Blog: ASIC’s Longo to fix financial advice – The Australian Financial Review

Medcraft told the National Press Club in a speech in 2014 that ASIC needed to clean up the financial advice industry.

His agenda was all about consumer protection and weeding out disreputable and unethical advisers.

Lobbyists for financial advisers have warned that 57 per cent of the industry’s income could be at risk from the new ethics code.

Seven years later, laws designed to force advisers to act in the best interest of consumers and lift education standards have successfully forced about a third of licensed advisers out of the industry, and there are predictions the number of advisers will halve by 2023.

Longo said he would make it a priority to see what could be done to address the issue of excessive regulation. He wants people to have confidence in financial markets and have access to affordable advice.

“We do have a complex regulatory regime,” he said.

One of the challenges for ASIC and policymakers was to figure out ways to make the regime more consumer-friendly.

The comments by Longo followed similar deregulatory signals from the government body tasked with implementing the government’s financial adviser and stockbroker education reforms.

‘Enhancing’ the code

In a response to questions on notice from Senator Brockman, the Financial Adviser Standards and Ethics Authority said on Wednesday it might consider “enhancing and refining” its code of ethics.

This reform is in line with what the industry has demanded.

Lobbyists for financial advisers have warned that 57 per cent of the industry’s income could be at risk from the new ethics code because of uncertainty about what is and isn’t “independent”.

The government moved to shut down FASEA in December, with responsibility for the education reforms to be split between ASIC and Treasury.

It comes as ASIC conducts a review of the payment of commissions by insurers to advisers – as recommended by the Hayne royal commission – and the government will review the regulation and cost of financial advice next year.

When he appointed Longo, Frydenberg said the securities regulator must “support Australia’s economic recovery from the COVID pandemic”.

This was seen by Chanticleer as the dawn of a soft-touch regulatory regime.

Frydenberg published a Statement of Expectations, setting out the government’s priorities for ASIC.

“The statement will make clear that the government expects the commission … to operate as a strategic board and that all operational matters are the responsibility of the chair, who is the accountable authority,” he said.

The Hayne royal commission focused on the poor outcomes suffered by consumers from bad financial advice. Some of its case studies were subsequently taken up by ASIC, which banned several advisers.

One of the key areas of focus for Longo should be solving the conflict between regulation and the need for widespread use of cost-effective digital advice platforms.

ASIC is reviewing industry and consumer group recommendations to make accessing digital advice easier and more affordable.

Superannuation Minister Jane Hume said last week that no company had yet “cracked the nut” of comprehensive financial planning in a digital format.

ASIC is reviewing industry and consumer group recommendations to make accessing digital advice easier and more affordable.

It is doing this after leading companies warned of a tangled spaghetti of regulations, some of which conflict with each other.

In doing so it must examine the gap between building a financial plan and actually obtaining investment advice using a machine.

An example of the former is the digital advice start-up Map My Plan, which is led by former Labor MP and chairman of the inquiry that led to the Future of Financial Advice reforms, Bernie Ripoll.

This fintech start-up enables anyone to build a personal financial plan without the need for a financial adviser.

Longo’s challenge is to deregulate financial advice regulations without allowing the worst practices of the past to resurface.

It’s a self-directed digital advice service that is being provided to large companies for their staff, including EY, Rio Tinto and Sunsuper.

However, Map My Plan does not make any investment recommendations.

This is the opposite of robo-advisers such as Six Park and Stockspot, which provide automated portfolios of passive ETFs under the umbrella of financial advice licences.

Other major financial groups such as AMP and IOOF see this area as a key part of their ability to provide advice to average Australians, but have been unable to find a way through the complex, post-Hayne regulatory framework.

Regulatory failure

AMP’s departing chief executive Francesco De Ferrari highlighted the failure of the regulatory system to accommodate affordable advice.

He said it was a moral imperative that the country’s biggest financial institutions develop a solution for low- and middle-income consumers.

The two big issues that drove bad behaviour in the decades leading up to the Hayne inquiry were commission-driven sales of financial products and integrated financial advice firms.

The first of these was not easily solved, as shown by the continuation of commissions in the life insurance sector and the free pass given to mortgage brokers.

The second issue was far more insidious because advisers operating within an apparently ethical framework were able to load up clients with products carrying excess fees and with unsustainable business models.

On the surface, the clients were led to believe they had received holistic financial advice. But their portfolios contained products that sucked away their wealth and transferred it to the financial planning firm.

Longo’s challenge is to deregulate financial advice regulation without allowing the worst practices of the past to resurface.

One fertile area that is ripe for Longo’s attention and the attention of the ASIC commissioner in charge of financial advice, Danielle Press, is the concept of “sophisticated investors”.

It was this loophole that allowed James Mawhinney’s Mayfair 101 to exploit unwitting investors unsure of the difference between a term deposit and a high-risk, private equity investment.

Also, Longo might actually have to increase regulations or enforce those in ASIC’s armoury if he is to stop the Google and Facebook platforms from being used by scammers.

Google and Facebook appear to be a law unto themselves when it comes to financial scams, particularly in the crypto space. As long as they put revenue ahead of ethical behaviour the vulnerable will be stung.

First impressions may not count for much. But Longo came across as a measured, straight shooter during his first public outing.

The risk is that in pushing ahead with the government’s soft-touch regulatory stance ASIC will become captured by commercial interests.

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