
went as far as to say that this was based on legal advice from the Commonwealth Solicitor.
OK, how about “sunset clauses”, so that we could phase out these arrangements over time? Nope, also
unlawful.
But we’ve since removed grandfathering, right? So if it was illegal to do so before, why isn’t it illegal
now?
Cue the crickets…
Unjust acquisition? Yep, FOFA started as an intractable mess on the apparent basis that we had no
choice because to do otherwise would mean the Government was unlawfully taking away product
providers’ property by making their existing arrangements unlawful from 1 July 2013, which would have
apparently infringed Article 51(xxxi) of the Commonwealth Constitution.
Article 51(xxxi) provides that the Commonwealth can make laws with respect to the acquisition of
property on just terms from any state or person for any purpose in respect of which the Commonwealth
has power to make laws.
For what it’s worth, the tobacco “plain packaging legislation” case heard by the High Court in 2012,
discussed Article 51(xxxi) in significant detail. The Court applied a very strict and literal interpretation to
the words used in Article 51(xxxi): specifically (and somewhat obviously), that there had to be a physical
acquisition by the Commonwealth of existing property. There was nothing new or surprising in that
decision. Article 51(xxxi) was very literal in its application.
On the basis of that decision, it would have been extremely difficult to conclude that the High Court
would (or indeed could) have determined that the FOFA prohibitions constituted an unjust acquisition
of property in breach of the Commonwealth Constitution: no “property” (if any) was acquired by the
Commonwealth.
Planners were dudded. The lobbyists got their way. The big end of town, led by their industry bodies,
successfully watered down FOFA to the rubble we were forced to live with, and which is now, some 6
7 years later, being cleaned up. But not before they extracted one last golden egg out of the goose.
Vested interests trumped clients’ interests. Revenue streams were protected. Planners were the
“pawns”, the “sacrificial lambs” in product providers’ pursuits to maintain and protect their revenue
streams. The quid pro quo was that we screwed the planners, because we lumped them with all the
obligations and restrictions on their trade.
This sleight of hand hoodwinked the Government. FOFA was trumpeted as a success, and a new dawn
in transparency, ethics, morality, accountability, competence, and professionalism was born!
For the few planners left standing years later, we serve the piece de resistance: FASEA. We force
planners to go back to school and get a degree (you know, because they’re unprofessional, unethical
and incompetent, remember?). We force them to do more CPD hours (you know, because they’re
unprofessional, unethical and incompetent, remember?). We mandate a Code of “Ethics” (you know,
because they’re unprofessional, unethical and incompetent, remember?). We crucify licensees who
don’t audit every one of their planners’ SOAs (you know, because planners are unprofessional,
unethical and incompetent, remember?). We subject planners to further laws, the outcomes of which
are further out of their control (check out Standard 5 of the Code of Ethics). We oblige them to crystal
ball the future (check out Standard 6 of the Code of Ethics). And if markets should fall, we’ll remind
ourselves once again that planners are unprofessional, unethical and incompetent, and introduce even
more laws!
Worse still, we’ll allow FASEA to interfere in what otherwise are private contractual arrangements
between planner and client (check out Standard 7 of the Code of Ethics).
Again, outcomes are out of planners’ control.
Lawyers are nowhere near as heavily regulated as the financial planning “profession”. Planners have
been legislated to within an inch of their lives. And, sadly, some planners have paid with their health
(worse still, their lives) both during, and following, the Royal Commission. COVID-19 has only served to add to planners’ woes. The stress has taken its toll. Mental health illnesses are on the rapid rise. And
all the while the legislature and industry & regulatory bodies collude to drive the nail deeper.
But the struggles go well beyond legislation. Planners’ income streams are at the behest of the
platforms. If you don’t play by their rules, they’ll cut your access, and switch off your fees. Never mind
what your contractual arrangements say about that. Never mind how it impacts your APL and your
ability to discharge the best interests duty. Never mind that the platforms interfere in legitimate
commercial relationships (ongoing service agreements and the like) between planner and client.
Worse still, you could be an AMP Financial Planning adviser, and have your financial livelihood and
retirement plans obliterated at the stroke of a pen, apparently on the basis that “economic
circumstances” warranted it. Oh, but those same “economic circumstances” still require you to pay back
in full those loans AMP gave you when you bought your book from them at inflated prices to begin with.
What’s good for the goose evidently isn’t so for the hapless gander…
But again, the planners caused the GFC, so it all seems eminently appropriate.
I guess it’s academic really, because soon (and in any event) we’ll be replacing planners altogether
with something call “robo” advice. Yep, robots. Yep, clients’ financial interests are now at the behest of
service delivery by artificial “intelligence”. Yep, we’re now reducing the financial planning profession to
the by-product of mechanical engagement: what was once financial advice is now a set of scripts
capable of being delivered via artificial means. Human planners replaced by artificial counterparts. We
don’t even call it “financial planning” anymore. We call it “robo advice”. Gone are the days of
independent thinking. Gosh, that borders on criminal. Conform, or else! Whoops, can’t use the word
independent. That’s illegal, too…
We conveniently overlook that “robo advice” services (including the recently-trumpeted “Digital SOA”)
only serve to compound the regulatory issues facing the industry, because they embed the very thing
ASIC wants to eradicate: templated SOAs. And good luck reproducing a digital SOA to ASIC in
response to a section 33 Notice! The industry has gone mad. And unnecessarily so. We’re not talking
rocket-science here: building a relationship with a client and understanding their needs doesn’t need
whiz-bang digital intervention. It’s doing more harm than good. But nor did we need legislation by
suffocation.
Let’s go back to the Royal Commission. In my view, it disproportionately focused on licensees and their
planners. But those players didn’t set the rules. Product and platform providers set the terms of
engagement. Planners were left with no choice but to play by those rules. If they didn’t, they’d lose
access to those products and platforms. Much like wholesalers needing to conform to supermarket
giants’ rules of engagement to be granted “shelf-space” in supermarket aisles. Conform, or your product
is banished from existence! But instead of blaming the game, we crucify the players.
Unfortunately, ASIC is compounding the problem. Lambasted in the Commission and across
mainstream media for being reactive, soft, benign, inept, and insipid, among other things, ASIC has
responded with aplomb, governed by a new seek and destroy mandate to eliminate any and all
recalcitrants from the industry. Moreover, ASIC has shifted its stance on what qualifies for expulsion.
Minor offences now subject licensees and their planners to oblivion. And bear in mind ASIC is meant
to be working with licensees in consumers’ interests.
They flexed their muscles on Dover, wiping out hundreds of planners and thousands (perhaps tens of
thousands) of client relationships in the process, not to mention abandoning those same thousands of
clients and leaving them alone in the woods to fend for themselves. Makes you wonder why we have
legislation to purportedly “protect” the consumer if the “watchdog” can throw caution to the wind.
But ASIC wants to impose “New World Order”.
And it’s not pretty for licensees. It starts covertly. Then it’s Armageddon.
Let me pose a scenario to you. You receive a letter from ASIC. Perhaps a standard section 33 notice.
Or a section 912C direction. Or they’re reminding you of the unlawful usage of the word “independent”
on your website (yes, they’ve got analysts trawling the web looking for dirt). Perhaps they want to conduct “surveillance”. Or perhaps a friendly phone call wanting to ask a few questions and to make
time to come in and “do a site visit”.
Awwww, what a friendly and proactive regulator! All seems harmless….
Fast-forward 6 months, and you’re staring down the barrel of (pick one): Enforceable Undertaking,
Licence Conditions, Penalties, AFSL Cancellation, or a Banning Order.
It’s all a bit of a blur: what started out as friendly dialogue suddenly sees your AFSL business fighting
for its life. You’re at a loss as to why. “We were open and transparent with them”, I hear you say.
Sound scarily familiar? Welcome to the new ASIC. The tough guys in town trying to fool the world into
believing that the public humiliation dished out to them under the heated spotlight of the Royal
Commission, was merely an aberration.
The analogy is this: ASIC rings your doorbell. They want to come in, and they exercise their right to do
so. It seems all “nice”. You say to yourself, “we’ve nothing to hide, so let’s show them what we’re all
about, and they’ll thank us and move on. They’re focusing on AMP and the Big Banks, anyway…”. So
instead of moving them along after a cup of coffee, you give them a tour of the house. They notice a
set of stairs, and you proudly inform them that you have 3 bedrooms upstairs. They ask to see your
bedroom. You let them in. They ask to see what’s in your wardrobe. Still not having cottoned-on to the
fact that your home is being raided, you not only open your wardrobe, but you show them your partner’s
wardrobe. Next thing you know, they’re in your children’s bedrooms. And they’re still ransacking the
place months later.
Again, sound familiar?
I’ve challenged my clients to reflect back on their own recent dealings with ASIC. Each and every one
of them regret their transparency early on.
“But they can do what they like – they have the statutory power to raid your home!”.
Not quite.
ASIC has released in excess of 100 Regulatory Guides (don’t we know it!), several of which set out the
legal threshold requirements for the exercise of ASIC’s functions and powers. For example, did you
know that ASIC simply does not have an unfettered power to cancel an AFSL or issue a banning order?
It must be necessary to do so: yes, necessary, not because they simply can. There’s a whole bunch
of tests on what “necessary” means. Ultimately, it has to do with preserving the integrity of the financial
services system and protecting consumers’ interests. Surely, then, mere technical breaches which do
not impact clients at all, don’t render it necessary to expel you into oblivion?
Also, don’t assume the statutory notices issued by ASIC are valid to begin with (for example, do they
establish a proper jurisdictional basis to ransack your home, or are they simply issued for something as
curiously broad as “to assess compliance with Chapter 7 of the Corporations Act“, noting that Chapter
7 of the Corporations Act is the entire substratum of a licensee’s obligations)?
What is often overlooked is section 1(2)(d) of the ASIC Act (yes, its own Act), which obliges ASIC, in
the performance of its functions and exercise of its powers, to strive to administer the laws that confer
functions and powers on it effectively and with a minimum of procedural requirements. Also, the
Financial Management and Accountability Act 1997 imposes criminal penalties on ASIC officials for
exercising functions and powers in a way which constitutes an improper use or handling of public
monies.
I’ve observed several instances of ASIC conducting its functions outside its powers, and/or without
proper process (for example, exercising “investigation” functions during “surveillance”, such as
obtaining records or contacting clients: no, ASIC cannot do these things during “surveillance”).
The worst recent client experience was that of a Responsible Manager of a licensee, who was contacted
by ASIC to come in for a “voluntary” interview (yes, voluntary) in relation to another licensee under
investigation.
“Sure, why not? I’m happy to assist in any way I can”.
18 months of no contact from ASIC post-interview. Then, wham! Two statutory notices of intent: one to
cancel my client’s AFSL; the other to ban my client from providing financial services.
“So let me get this right”, I hear you exclaim. “ASIC called your client in for a voluntary interview in
relation to an investigation into another licensee, and they used the information obtained from him in
that interview to shut down his own license and ban him from the industry?”
Bingo!
Naturally, I sought the transcript of the “voluntary” interview. To no one’s surprise, at no time prior to,
or during, the interview, was my client informed (as was legally required) that:
- He was under no obligation or compulsion to attend the interview;
- His responses in the interview would be used against his own AFSL or otherwise form the basis
of surveillance, or investigative or enforcement action against his own AFSL; - His responses in the interview would be used against him or otherwise form the basis of
surveillance, or investigative or enforcement action against him (especially in his capacity as
director and responsible manager of his AFSL); - He could terminate the interview at any time; and
- Being a voluntary interview, and not one conducted pursuant to the exercise of ASIC’s powers
under section 19 of the ASIC Act, this meant that my client was not protected in the event of a
breach of confidentiality, and – most importantly – was not protected by the privilege against
self-incrimination, and could not avail himself of the privilege in relation to each question
asked of him during the interview.
Imagine my client’s response when I brought these to his attention.
It’s all about the Media Release. And, yes, ASIC is on record (I have the emails!) where they have asked
licensees to “choose” or “negotiate” their outcome, but on the condition that the outcome is one on
which ASIC can issue a media release. In other words, it has to make ASIC look good. ASIC needs to
show the world how tough it is. To give you another example, one of my clients had already moved to
voluntarily cancel its AFSL (for separate commercial reasons), but ASIC since advised that it still wished
to cancel the notice for alleged breaches (so the media release that it so desperately craves could be
issued).
“Ummm, but it’s no longer necessary to cancel the AFSL, because the licensee has already done so”.
“Even though the licensee sought to voluntarily cancel its AFSL, we consider that we should still cancel
the AFSL, because of the risk the licensee will breach its obligations in the future”.
I’m not making this up.
ASIC no longer wishes to work with licensees and planners. It has a vendetta against them. ASIC no
longer takes heed of its own prescribed mandate: it wants to throw the book and beat its chest. It surely
cannot be sustained. It’s a disaster waiting to happen. Can we not see the consequences of this
regulatory vendetta against planners and their AFSLs? Apart from the obvious, such as fewer AFSLs,
fewer advisers, clients being left without advisers (wonderful demonstration of ASIC’s pro-consumer
mandate – just ask Dover clients!), advice priced out of reach for ordinary Australians etc…, what about
the inevitable market failure?
“Market failure”, as we know (at least in an economics sense), essentially arises where there is an
inefficient distribution of goods and services in a free market, such that it leads to irrational behaviours
and outcomes. Furthermore, the individual incentives for rational behaviour do not lead to rational
outcomes for the group. Put another way, individuals make what appear to be correct decision for
themselves, but those prove to be the wrong decisions for the market.
Sounds disturbingly like the financial services industry, does it not? Look at ASIC’s behaviour. Look at
the legislation. Look at the way service providers act in their self-interests (product providers,
compliance consultants and lawyers, 8-figure “remediation” programs run by the Big 4 accounting firms,
to name a few – where everyone is both out for themselves and acts to protect themselves). In an
economics sense, this leads to a net social welfare loss (in this case, consumers suffer greatly, because
of the increased costs of, and limited access to, financial advice and services). Stakeholders’ pursuits
of self-interest lead to inefficient and adverse outcomes for consumers. Ironically, in a traditional
economics sense, it is the role of governments to intervene to correct this market “failure”: however,
ASIC and the legislature appear to be the main protagonists. In any event, the end-consumer loses.
Everyday Australians are being priced out of advice and services, and therefore improved retirement
outcomes. The social welfare costs (especially the increased reliance on the public purse as a
consequence) are immeasurable.
ASIC’s “shoot first, ask questions later” approach has crippled the industry. One mistake, and you’re
out! Recent experiences show that they’ll keep looking until they find something. They’re no longer
about the consumer. They’re no longer about educating and working with planners. Rather, we’re at the
mercy of the equivalent of a top-tier litigation law firm, filled with gun-toting mercenaries governed by a
mandate to seek and destroy. And they’re comfortable enough to act unlawfully and outside powers,
knowing licensees and planners are too exhausted and resource-drained to take up the fight.
What do you think’s going to happen when they’re given the unfettered power to tap planners’ phone
calls? That one’s going to end well…
A few rotten potatoes have contaminated the entire shipment. ASIC should let the industry self-heal.
Market failure is compounded (and indeed reinforced) by what I have termed the “Rome Effect”: much
like what happened in the Eternal City, we keep building new on old, in the hope that problems are
solved. What then happens is we strip back the “new” and realise the “old” was pretty good to begin
with, and we’ll do what it takes to preserve it! And then we regret ever covering the “old” to begin with.
We have legislative precedent for this in the financial services sphere. Just look at the 8-page Short
Form PDS. Weren’t we thereabouts (remember the old KFS?) pre-FSR? We didn’t like KFSs, so we
created the 100 page PDS. That was a mess, so we reverted to an 8-page document. Today, we have
100 page SOAs. We’ll no doubt have the “8-page SOA” legislated in the near future (delivered by robots
of course!).
By all means, weed out the crooks. And there are plenty of them! And, yes, there are several who
deserve to be expelled. But the industry has been kicked around long enough, and is doing its best to
self-heal. So let it do just that as well. Give it time. Give it space. Give it support. And let planners do
what they’re best at – which is building trusted relationships, and working with their clients to deliver
better retirement outcomes. The Australian economy needs good financial planners more than it is
prepared to realise.
Cristean Yazbeck
Managing Director, Hamilton Blackstone Lawyers
cyazbeck@hamiltonblackstone.com
www.hamiltonblackstone.com
