Professional Standards of Financial Advisers Legislation Passes House of Representatives

Thursday 9 February 2017 @ 10.39 a.m. | Corporate & Regulatory | Taxation

The Corporations Amendment (Professional Standards of Financial Advisers) Bill 2016 (the Bill) passed through the House of Representatives on 7 February 2017. The Bill has been a year in getting to that stage, being first released as a draft in December 2015 (see our article Draft Corporations Amendment (Professional Standards of Financial Advisers) Bill 2015), and being then introduced into the Parliament as a Bill on 23 November 2016.

Key Aspects of the Proposed Legislation

The Bill is said to address the following key areas of financial adviser training and standards:

  • The provision of compulsory education requirements for both new and existing financial advisers;
  • Supervision of the requirements for new financial advisers;
  • A code of ethics for the financial advice industry;
  • The development of an exam that will represent a common benchmark across the industry; and
  • The development of an ongoing professional development component.

Why the Proposed Legislation is Needed

The current position is that while the Australian Securities and Investment Commission (ASIC) provides guidance (see ASIC’s Regulatory Guide 146: Licensing: Training of financial product advisers (RG 146)) for the minimum knowledge, skills and education standards for financial advisers there are concerns with how that guidance has been followed and implemented. According to the Ministers for Finance's Media Release issued after the introduction of the Bill in the House of Representatives, both the Financial System Inquiry and the Parliamentary Joint Committee have raised concerns with the current standards applied to financial product advisers, and have questioned whether they were appropriate to ensure that advisers were professionally competent:

“The current requirements have allowed some financial advisers to become qualified to provide financial advice to retail consumers after only four days of training. There is also no specific requirement currently for advisers to undertake continuous professional development. The Government’s reforms will significantly increase the education, training and ethical standards of financial advisers, who will need to be qualified to a standard equivalent to a degree, . . ” .

How the New Legislation is to Operate - Timing

According to the Minister for Finance's Media Release, the new professional standards regime for Financial Advisers is to commence on 1 January 2019 and, from that date, new financial advisers entering the financial advice industry will be required to hold a relevant degree. Existing financial advisers will have access to transitional arrangements that will allow them two years (until 1 January 2021) to pass the relevant examinations, and five years (until 1 January 2024) to meet the education requirements. The transition period recognises that existing advisers may need to complete the education requirements on a part-time basis, while continuing to service their existing clients.

How the New Legislation is to Operate - Framework

The Minister for Finance's Media Release indicates that the government intends to establish an "independent standards body", as a Commonwealth company, to administer the regime. From the date of establishment until the regime commences on 1 January 2019, the body will be given the responsibility for:

  • developing and  setting the industry exam;
  • developing the code of ethics; and 
  • setting the education requirements, including working with education providers to establish appropriate courses. 

According to the Minister for Finance, the independent standards body will develop the relevant examination, the ethics Code, and the standards in accordance with international best practice and will  consult broadly with stakeholders throughout this process. The body will be funded, both initially and on an ongoing basis, by the finance industry.

Reforms will Benefit Consumers

According to the Minister for Finance, the reforms will address some of the problems and fallout from recent scandals involving poor or negligent financial advice and rebuild customer confidence in the industry:

“These reforms will deliver significant benefits to consumers by building trust and confidence in the financial advice industry, by ensuring that people have access to financial advisers who will put their interests first, and who are professionally competent and ethical, . . .”.

Reaction and Comment

As already stated above, the Bill passed the House of Representatives on the first sitting day of the Federal Parliament for 2017 (7 February 2017). While allowing passage of the Bill, the opposition did not let it pass without contest, and the shadow assistant treasurer, Mr Andrew Leigh, proposed an amendment calling on government to apologise for consumer failures in the financial advice sector as follows:

“Whilst not declining to give the bill a second reading, the House notes that in recent years, numerous cases of inappropriate financial advice have had a negative impact on Australian consumers’ confidence in the financial services industry, . . . ”.

The amendment went on to call for an apology from the government for allowing the industry to reach a point where the ". . . lack of trust has become a barrier to consumers seeking financial advice".

The opposition's amendment was subsequently defeated 75 to 68.

Money Management quotes Association of Financial Advisers (AFA) chief executive, Brad Fox as indicating that the measures will have a positive effect on the image of financial advisers and the industry in the minds of consumers, saying:

"We believe the legislation will propel financial advice forward in the minds of consumers and make strides towards achieving greater public recognition and ultimately take up of advice".

Mr Fox is also reported as commenting that a key concern will be defining what "degree equivalency" means so that transition pathways for existing advisers can be clarified.

It is also reported that the AFA Professional Standards Working Group has started preparing for the  AFA to obtain a registered compliance scheme to monitor and enforce the future Code of Ethics and that once the Professional Standards Body was set up, the AFA would ". . . examine the syllabus for bridging courses and bachelor degrees, transition pathways for existing advisers, Code Compliance Scheme requirements and integration of Tax Practitioners Board requirements."

Next steps

While there has been some disagreement at the detail level, the legislation is not expected to run into difficulty in the Senate and should be enacted in the near future. Delay in actual implementation will be more related to the long lead up period required for setting up the training and monitoring provided for in the legislation.

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