Impending financial advice reforms could see NZ repeat the same mistakes currently on show in the Australian Royal Commission (RC) into banking, according to the head of an advisory group across the Tasman.
Peter Mancell, head of the privately-owned FYG financial planning business, said the Financial Services Legislation Amendment Bill (FSLAB) echoed many aspects of the Australian advice regime.
“Quite a lot of [FSLAB] is similar to what we experienced across the ditch,” Mancell told a group of NZ advisers last week. “You should be cautious about the legislation coming your way.”
He said FSLAB will create an entity-based licensing regime much like the Australian ‘dealer group’ model that has come under RC scrutiny over the previous fortnight.
“[NZ legislators] would be wise to keep a close eye on what happens at the Royal Commission,” Mancell said.
The RC uncovered a range of dubious practices across many institutionally-owned dealer groups that exploited the quasi-regulator status of licensees.
Under Australian rules, licensees are responsible for the behaviour of all financial advisers – legally described as ‘authorised representatives’ – that sit under the entity.
FSLAB, currently in Select Committee phase, creates the similar category of ‘nominated representatives’ for those giving advice on behalf of the licensed entity – or Financial Advice Provider (FAP). However, the draft bill also allows for ‘financial advisers’ to be individually-accountable under the law for their advice (which must, too, be delivered via a FAP).
Over the last two decades Australian financial institutions gorged on dealer groups in a feast that took their collective control of the advice industry to well over 80 per cent.
Mancell said the battle for distribution resulted in “massive corruption in the delivery of advice in banks and big institutions”.
He said the RC may accelerate the separation of financial advice from product providers in Australia that has already begun – albeit initially as the banks et al jettison their worst-offenders.
“Institutions are finally starting to kick out their shonky advisers,” Mancell said. “We’ve had 39 [former institutional] advisers approach us since this January – and we haven’t appointed one yet.”
According to figures supplied to the RC, as at April 1 there were 25,386 financial advisers registered in Australia – up 41 per cent compared to late in 2009 – distributed across 5,822 licensees. About a third of advisers worked for banks while 44 per cent were authorised by institutionally-controlled licensees.
“The financial advice industry is highly concentrated,” the RC was told. “As at late 2017, the top five entities, the four major banks and AMP, collectively held a market share of about 48 per cent by industry revenue [of an estimated $4.6 billion in the latest annual period].”
By contrast the current NZ authorised financial adviser (AFA) population of about 1,800 has been stagnant for years. A 2016 Investment News NZ report found banks and AMP owned about a third of the AFA market while stockbroking firms accounted for roughly a quarter.
FSLAB could widen the regulated advisory population to between 3,000-5,000 ‘financial advisers’ and more than 20,000 ‘nominated representatives’, according to government estimates.
While entity-based licensing was probably the only way to regulate a large, diverse advisory industry, Mancell said legislation should clearly delineate between advice and product sales.
“The regulator is seriously underfunded in Australia… I would guess the regulator is seriously underfunded here too,” he said.
Mancell was in NZ last week as a guest of the Hastings-based Stewart Group, which he serves on the business advisory board.
FYG represents about 70 underlying advisers and more than $2.8 billion in funds under advice.