Are AFSLs on the chopping block?

Alex Burke,  Senior Writer,  No More Practice Education

Late last year, we discussed the potentially massive ramifications of the Australian Law Reform Commission's review of legislative complexity in financial services.

The review, which is ongoing, involves examining the full chain of interdependencies and supplementary legislation connected to the Corporations Act, including the ASIC Act, the SIS Act, the Life Insurance Act, various state and territory laws and regulatory settings implemented by ASIC, APRA and the RBA. In its interim report, the ALRC noted that at least partly due to these interdependencies, the Corporations Act has become "the most complex on the Commonwealth statute book."

And given that the Act appears in Federal Court judgements more than "almost any other Commonwealth Act," this complexity "likely has a significant effect on businesses, consumers, legal professionals and the judiciary." 

At around the same time, Clime Investment Management CEO Annick Donat told us she had high hopes for the review given that "they're going back to basics" and "[reframing] the problem statement" instead of making minor adjustments to the existing framework (such as, for example, reducing the size of the SOA). 

It seems that FPA CEO Sarah Abood agrees with this sentiment. Commenting on the FPA's new submission to the ALRC review, Abood said: "“The financial planning profession doesn’t need more regulation, it needs better regulation. Financial planners are required to interpret a never-ending list of contradictory requirements placed on them. To ensure compliance, planners are required to comply with four laws regulated by eight regulators with additional oversight from [licensees] and professional associations and additional consumer complaint mechanisms through two ombudsman services and the courts.

She added: “This all comes at the cost of providing clear, concise, efficient and affordable advice to ordinary Australians who need it most." 

The submission itself expands on Abood's comments, noting that the complexity of the regime in which advisers operate "creates significant risk that the regulatory and compliance requirements under one Act and Regulator may differ to those of others, leaving financial planners at risk of breaching one regulation in order to meet the requirements of another set of regulatory requirements."  

"Financial planners must interpret how each different set of regulatory requirements for each different Regulator differ from other regulators to ensure they do not inadvertently breach requirements. This has a significant impact on costs and efficiencies, particularly on small licensees who do not usually have the in-house expertise or economies of scale to meet the regulatory demands."

In order to address this problem, the FPA has proposed five key points from its 2020 policy platform. The first is renaming general advice to something like "product information" or "strategy information". The submission argues that these labels would "better [reflect] the definition" while being "less misleading to consumers" - although it is worth noting ASIC's own research on topic, which suggests that the manner in which advice is delivered has more of an impact on consumer understanding than the label it is given. 

The submission also argues that the terms "financial adviser" and "financial planner" - along with any similar titles such as "financial coach" and "financial mentor" - should be reviewed and potentially restricted so as to protect consumers from unqualified advice. The "sophisticated investor" category should also be revised, with an increased dollar-value threshold as well as a measure that tests the financial capability/literacy of the individual. 

Next, the submission recommends the separation of product and advice - a central topic within the interim paper issued by the ALRC, which questioned whether Chapter 7 should be included in the Corporations Act at all or reframed to prevent  the definitions of "financial product" and "financial service" being used inconsistently throughout the Act. In the paper, the ALRC argued that these inconsistencies "[undermine] the coherence of the regulatory design for financial services law."

Finally, following on from its long-term advocacy for individual registration of financial advisers, the FPA submission recommends cutting ties between advice and the AFSL system. The AFSL, the submission argues, "should be changed to focus ... on the regulation of financial products and remove the requirement for an AFSL to cover the provision of financial advice." 

Justifying this, the FPA's submission acknowledges the important role the AFSL system plays in the regulation of financial products and services, but given that recent reforms have "focused the regulation of financial advice at the individual practitioner level," the continued requirement that an AFSL be required to provide advice "duplicates regulation, creates significant additional regulatory cost and introduces potential conflicts between the views of the licensee and the professional judgment of the financial planner." 

While the ALRC's final report isn't due until November 2023, the interim report has already made recommendations regarding certain "quick fixes" that could be implemented as part of the Quality of Advice review. What kind of an effect do you think the FPA's suggestion of removing the AFSL requirement would have on financial advice? Do you see it as feasible in the near term? 


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