Insurance Law: Australian Financial Services Reform - Essay Example

INSURANCE LAW: AUSTRALIAN FINANCIAL SERVICES REFORM By Name Course Instructor Institution City/State Date Insurance Law: Australian Financial services Reform Introduction Early in 2017, the parliament passed the Corporations Amendment Act 2017, which was followed by numerous related regulations. The Act got rid of the exemption from the prohibition on commissions’ conflicted remuneration, which is paid with regard to certain products such as life insurance. More importantly, the Act allowed the Australian Securities and Investments Commission (ASIC) to let the commissions be paid if benefit ratio requirements (requirements regarding the commission caps) and clawbacks have been met. Before the passing of the Bill, the professional standard for Australia’s financial advisers was mainly rooted in the ASIC's Regulatory Guide 146 that brought forth ASIC minimum expectations in terms of the education, skill and knowledge levels. Previously, the financial advisers were supposed to have at least a ‘Certificate III’ or ‘Diploma’ level qualification as well as agreeable inclusive training courses approved by ASIC. However, this depends on the type of financial advice being offered. The passing of the bill by parliament would significantly change the requirements for training and education, which the financial advisers will have to comply with. The reforms to the educational and professional standards come amidst the recent long-drawn-out criticism of the financial services industry in Australia. After the collapsing of major financial services companies during the most recent global financial crisis, a number of parliamentary inquiries were instigated, which consequently facilitated the identification of the main deficiencies in the Australia’s financial sector. The parliamentary inquiries also investigated financial advice disasters that have highly been publicised, eventually resulting in the Future of Financial Advice (FOFA) reforms. In Australia, there is an enormous regulatory focus aiming at improving the confidence and trust of the community in the financial services sector. For that reason, the reforms brought forth by the Act offer an additional layer to pervasive efforts in enhancing Australian financial services industry. Nearly 75 percent of Australia’s financial advisers without a degree are expecting an increase in the education programs, especially with regard to financial planning.1 The objective of this piece is to discuss the background to major changes to the educational and professional standards expected of financial advisors. The paper also considers how these changes might impact upon the Australian financial services and insurance industry. The New Legislation Overview There has been a serious concern in the public concerning the lax professional standards within the Australian financial services sector. Certainly, a number of key bodies, such as ASIC, the Financial Services Inquiry, as well as the Parliamentary Joint Committee on Corporations and Financial Services have become worried about the current standards in the financial sector. For that reason, a number of recommendations were made by Parliamentary Joint Committee in 2014 with the aim of lifting the industry standards. The government responded to such concerns by releasing Bill’s exposure draft as well as the public consultation’s explanatory memorandum. Since late 2015, the Australian government has relentlessly engaged in numerous bilateral meetings and roundtable discussions with key stakeholders in the industry with the intention of refining the details of the new legislation further.  The commencement date of the exposure draft will be 1st July 2017 and the existing advisers have been given up to 2019 to meet requirements for education and training. The bill includes lenient transitional arrangements; for instance, every adviser would be allowed to complete his/her education requirements in a period of five years on a part-time basis.2 More importantly, they will continue serving their clients. The new legislation seeks to establish strategies for ongoing supervision and development, minimum education requirements, an independent standards body, an industry-wide exam, as well as a new code of ethics. The independent standards body would be responsible for the development and implementation of the industry exam, setting education requirements as well as formulating the code of ethics. Furthermore, the body would be tasked with determining the level of ongoing requirements and supervised work experience in order to facilitate a continuous development and improvement of the financial advisers. The body will also collaborate with education providers so as to create suitable courses that would meet the requirements set forth by the Act (section 5.9 of the explanatory memorandum).3 With regard to education, the educational standards set forth by the new legislation are exceedingly higher as compared to the current regime since the financial planners have to do the basic ‘RG146 exam’ in order to become a qualified financial planner. All new advisers, would from 1st January 2019, be expected to complete a higher degree or bachelor degree, or a qualification that is equivalent to that. The existing advisers have not been mandated to go back to the institution of higher education to finish a bachelor's degree. Rather, the current advisers holding a diploma (AQF 5) can reach a similar qualification by upgrading their qualifications to advanced diploma degree level within 36 months of the education standards commencement. After that, they can further their study to upskill up to the degree level by end of 2023 (section 6.10 of the explanatory memorandum).4 According to the new legislation, any current financial advisers that would fail to meet the new educational standards by end of 2023 would have to leave the financial service industry. Under the new legislation, all new advisers would have to undertake at least 12 months of training and work which have to meet particular requirements; they would have to meet minimum continuous professional development requirements; and would have to meet the supervision requirement set forth by an independent standards body (section 8.2 of the explanatory memorandum).5 Currently, the financial industry does not have any tool for measuring performance in order to ensure skill and competence in the profession. The new legislation allows the independent standards body to introduce an industry exam (Benchmarking Exam) that would facilitate the setting of the standard (section 5.9 of the explanatory memorandum). From the first day in 2019, all new advisers would only be allowed to offer financial advice after passing the exam. The existing advisers are supposed to pass the exam by 1st January 2021. Presently, only 22,500 advisers in Australia are registered to a professional association, with all associations having their own code of conduct.6 The new legislation brings forth an industry-wide code of ethics which will be in line with the global best practice. ASIC Instrument and Licensees The Corporations Amendment (Life Insurance Remuneration Arrangements) Act 2017 seeks to introduce the ASIC Instrument that would allow for the payment of commissions for the life insurance sales, but limits would be set on the commissions and there will be clawback requirements in case of the policy is cancelled in the first 24 months. The ASIC Instrument offers a period of the transition with regard to the commission limits to allow for the capping of the commission at 80%, 70%, and 60% of the premium for the policy’s the first year, from the first day of 2018, 2019, and 2010, respectively.7 Besides that, the ASIC Instrument would set out satisfactory repayment amounts in case the policy gets cancelled in the first 24 months. The act also introduces major reforms for licensees that operate in the life insurance industry. The Licensees would be expected to understand the clawback amounts as well as commission caps in order to adhere to such requirements from 1st January 2018. The clawback amounts and commission caps have been introduced with the aim of reducing the advisers’ incentives to offer wrong advice to the clients. Clearly, the new legislation connotes that a number of requirements and obligations would be imposed on the financial advisers; for instance, both existing and new financial advisers are expected to meet the compulsory education requirements. Companies in the Australian financial services and insurance industry would be restricted from using the ‘financial planner’ and ‘financial adviser’ titles unless they meet the new standards and get authorisation to offer personal financial advice. The government has been empowered by the new legislation to institute a regulatory body that would help develop, put into practice, and oversee such reforms.8 Pursuing this further, the licensees would be responsible for making sure that their representatives adhere to the new standard. Failure to observe the new obligations would result in sanctions. Independent Standards Body  As mentioned earlier, the new legislation allows for the formulation of the new independent industry-funded standards body that has powers to govern financial advisers’ professional standards. Besides that, other independent third parties such as professional associations are expected to create schemes for compliance that would help enforce and monitor observance to the code, but must be approved by ASIC. The standards body, according to the Hon Kelly O’Dwyer (Minister for Revenue and Financial Services) would be named Financial Adviser Standards and Ethics Authority (FASEA). Therefore, the new financial advisers and planners would be required to have at least a Bachelors degree, pass the FASEA exam, and undertake ‘the professional year’. In view of this, it would be important for all financial advisers as well as firms in Australian financial services and insurance industry to prepare effectively for the widespread changes in order to ensure sufficient compliance.9 In the last few years, the number of advisors in the Australian financial planning industry has increased from 16,000 to 23,000 and it is still ballooning.10 This growth has been fuelled by the ageing population as well as the legislative reforms on superannuation, tax and pension eligibility. Between 1992 and 2017, superannuation has increased ten times to a staggering $2 trillion; therefore, this demonstrates why the demand for financial advice has continued to increase.11 Still, the growing demand for financial advisors has led to the increase of deceitful practitioners leading to scandals whereby people’s life savings get swindled out. These scandals in the financial services and insurance industry resulted in the push for professional standards. The current RG146 training standard has been considered inadequate by numerous government and regulatory reviews. As a result, new legislation has been introduced with the aim of lifting the educational, ethical and professional requirements. Effect of the New Legislation Without a doubt, such reforms are crucial since as the country’s population continues ageing, there would be a high desire to move the retirees from depending on the aged pension offered by the government into one that is being self-funded. For that reason, the country cannot afford to have inadequate financial advisors offering advice that can lead to loss of people’s retirement funds. The introduction of the new legislation would help improve the professional standards in the industry, which consequently would motivate many people to look for quality financial advice and could limit future financial crises. Undoubtedly, the reforms come at a cost since many older financial advisers would prefer to retire instead of studying. This would lead to loss of knowledge that has been accumulated for many years. Cleary, the new legislation would result in a deficit in financial advisers in 2019 and in the end of 2023 (when many of the existing advisers would retire). Ironically, the deficit comes at a time when the demand for advisors is expected to increase as the quality perception of advice amongst the people increases. This can be countered by encouraging many school leavers to study financial planning at the institution of higher education and offering scholarship and internship opportunities in the industry. This would help attract many talented students from other fields of study like management, law, and finance. Issues associated with the financial advisers’ educational, professional, and ethical standards have resulted in numerous formal inquiries that date back in 1979. Some of the measures taken to address these issues include the introduction of the FOFA, which was amendments package to the Corporations Act that sought to change how advisers delivered financial advice to their clients.12 Education Requirements and FASEA Exam Presently, minimum education, skills and knowledge standards for financial advisers have been set out by ASIC guidance. Still, both the Parliamentary Joint Committee and Financial System Inquiry have questioned the existing standards with regard to their appropriateness in making sure that the financial advisers are professionally skilled. Before the passing of the new legislation, financial advisers only needed four days of training to become qualified to offer retail consumers some financial advice. There was no requirement that needed the advisers to embark on continuous professional development. Therefore, the new legislation would improve the financial advisers’ training, education, and ethical standards significantly.13 Such reforms would bring forth considerable benefits to clients by creating confidence and trust in the financial services and insurance industry, by facilitating accessibility to financial advisers that put the clients’ interests first and who are professionally ethical and competent. Financial advising interrelates with other professions such as law, auditors, estate planners, and accounting. Currently, financial advising has numerous quasi-professional elements and scores of organisations which compare positively with well-known professional institutions. Generally, the majority of the financial advisers’ clients have scores of multi-layered vulnerabilities that face other professionals’ clients, and the major scandals are related to the signature professional issues. In Australia, the financial services are acknowledged widely for offering substandard quality. The country has also faced numerous corporate collapses and front-page scandals as evidenced by WestPoint Corporation, Opes Prime, Great Southern and Storm Financial. Besides that, the global financial Crisis exhibited the widespread pitiable financial advice standards in Australia. This was mainly attributed to Low education standards.14 Although poor standards of service, as well as behaviour, are directly related to competence standards, knowledge and expertise have an ethical dimension. The levels of individual competency among the financial advisers are presently very low to make them able to resolve the multifaceted ethical dilemmas they experience while offering advice. The competence issue can be confronted squarely by the FASEA Exam, but it would affect ethical compliance. The FASEA exam would serve as a platform for checking the standard of knowledge possessed by all financial advice practitioners. Although the exam could experience numerous pedagogical limitations, it would help improve the knowledge competence in the Australian financial services and insurance industry. Consequently, this would offer a layer of quality assurance and would standardise the knowledge sought after by the aspiring financial advisers. This ensuing standardisation would facilitate the aligning of settled expectations across students, educators, industry, employers, as well as organisations.15 Effect of Inappropriate Financial Advice The new legislation is consistent with human rights since the requirements to become a financial adviser or planner make certain that the clients get improved service standards and also inculcates confidence in the financial services and insurance industry. Besides that, the transitional arrangements would make sure that the effects brought forth by the current financial advisers are reduced devoid of compromising the new standard. Increased instances of scandals have negatively influenced clients’ confidence in the industry. Undoubtedly, lack of trust is a major barrier to clients looking for financial advice. Presently, a general obligation has been imposed on a licensee by the Corporations Act to make sure that all its representatives are trained adequately and skilled to offer financial services. The present financial advisers’ education has not included mandated requirements for supervising as well as monitoring a new adviser to allow him/her to create the needed minimum skills so as to offer adequate financial advice. The framework also does not have conduct and ethical standards and continuous professional development.16 Financial advice social and economic significance has turned out to be more and more perceptible as the financial services and insurance industry, government and Australian community search for improved advice quality. The advisers and planners were placed under a spotlight after the global financial crisis since customers losses demonstrated a number of questionable business practices. Hitherto, it has been observed that matching job opportunities to graduates that have the needed experience and skills is crucial for enabling the industry to stay abreast of the increasing demand for financial advice. The need to assist the graduates to make a successful transition through their career’s first stages adds complexity to meeting the legislative change and the increasing demand. Successful Transition to the Financial Advising A successful transition to the financial advising and planning is expensive and challenging for both prospective employers and students. The turnover cycle can be improved in early phases of financial service career by implementing ‘career path’ recommendations from scores of regulatory reforms and policy reports such as ‘one professional year’ recommendation. All through FOFA and associated reform process, how financial planning is taught in different TAFE institutions and universities across Australia have been reformed by academic stakeholders. The Financial Planning Education Council (FPEC), as well as Financial Planning Academic Forum (FPAF), was established and in 2011 the Financial Planning Education Council (FPEC) were created, with the aim of steering change in the academic area to facilitate financial planning professionalism. Besides providing different programs in formats accepted by all students and stakeholders in the industry, far-reaching financial planning-specific research has been conducted by the academic community. Presently, researchers are borrowing home economics’ theoretical models; Efficient Market Hypothesis (EMH), Modigliani’s life cycle theory, agency theory, and other models from disciplines like psychology and finance, but there exists no formal theory that explains financial planning and advice.17 Having a stand-alone theoretical base for financial advice and planning could help Australians understand the value of financial planning. The new legislation restricts the use of the titles ‘financial planner’ as well as ‘financial adviser’ in order to be utilised by the relevant providers.18 Conclusion In conclusion, this piece has discussed the background to major changes to the educational and professional standards expected of financial advisors. It has also considered how they might impact upon the Australian financial services and insurance industry. As mentioned in the essay, the new legislation seeks to quell community concern with regard to this industry. It has become imperative for financial advice sector’s participants to take into account the consequences of this new legislation. The new legislation seeks to improve financial advisers’ training, education and ethical standards by requiring all relevant providers to undertake a professional year, have at least a degree, and must pass FASEA exam, engage in continuous professional development as well as observe the Code of Ethics. I think the new legislation would be beneficial in the short- and long-term since it would reduce instances of scandals and improve trust and confidence amongst the clients. The legislation would reduce cases of inappropriate financial advice in Australia since the levels of individual competency among the financial advisers would be high. The government should come up with measures that would facilitate the retention of the older financial advisers since their accumulated knowledge is still needed in the industry. Bibliography Breakey, Hugh and Charles Sampford 'National Exams as a Tool for Improving Standards: Can Australian Financial Advisers Take a Leaf from the Professionals Book' (2017) 40(1) UNSW Law Journal 389,395. Coleman, Ann-Marie, ASIC sets commission caps and clawback amounts for life insurance (7 June 2017) Insurance Flashlight . Commonwealth of Australia, Corporations Amendment (Professional Standards of Financial Advisers) Bill 2016 (2016) Australasian Legal Information Institute . Dandan, Reena, Changes to professional standards for financial advisers: The Corporations Amendment (Professional Standards of Financial Advisers) Act 2017 (9 May 2017) Lexology . BIBLIOGRAPHY \l 1033 Deakin Business School, DBS’ financial planning programs are prepared to meet new legislative demands (12 April 2017) Deakin Business School . Johnson, Dianne, Mark Brimble and Ric Zanetti 'Industry demand for financial planning graduates' (2016) 1(1) Financial Planning Research Journal 110. O’Dwyer, Kelly, Professional Standards For Financial Advisors Introduced (23 November 2016) Treasury Portfolio Ministers Portal . Parliament of Australia, Corporations Amendment (Professional Standards of Financial Advisers) Bill 2016 (8 February 2017) Parliament of Australia . Raetze, Astrid, New Professional Standards and Training Obligations for Financial Advisers (13 February 2017) Baker & McKenzie . Raftery, Adrian, Reforms set to boost the professional standards of financial planners (7 April 2017) Mr Taxman . Tzerefos, Con, Lisa Simmons, Corey McHattan Don Maloney, Sarah Galloway and Aaron Yorke, Professional standards for financial advisers: Bill introduced to Parliament (29 November 2016) Ashurst . Read More