Feature: Regulation in 2016

14-Jan-2016

By Kristen Crawford

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As much of the financial services industry waits nervously to find out what impact the proposed life insurance framework (LIF) reforms will have on business, many also acknowledge 2016 could mark the beginning of a bright new era for professional standards across the board.

A number of industry associations have highlighted the magnitude of change set to take place following what Financial Services Council (FSC) chief executive Sally Loane terms the “instigation of industry-supported reforms which better align the interests of advisers and consumers”.

“This year will see the transformation of the financial planning industry into a profession, with industry-wide competency standards in the process of being developed,” Loane says.

“As well, after extensive consultations with the life insurance industry and other stakeholders, including consumers, the FSC will launch an industry code of practice.”

FPA head of policy and incoming chief executive Dante de Gori agrees 2016 will be a year of significant transition for the profession.

“The biggest challenges will be the implementation of the life insurance framework and the new education and professional standards,” de Gori says.

“The FPA has long advocated higher standards and the need to raise RG 146 to a degree requirement for new financial planners.

“This change will send out a positive message, not only to consumers, but to students who represent the future of our profession.”

With such a significant set of reforms set to come in, de Gori says he has concerns about the transition and how the changes can be implemented in a workable and practical way.

“The FPA will continue to advocate that existing financial planners have an appropriate transition plan,” he says.

“The requirement to complete a bachelor’s degree within two years is not only unachievable, but also fails to recognise existing experience and training.

“The FPA is advocating that the independent body should be charged with developing appropriate pathways, including the recognition of prior learning such as the CFP (certified financial planner) designation, years of experience and CPD (continuing professional development).”

He also has concerns over the proposal that all financial planners will need to complete a registration exam regardless of their level of education and experience, pointing to “there still being many questions about the exam proposal that remained unanswered”.

The Association of Financial Advisers (AFA) drew financialobserver’s attention to the current draft professional standards legislation, which suggests that by 1 July the proposed standard setting body for financial advisers is to be established.

“This independent council will set education standards, professional year and continuing professional development requirements, as well as be responsible for developing a comprehensive code of ethics for advisers, competency exam/assessment and transition pathways,” the industry body points out.

The composition of the body’s board of seven directors will include some industry representation and the AFA is calling for small business advice practitioners to be represented on it.

The proposed LIF reforms set to come into force on 1 July will undeniably have a significant impact on the remuneration and business structure of many third-party risk distributors, something widely discussed in the industry throughout 2015.

Investment Trends’ “2015 Planner Risk Report”, based on a survey of 852 financial planners, demonstrates the key role insurance plays in planners’ businesses, typically accounting for 32 per cent of their overall practice revenue.

However, Investment Trends head of wealth management Recep Peker points out planners expect this to decline over the medium term, falling to 30 per cent of practice revenue by 2018.

“One of the reasons driving this expectation is impact of regulatory reforms in this sector,” Peker says, pointing to the capping of upfront and ongoing commissions, which will fall to 80 per cent upfront and 20 per cent trail from 1 July, and the introduction of a two-year responsibility (clawback) period.

“If the reforms are implemented, financial planners are indicating they would move to a holistic advice model and use superannuation and [general] insurance advice to help recoup some of the lost revenue.”

Following the implementation of the reforms, the research indicates that it’s likely those who already provide risk advice as part of their comprehensive advice will start to charge more.

“The move away from upfront commissions has already begun,” Peker adds.

“While upfront commissions are a key component of financial planners’ revenue from insurance advice, comparisons to our 2014 results show planners have already begun the gradual shift from upfront commissions to hybrid commissions and fee-for-service for insurance advice.”

The implementation of capped upfront commission as per the proposed legislation will see the process of moving away from upfront commissions gain momentum and challenge those not already doing so, he points out.

With this in mind, a number of associations are taking steps to assist their members with best practice advice in life insurance and the transition to the incoming framework, including the launch of the FPA Life Insurance Advice Guide in late 2015.

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