The financial advice mess: How we can get it right
The removal of the accountants’ exemption has not improved advice outcomes for Australians, and it’s time for a new and improved licensing option to keep accountants meaningfully in the advice picture.
It’s no secret that 2018 was a challenging year for the financial advice sector.
The banking royal commission unearthed several instances of misconduct that took place at the large financial institutions, with conflicted pay to financial advisers cited as one of the main drivers behind the wrongdoings. The issues emerged despite the government having introduced laws intended to avoid them.
Conflicted remuneration was thought to have been stamped out when the Future of Financial Advice (FOFA) reforms came into effect in 2013. With the effectiveness of FOFA now being questioned, another section of the law has come under scrutiny, and that is the removal of the accountants’ exemption.
The exemption once granted accountants the ability to provide basic advice to their clients, including in relation to self-managed superannuation funds. However, this carve-out was removed when FOFA came into play, and a new limited licensing option was established for those accountants wishing to still provide that advice.
But this option has been deemed “unworkable” by accountants, with the majority opting to stop providing SMSF advice entirely. Their concern? They cannot operate under the regime and give effective, appropriate advice to their clients. The regulatory environment is such that an accountant can’t, for example, discuss the entirety of a client’s superannuation portfolio when recommending changes, which could work to the detriment of their finances more broadly.
Institute of Public Accountants chief executive Andrew Conway believes it is time the government took another look at the reforms and recognised the accountant’s position, so clients are ultimately better served.
“When we look at what’s happening in the broader financial services sector, there’s been countless examples given the evidence about the failure of large institutions and the provision of financial advice,” Mr Conway says.
“We believe that what it has created is this sense that advisers have left the space. Accountants are hamstrung in the advice they can provide to their clients and, ultimately, Australians are not getting access to affordable financial advice. We think it’s appropriate to be considering an advice model provided by accountants and making modifications to the licensing regime for qualified accountants.”
However, the IPA is not necessarily asking the government to go back in time. Instead, the professional body is proposing a brand-new option for qualified accountants – one that would allow them to provide advice to their clients without having to meet the extreme requirements and high fees of an AFSL.
“From our point of view, the solution, as we see it, is not necessarily to return to the accountants’ exemption. We want to look ahead. We recognise the unique positions that qualified accountants have,” Mr Conway says.
“Do accountants need to hold and pay annual licence fees when they’re seeking permission to have conversations they have always had and have the qualifications to actually have?
“We’re being told by a number of stakeholders that, ‘Oh, it’ll be too hard to do. You won’t achieve it’. I’ve never been afraid of something just because it’s too hard.”
The profession versus the government: How we got here
Once upon a time, accountants could give basic advice in relation to SMSFs.
Under the reforms from the early 2000s that created the financial services licensing regime, a carve-out was put in place for those accountants who help their clients establish SMSFs. When the federal government decided to create FOFA, a recommendation for the removal of the exemption came with it.
“We, at the time as a profession, lobbied heavily to keep the accountants’ exemption in place. We weren’t convinced at all that there was a systemic failure. There were certainly issues in relation to a small number of advisers providing advice around speculative managed investment schemes, but there was never a suggestion that there was a systemic market failure in relation to the provision of advice by accountants in relation to self-managed superannuation funds,” Mr Conway says.
“The profession lost the argument. The advice given to us by the government of the day was that they weren’t going to entertain a review of their decision.”
According to Tony Greco, IPA’s general manager for technical policy, the argument against the accountants’ exemption at the time revolved around the idea that an SMSF is considered a financial product, and not a structure. Delivering advice on an SMSF is therefore considered financial advice.
“The decision to set up a self-managed super fund comes with a lot of obligations. The government wants to ensure that those who set up a retirement fund for themselves understand the ins and outs,” he says.
“We’ve always argued that it’s just a structure. But once you’ve got the money in that structure, you need to then empower the trustee to be able to make decisions.”
With the removal of the exemption came the introduction of a limited AFSL, which allowed holders to provided limited kinds of financial services. Accountants choose to apply for their own limited AFSL or become a representative of a limited AFS licensee. However, the majority of accountants have found these options too costly and have dropped this service altogether.
“Accountants are really being asked to do almost the same level of study and the same level of licence that a full licensee would be required to hold. There’s very little difference between the limited licence and the full licence. What’s actually transpired is that the majority of accountants have not transitioned to the limited licence model,” Mr Conway says.
“Our biggest concern from the public interest point of view is that accountants have effectively left the space and are not providing the advice they once were. It’s an absurd situation, leading to this perverse relationship where the client is not getting the full suite of the accountant’s expertise.”
A hit on engagement
According to Mr Conway, the removal of the accountants’ exemption has had a huge impact on client engagement. Members have shared with the IPA their frustrations with not being able to have full conversations with their clients, which has been one of the biggest challenges for them.
“We went around the country and spoke to members directly about this issue. I’ve never had such a strong response from members on any issue than I’ve had with this,” Mr Conway says.
“Members have said it is absolute nonsense. We’ve sought from members real examples. In one extreme case, a client came for their tax return and one of the items throughout the tax return was financial advice that they’ve been given by an adviser. The statement of advice said two things: have a superannuation fund and make regular contributions. The fee for that advice was $10,000.
“You look at that and ask, ‘Why are people feeling like they’re forced in this advice model when they were once getting that advice as part of their standard engagement with their accountant?’ Members are saying they’ve lost the ability to have full conversations with clients.”
That challenge is already having an impact on the business side. Mr Greco says some clients would expect a full service from their accountant. The removal of that may have led to lost clients.
“Accountants find it quite difficult to have a conversation about a lot of the things that clients walk in to talk about because they’d be in breach of the law. It’s quite an outcome that the client will say, ‘I want to do this’, and the accountant’s response is: ‘Sorry. That’s financial advice. I can’t answer that’,” he says.
“Not being able to be serviced in that regard is obviously a negative for client relationships. Some may have lost clients because they haven’t been able to provide that full level of service.”
Mr Greco adds that most clients don’t understand what is considered financial advice. He says with an accountant present in the lives of most Australians, they are best placed to provide some sort of advice.
“Accountants have a role to play. They can make advice more affordable, if that’s one of the key objectives. If you think about it, 96 per cent of businesses go to a tax agent and 70 per cent of individuals go to a tax agent. So, there’s already a presence,” he says.
Fighting for change
Making advice more accessible is exactly what the IPA is working towards. It has been extensively advocating its revised model to government and will continue to do so, in the best interests of Australian consumers.
The term ‘qualified accountant’ would be defined using the Corporations Act definition: those accountants who belong to one of the three professional bodies and comply with their requirements.
“We think that it’s important to recognise the training and education base. And, by all means, we acknowledge the need to have to undertake a specific course of education in relation to self-managed superannuation funds and the provision of advice,” Mr Conway says.
“We would argue as well an annual training update specifically in relation to ethics. I think it’s important to show and demonstrate confidence to the market around the awareness of those issues. This is in addition to being bound by the range of professional and ethical standards we hold members accountable to.
“We think those mechanisms are sufficient to protect the consumer interest and importantly make sure that Australians continue to have access to affordable financial advice, relevant to their needs.”
As part of this initiative, Mr Conway says the IPA is engaging heavily with members to get first-hand examples and accounts of what is actually happening in practices. This is to build the evidence case.
The IPA is also engaging with the other professional accounting bodies to develop an appropriate model. The government has already heard an outline of this proposed model.
“We acknowledge that we need to always, from a professional body point of view, look for opportunities to raise the bar. And in doing so, we’re presenting what we believe to be a solution,” says Mr Conway.
“No doubt, these sorts of recommendations have their critics. With an ageing population, it’s in Australia’s best interest to have affordable and more open access to financial advice.”