Review a resounding win for the 'big end of town'

Murray Weatherston, a founding member of SIFA, talks to us about the Financial Adviser Review Act, where it’s going and some of his thoughts on it.

Wednesday, July 19th 2017, 10:49AM

One of the things you said in your submission was that the officials weren’t going to listen to you. What’s your view on that? Do you think they’ve listened?

I’d be very surprised. I think they’ve been heavily captured by the ‘big end of town’. The people doing the review didn’t actually have very much experience in the financial sector, let alone financial advice, and I just think they’ve been captured completely by the big end of town.

One of the issues is that they just don’t have the experience, do they? They're just policy analysts, they don’t know anything - I don’t know if any of them have a financial adviser?

We did ask some of them early on in the piece, and no, I’m not even sure they had any financial products.

So, they’re coming from a zero base?

Absolutely.

How can you actually draft new regulations when it’s like that?

Well, you’ll have to ask the government that, but they seem to have taken the view that you don’t need to know anything about the subject that you’re going to regulate. All you need to know about is this magic thing called policy analysis.

One of the goals of the review is to try and get rid of some of these acronyms and make the financial advice system more accessible to the public. Do you think where they’re going is going to achieve that?

Well, if changing the acronyms of AFA, RFA, and QFE to FA, FAR and FAP makes a difference, then I’ll be very surprised. Clearly, I think what they’re trying to do is to make it easier for the big end of town – that’s the banks, the insurance companies, the big institutions – to sell their product to their customers, whereas we, at the little end of town, or the small end of town, what we’re trying to do is advise customers on what we think is the best thing for them to do.

You were saying that as long as they disclose all these things – that they work for a bank, that they’re going to sell a bank product, they might get paid commission, they might get paid a bonus - and then they can just go and sell the product and that’s advice?

That’s right, it’s called “advice”. The retired Chief Justice of Australia, Sir Anthony Mason, put it in words as well as I could put it, talking about Australia. He said, “Our system of regulation proceeds on the footing that the adviser may be a product seller. Indeed, our system enables the product seller to adopt the disguise of a financial adviser and endows that disguise with the aura of legitimacy by calling him a ‘Financial Advice Representative’.” That sums it up to me.

Pretty damning, isn’t it?

Absolutely. One of the things in the review was whether or not there should be a separation between sales and advice. I didn’t have any problems with the bank selling its own product to its customers, so long as the customer knows they’re getting a sale. In the same way, if I go into a Toyota car plant, I’m going to be sold a Toyota. I don’t expect to be sold a Ford or a Holden, or whatever, and we know that that’s the way that it works. But I think what they’re trying to do, and I like those words – “endowing the disguise with the aura of legitimacy” – it’s almost saying that what the banks are doing actually isn’t selling, when in fact, we know that it’s selling. But the people in the review team just didn’t seem to accept that at all.

It’s like that boat has sailed, hasn’t it? It’s nearly too late?

I would say so. I would say the big shape of what the new regime will be is already writ in stone, and the chances of getting any changes is well-nigh zero.

You’re also very hot on the website around putting the client’s interests first, and I think you made the comment that it was one of the areas where you actually agreed with the officials?

That’s right, because what the Code has always said is that you have to put the interests of the client first, and everybody’s gone on, saying, “yeah, that’s what it is”, but no one can actually define what exactly it is. It’s one of these sayings where everybody knows what the words are, but they don’t actually know what the words mean. What the Exposure Draft did was codify what it meant, and limited it to the circumstances where there was a conflict of interest between the client and the adviser.

And then the Code Committee itself came out with a pretty wishy-washy response.

Well, the Code Committee came out and said, “No, what’s in the Exposure Draft is actually too narrow, it narrows down what we mean by ‘putting the client’s interests first’”. Well, they’ve had eight years and they’ve never defined it. The things that I found absolutely amazing - given that this is going to go into a statute and is going to be a statutory duty for advisers – they said things like, “It’s only an aspirational goal”, “It’s a philosophical goal”, and the most amazing one to me was saying, “It was actually never intended to be argued in a court of law anyway”. Now, to me, if I have a statutory duty, I’m liable to be pinned for failing to meet that duty. I actually want to know what that duty is. I don’t want to find myself in the situation where what I thought it was, it wasn’t, because someone else thought it meant something else.

A lot of advisers haven’t engaged in this debate and yet I would have thought it was one of the most critical parts of the legislation.

Yeah, I hate to be critical of my fellow advisers, but I think a lot of them have just sat back and either thought, “Someone else will solve this for me”, or, taking an even more pessimistic view, “It doesn’t really matter whether I get engaged or not”. I mean, it’s wasting your time doing it, so just don’t do it. I think advisers could find themselves having to face things that they don’t really like when the final shape is known.

But then, they could also end up in court quite easily.

Yeah, but again, I think some of them are saying, “Oh, it won’t be me. It’ll be that other person that’ll be there, and if they get caught, well, that’s their fault.”

Coming to the Code Committee, I understand a lot of people put their names forward - you got the “Don’t come Monday” letter…

We didn’t actually get the “Don’t come Monday” letter. We got the letter, “You’ve wasted your time because we were never going to consider you anyway.”

But shouldn’t they have told you that at the start?

Well, I’ve made the point to them about that. To their credit, they’ve actually said it was a fair point.

Who do you think should be on the Code Committee? Who should it be made up of?

I’d hate to think that it’s made up of academics, do-gooders and people who have no real understanding of what the industry is about. I hope there’s a decent practitioner representation in it so that what the Code comes up with is actually sensible and workable, rather than some theoretical stuff that somebody’s got out of some journal somewhere.

Should there be a consistency or continuity between the current Code Committee and this new one?

Well, I know that actually some members of the existing Code Committee applied for the new one and got “Don’t come Monday” letters.

Oh, really?

Yeah. So it’s not automatic. I know the chairman of the current Code is at least in with a chance for the new Code. I don’t actually think it matters that the individuals be the same, so long as the approach is the same.

So, consistency of approach rather than people?

If the Code working group came in and said, “Oh, we’re now going to have a completely different structure for the Code, we’re going to throw out everything that’s been done for investment advisers, we’re going to throw all that out and we’re going to start from scratch”, I think that would be a bad move. My hope is that they use the model of what they’ve got for investment advisers and take the clauses for ethics, client care and CPT and extend them across to the other disciplines.

Authorised Financial Advisers have to do all these things, but everyone else giving advice in other parts of the industry, whether it’s insurance or mortgages, don’t have to live by the same standard. Do you understand that?

No. And on equitable grounds, that doesn’t seem right. If investment advisers had to meet Level 5, then I would think mortgage advisers have to meet Level 5, general insurance advisers have to meet Level 5, personal insurance advisers have to meet Level 5 and so on.

So, Level 5 should be the minimum across the industry? Is that your position?

That would be my position and it’s really based on the fact that that was what it was for investment advisers. Right? So therefore, everyone else should have to do that. The issue then becomes what are the alternative qualifications that they’ll accept? And that’s where I suspect a lot of argy-bargy, but if that debate is actually run by the academics and the Skills New Zealand people – I reckon they’ll get it wrong.

One of the other issues is this transitional licensing period through to licensing. It seems it’s very unclear what you actually have to do. Do you have any views on that?

Well, I think it’s clear that from February 2019, if you’re in the game, as a firm, you’ll get a transitional license. Sort of what I’d call, “if you can put breath on the mirror, you’ll get your transitional license”. You’ll then have two years to apply for your full license. The thing is, what’s not known, is what are you going to have to do to get the full license. I think the reason they have that transitional period, (they’ll hate me for saying it), but I think it’s because they couldn’t actually get their head around it. So what they’ve done is they’ve kicked the can down the road for a couple of years and they’ll figure it out along the way.

It seems that what we’re doing here in New Zealand is following Australia a little bit and moving the licensing from the individual to the firm. Is that the right approach?

Well, in 2008, they thought the right approach was to authorise the individual, because that’s where all the responsibility would be. If you look at accountants, it’s individual responsibility. If you look at lawyers, that’s individual responsibility. If you look at doctors, it’s individual responsibility. Financial advisers? It was individual authorisation; now, it’s actually going to go to firm licensing. I suspect that’s done for the benefit of the regulator because there are fewer firms to regulate than there are advisers to regulate.

It could be suggested that there would be no way the regulator would have the resources to actually do all the individuals.

And maybe they don’t have the resources to do all the firms either.

So, what do they do?

Resource-up, or take a shortcut.

Who’s got the most to worry about in these changes coming up?

Well, my pick is there probably won’t be much change for AFAs, the investment adviser people, because they’ve already been through it. I think the biggest change is going to be for the registered but not authorised financial advisers, the people that everyone has called RFAs. I think they’re going to find for the first time that they have a qualification, which will be Level 5, (well, I would argue it should be Level 5 on the grounds that that’s where investment advisers were). They’re going to be facing a code of conduct for the first time. I think there’s much more change going to occur for the non-investment people than there is for the investment people.

A lot of those people have had their heads in the sand through this review process.

Well, you know that I’ve actually tried to wake them up. I don’t want to be too critical, but I think IFA and PAA didn’t really represent those people too well. My criticism of them is that they were spending too much time in the review process trying to carve out a position for themselves in the regulatory scheme going forward, than actually to represent the members.

How much do you think the industry has spent on these regulatory changes?

Well, I had a guess a while ago that for AFAs up until now, it’s something over $100 million.

And the cost benefit?

The benefit, I think, is very light at this point in time. If the consumer is still confused, if they’re still saying they don’t know where they need to go to get investment advice and all the rest of it, then there can’t have been too much benefit. So I would say, I would score it that the cost has way, way exceeded the benefits to date. It’s not impossible that going forward, the cost of the other 25,000 people getting up to speed with what the regulations are, the cost of that won’t be insignificant.

Personally, you’ve put a lot of time and effort into this – what’s driven you to do that?

Part of it was that it was going to influence the environment of what I had to do in my own firm. But I guess partly, as a 64-year-old adviser looking back, it’s actually giving something back to the profession.

Finally, a lot of your focus has been on the “small end of town”. What do you think the future is for that part of the industry?

I think it’s very poor. I think, going forward – look, if I was 40 years of age, I’d be a sole practitioner. If I was 40 years of age as a sole practitioner, I would say, “There is no way in Hades that I have a chance of continuing to age 60 in my current shape.” The cost is just too large. The requirements that they seem to think you have to have – I mean, as a sole practitioner, should I need procedure manuals? I would argue not, but, dollars to doughnuts, the regulator would require a sole practitioner to have a procedure manual.

We’ve seen that through what they’ve done with AFAs and what they’ve done through DIMs - apparently, everything has to be codified and written in manuals.

To me, that’s more so that when the regulator comes in to monitor you, they can actually see what you do. It’s because they don’t know what advisers do that they actually need a manual for them to actually go and tick, to say, “In your manual you said you’d do A, B and C. I can see you’ve done A, show me how you’ve done B, show that you’ve done C”, whereas if they knew something about the industry, they’d be able to go in and instantly see whether the person was doing what they said they were.

It’s always seemed that financial advice is as much an art as it is a science.

It’s not a science. It really is an art. And actually, a lot of financial advising is based around relationships. The best definition I’ve ever seen of what financial planning is says, “It’s a process whereby we determine whether, and how best, we can achieve our lifestyle objectives through a sensible use of our financial resources.” That’s not a science. That is clearly art. And people are different.

With this review coming up, people might be able to set their retirement dates?

Absolutely. I think a lot of people at the small end of town will actually say, “Hey, this is just getting too hard, I tried my best but I just can’t beat City Hall.”

So, at the end of the day, the big end of town wins, and it becomes a corporatised business?

That’s right. And what happens, I think, is people, the big end of town, sells their product through the guise of advice. It just doesn’t seem right to me.

Tags: AFA banks Code Committee DIMS Disclosure financial advisers Financial Advisers Act IFA Insurance Advisers Mortgage Advisers PAA qualifications regulation RFA