As anyone who has watched a game of Australian Football knows, the rules involved are minimal and do not inhibit players excessively. The same directness of approach and focus on objective has informed the Australian government in its proposals for the banning of commission and regulation of financial advisers. Compared to the FSA’s retail distribution review (RDR) with its voluminous reports and consultation papers, the Australian Ministry for Financial Services rules are a model of brevity and clarity.
Chris Bowen, Minister for Financial Services in the last Australian government has gone for a straightforward ban on commission for all non risk products, similar to the RDR, but there the similarity ends. He has not got as enmeshed in the requirements for disclosure or for the adviser qualification reforms.
This is a smart move, as the result of the UK’s approach is to remove from the business many experienced advisers who feel too old to go back to college and be certified by people half their age and without their experience of providing financial advice. In reality, the quality of advice is not just about product knowledge but about the ability to assess the needs of real people, the kind of ability that primarily comes from life experience. Australia is recognising this, while the UK is taking a box-ticking approach which won’t prevent bad advice being given, but will protect bad advisers from being sued – not the way to go.
Australia, instead, is placing an explicit fiduciary on financial advisers to place their clients’ interests ahead of their own. This is the kind of principle that can be easily tested in court and will prevent an adviser escaping an accusation of bad advice by pointing to qualifications achieved and disclosure documents posted. After all, qualifications are useful, but they do measure an ability to pass an exam. They don’t tell you if the adviser is capable of applying the knowledge to real-life situations.
This duty will include a ‘reasonable steps’ stipulation which will place a duty on advisers to take reasonable steps to provide whole-of-market advice but does not expect them to base their recommendations on an assessment of every single product available in the market. This decision was based on practicality and cost.
Again, a far more sensible approach than insisting that independent advice should cover whole-of-market or else be labelled “Restricted”, as the FSA have decided. The UK RDR will mean that true independent advice will be very expensive or else customers will have to settle for the “Restricted” advice, which will be a worrying concern for the non-financially literate.
A good extra regulation is that the Australian rules ban remuneration by percentage of the funds under management, if the product or investment amount is geared. This is the kind of practical ban that will remove the incentive for financial advisers to encourage reckless gearing by the customer, when it is not in their best interest.
Overall, the Aussie rules for financial advice score heavily over the more cumbersome and excessively detailed approach in the UK and, with fewer loopholes, are more likely to achieve their aim.