Community expectations of the quality of financial advice in Australia are extremely high, given the critical position financial services holds in Australian society.

The Hayne Royal Commission into Banking and Financial Services provides evidence that the industry, including the regulators, are struggling to oversight the sheer volume of advice. ASIC Deputy Commissioner Peter Kell gave evidence at the Royal Commission that he has only 60 staff to oversight the 25,000 advisers. CBA gave evidence that “they couldn’t tell” whether fees were being charged or not due to the volume of advice and outdated or nonexistent systems.

It’s an age-old truism that “what gets measured gets done”. The current audit practice within the industry is to hindsight approximately 10% of advice in the hope that it provides a representative sample. Contrastingly, prior to the Royal Commission, consumer expectations were that 100% of advice is in their best interest. The assumption is that all advice provided is compliant, and that appropriate checks are in place to ensure this. The Royal Commission has dispelled this myth.

There is an enormous gap between the reality of 10% audit oversight and the community expectation of 100% compliance. The only viable solution is to oversight every piece of advice before it goes to the customer, and the only efficient solution is to use technology to provide the oversight.

 

Community Expectations

Community expectations of the quality of financial advice in Australia are extremely high, given the critical position financial services holds in Australian society.

This position is critical due to the enormous influx of funds into superannuation over the last 25 years due to both compulsory and voluntary superannuation contributions, in an industry employing over 400,000 people. Australians now have a relatively large retirement nest egg to consider and little experience in investment management outside of bricks and mortar, making the sector highly emotive. They are completely disengaged from this pot of gold until they hit their 50’s, and it becomes a real, viable asset they need to think about.

Critically, only 20% of Australians seek financial advice, yet every worker has this pot of gold. Superannuation laws are complex, regularly changing, and have heavy tax implications if mistakes are made.

The volume of funds, coupled with the emotive nature of the industry, drives a high level of scrutiny.

 

Royal Commission Findings

The Hayne Royal Commission into Banking and Financial Services provides evidence that the industry, including the regulators, are struggling to oversight the sheer volume of advice. Anecdotal industry data suggests that there are over 1 million Statements of Advice produced each year, and even more Records of Advice. The sheer number of file notes, telephone conversations and emails only add to the problem.

ASIC Deputy Commissioner Peter Kell gave evidence at the Royal Commission that he has only 60 staff to oversight the 25,000 advisers in the industry. Even with ASIC just looking at licensees, that is almost 100 licensees to each ASIC staff member. The regulator is using the same model as the licensees to oversight the advice and its clearly not working.

CBA gave evidence that “they couldn’t tell” whether fees were being charged or not due to the volume of advice and outdated or nonexistent systems. As one of the larger players in the market, with enormous resources and access to capital, if CBA can’t fix the problem then how can smaller, less well-resourced licensees have a hope?

 

Increased oversight is not the solution on its own

The current audit practice within the industry is to hindsight approximately 10% of advice in the hope that it provides a representative sample.

But even if licensees doubled the number of audits they conducted, or tripled, or even multiplied by 5, they would still only check half of the advice provided. Which might be fine if the advice you receive is in that half, but what if you aren’t? And that is all done in hindsight, when you might have already been disadvantaged.

Licensees spend millions of dollars annually trying to oversight the advice provided by their advisers, yet we still have the problems that we have. The system is broken and needs to change.

 

Aligning expectations

How can you align consumer, regulator and licensee expectations?

  • Increased professional standards for advisers
  • A better resourced regulator
  • Consumer education
  • Efficient use of new technologies

How can we ensure that more Australians, not less, seek advice?

  • Make advice more cost effective
  • Increase the trust in financial advisers
  • Better capitalised and resourced licensees
  • Efficient use of new technologies
  • Transparency of business models and a true understanding of the costs and benefits of advice

 

Technology as a part of the solution

Millennials see technology as a critical part of the way they engage the world.

  • Technology in the advice industry is as relevant to older consumers as it is to millennials as it has the ability to reduce costs across the advice value chain.
  • Technology allows real time oversight, providing consumer and adviser protection.
  • Technology allows 100% oversight of advice, providing consumer and adviser confidence.
  • Technology has the potential to reduce cost, thereby putting quality, best interest duty tested advice in the hands of many more Australians.

 

Conclusion

Technology is only part of the solution, but there are available technologies that could improve oversight and ensure that highly qualified and experienced compliance resources spend their time adding value and not ticking boxes.

Licensees and regulators need to embrace Regtech as a means of increasing oversight and reducing costs.

The 2018 Netwealth Survey of Adviser Technology stated that “Regtech”, the use of technology to provide compliance and regulatory oversight, is a Horizon 3 technology that should only attract 10% of the focus on a technology roadmap, but as the Royal Commission has shown, this problem is here now and needs fixing asap!

 

About the author

Steve Thomson is the CEO of Tiqk, a game changer and disruptor in Regtech. He has been a Responsible Manager on a number of large licensees, as well as holding roles in distribution, operations & compliance.