Registration of Advisers - beware of unintended consequences

Recently we approached the issue of individual registration of advisers. There has been promotion of this by the FPA and a number of other interested parties. We don’t have a direct interest in this because we do not provide personal advice to retail or wholesale clients, but we have an indirect interest because we are vitally interested in a strong and viable advice profession.

Imagine for a moment there were no advisers. The options would be either a DIY investment approach or simply outsourcing investment outcomes to a product issuing institution. A moment’s reflection tells you that receiving expert advice makes it more likely that goals are articulated clearly, prioritised and achieved.

So how does this bear on the proposal to replace the current AFSL based structure with individual registration? ASIC’s funding levy publication notes there are 3,051 AFS licensees which provide personal advice through 22,652 advisers.

Well-meaning actions or regulations frequently have unintended consequences. So what might be the consequences if (i) personal registration replaces AFSL responsibility for personal advice or (ii) the current, evolving regime continues?

Development of Advice: In the event of individual registration, organisations will continue to make a business of providing services current AFSLs offer, but without the licensing element. An individual, registered adviser will be personally, legally liable for the service they provide, so may be more likely to spend extra time and money reviewing compliance-related aspects of their operations. Proponents say this is the whole point – personal responsibility will bring with it better advice. But the overhead of managing the practice may make it impractical to deliver to more than a handful of clients. Currently the licensee is responsible for developing and monitoring the creation of advice and has the economies of doing this for a group of advisers, not at a single adviser level. The counter argument says continuing the current AFSL regime could result in the development of a new set of vertically integrated organisations, smaller than the banks and insurers but nonetheless primarily product issuers.

Costs: If individuals become responsible for every aspect of the service they provide, will this lead to a market of subscale individuals each getting their own legal advice, compliance services, technology, research and so on? The costs of this could be huge – larger than the current arrangement where licensees take this responsibility. One way individual advisers will manage costs may be to avoid seeking advice or compliance services and only use free CPD for education, which hardly bodes well for high quality services. Alternatively, if the current regime continues, Licensees themselves may skimp on services under pressure from advisers to cut costs. But at least they have a pool of advisers to spread costs over.

PI Insurance: It’s been challenging for licensees to get PI renewed at reasonable premiums over the past year or so. Individual insurance policies might be an altogether harder challenge, with a steep increase in cost per adviser from the administration costs of underwriters and brokers servicing 22,652 policies not 3,000.

The Regulator and other Bodies: ASIC operates on a cost recovery model, and those costs are rising well ahead of inflation. If, instead of having first recourse to 3,000 licensees they focus solely on 22,000 advisers, the cost per adviser is likely to rise steeply, transferred immediately to advisers through the ASIC funding levy. It’s also hard to conceive that costs for FASEA, AFCA, the Code Monitoring Body and the Compensation Scheme of Last Resort could be lower under individual registration than under the current AFSL regime.

We need to be careful that the focus on ethics as a reason for individual registration doesn’t have unintended consequences which detract from achieving the profession’s fundamental purpose of assisting clients to achieve their personal outcomes.

Creating advice for retail investors is almost the definition of mass customisation. Doing this requires a systematic approach throughout, and one where the responsibility for each step is clear. Will individual registration make this a more likely outcome?

Conclusion: The advice industry is undoubtably undergoing a period of significant change. The royal commission, the deinstitutionalisation of advice, new regulation, generational change and the impact of managed accounts and new technologies are all changing the advice landscape. Further reform can be positive, but careful assessment of the potential impact of mooted changes is needed if the industry is not to find itself dealing with negative consequences that were foreseeable.