Delaying the progress of the Hayne Royal Commission recommendations through Parliament during this period of pandemic paralysis seems to be a wise move but not just because the coronavirus has caused business disruptions.
There are recommendations that need a greater depth of thought, including the Hayne proposal for a revised disciplinary regime for financial advisers.
One theme of the finance royal commission’s work involved exploring whether professional associations and industry bodies are effective in disciplining members found wanting and in breach of ethical pronouncements.
The case study that shone a spotlight on this issue was that of Sam Henderson, the former financial adviser who had both a firm called Henderson Maxwell and a profile in the financial press.
The former financial services entrepreneur now runs a business flogging gift hampers. He and other folks that fronted the royal commission ended up in media coverage in February as people went diving into the ashes of the royal commission to see what else there was to talk about.
Henderson was taken to the Financial Planning Association by his client over concerns about how advice was prepared for her by Henderson and his team. One notable detail from that case study was that phone calls were made to the client’s superannuation fund by a staff member from Henderson Maxwell impersonating the client. Which, of course, was not on.
The point of that case study was that is seemed to take forever for the professional association for financial planners to conclude the Henderson matter and, in any case, the consequences of the association’s actions were likely to be limited.
Why?
Professional associations have a limited scope within which they can operate.
The most severe sanction they can hit somebody with is a fine and a forfeiture or strike down of membership. A professional body is important and necessary, but their disciplinary processes are not legal processes in the way that the processes of statutory disciplinary boards or the court system are. The statutory disciplinary boards and the court system are the forums where people who have engaged in misconduct can be dealt with appropriately under law.
The final report of the Hayne juggernaut provided a thumbnail sketch of a revised disciplinary regime that would involve registration or licensing to be tied to an individual in the same way as auditors or tax agents are registered.
The number identifies a single practitioner. This means that your meal ticket if you are a professional adviser in the financial services space would only be guaranteed while you hold onto the registration.
Case studies presented before the commission demonstrated how some advisers managed to jump from one company after another despite question marks over their conduct.
Licensing or registering individuals would mean a financial services firm would be unable to hide the person or protect an individual from their misconduct. The person can be dealt with properly by the authorities in their own right.
Hayne proposed that an employer should be required to report suspicious conduct by their employees to the regulator, which could lead to the commencement of disciplinary action.
Hayne also referred to employers needing to mandatorily refer specific conduct to the disciplinary board for consideration. External parties such as clients should have the option to refer somebody to the disciplinary board. This thing is a pincer movement of sorts.
Consider the instance where an employer was unable to or unwilling to report a registered financial planner working for them but a client referred that person to the disciplinary board.
It is open to the regulator to ask why the client was able to detect or find conduct that should have been detected by the employer. Failure to report something suspicious or a clear case of misconduct that surfaces in a client complaint might also be evidence of a failure of internal systems within a financial planning practice.
The Hayne disciplinary proposals could be enhanced by another significant initiative if the Federal government was prepared to consider a more holistic approach to regulating financial advisers rather than the piecemeal approach that is surely bemusing to any policy analyst capable of sound thought.
The body that develops professional and ethical standards for financial planners known as the Financial Adviser Standards and Ethics Authority (FASEA) needs a rethink.
It sits out in the universe like a shag on a rock while tax agents have a one stop shop.
Financial advisers should be able to get registered and monitored and disciplined by one single body the same way tax agents are. FASEA ought to be folded into a new structure that registers and disciplines financial planners rather than be a separate authority. It would be much neater and create a more understandable structure.
People need to meet certain educational standards to get registration. Why on earth would you have the body that sets those education and ethical standards sitting outside the registration processes?
The Tax Practitioners Board (TPB) sets standards for education for those seeking registration. It registers the people who meet their conditions as well as dealing with them under the disciplinary rules if they fail to behave in accordance with the ethical requirements stipulated by the law.
FASEA’s days ought to be numbered. A sensible government would consider using the TPB as the model for a revitalised structure for financial planning regulation, but this requires a government prepared to show that it has the capacity to think creatively about financial services regulation rather than just take recommendations as written.
Does that creative policy making skillset exist? We will only be able to tell in due course.