New knowledge requirements for licence holders
The Australian Securities and Investments Commission (ASIC) has released Consultation Paper CP 153 Licensing: Assessment and professional development framework for financial advisers and has sought responses from the public. The Joint Accounting Bodies (the IPA together with CPA Australia and the Institute of Chartered Accountants) have reviewed and raised concerns about the proposed framework.
There are three major elements to the reform being proposed, each of which is discussed below:
- a national certification exam for financial advisers
- a knowledge update review every three years
- monitoring and supervision of new financial advisers.
1. National Certification Exam
As a result of concerns over the quality of some education providers and the performance of some financial advisers, ASIC has determined that all financial advisers need to be able to assure a base level of knowledge. Having reviewed developments internationally, particularly in the US and UK, ASIC is of the view that the most effective means to achieve this is a nationally certified exam.
ASIC believes that a uniform exam will “provide a benchmark for training organisations to ensure that the individuals they train have the necessary skills, knowledge and competence to pass the exams”. It therefore proposes that any individual who provides personal or general advice to retail clients on Tier 1 products be required to pass a national exam.
ASIC is seeking feedback on whether the exam should be a single assessment covering all aspects, or if it should be broken into constituent parts so that advisers are examined only on those elements relevant to their areas of advice. The exam is proposed to be pass/fail, with the adviser being required to resit only any modules they have failed.
However, ASIC has not specified the format of the proposed exam (online, in person), how often it could be sat or who would provide the exam content and mark the results.
While an exam would appear to provide a simple process to ensure a base level of knowledge the Joint Accounting Bodies have opposed the proposal. We believe that if there is an issue with the quality of training, then the answer is to address those training issues directly, that is, targeting those providers that are not providing adequate training and forcing them to either raise their standards or be removed from the approved list.
The Joint Accounting Bodies are also concerned that the proposal will lead to ‘dumbing down’ of training to merely focus on rote learning to pass the exam rather than increasing the standard and quality of training. It may in fact drive down the overall quality of training rather than bring about an improvement in quality.
The proposal also goes against modern adult education philosophy, which believes exams are only a point-in-time test and do not recognise that training is more than knowledge retention. Modern training theory says hands-on training with multiple assessment methods provide a better training environment and test of competency.
The Joint Accounting Bodies are also concerned that this is the ‘thin edge of the wedge’, that ASIC will then seek to impose such testing on various other groups it regulates, particularly auditors and liquidators.
2. Knowledge update review
ASIC is proposing that, in addition to the national exam, advisers must undertake a knowledge review assessment, two years after their initial exam and every three years thereafter. The focus of the review would be on regulatory and market changes and not a review of core competencies.
The accounting bodies believe that continued professional education (CPE) is the preferred method for addressing ongoing skill retention and updating. While some advisers receive appropriate CPE training it is not consistent across the industry. Working with the industry and professional bodies to enforce better CPE would be a more effective mechanism than an update review.
3. Monitoring and supervision
ASIC is also proposing that new financial advisers, once they have successfully completed their exam, should undertake a period of monitoring and supervision. This would require that for a period of time the financial advice being given by a new adviser is vetted by a more experienced supervisor. This move is designed to ensure initial advice is appropriate and to help develop a new adviser’s skills and competence by providing a mentor. ASIC proposes that the period of such monitoring and supervision be 12 months. Supervisors will need to have at least five years’ experience under the ASIC proposals.
The accounting bodies already require mentoring for new accountants and support the proposal. We believe it will help to raise the standard of advisers, while at the same time providing safeguards to clients. Many financial advice firms already have similar requirements in place and it should not be too difficult for the advice sector to bring these reforms in.
Code of ethics for financial advisers
ASIC has also sought feedback on the issue of how a code of ethics for financial advisers should be implemented – whether there should be a statutory regulation or whether industry or ASIC could approve existing and new codes from a variety of professional and industry groups. Our preference is for a statutory set code, akin to that for tax agents. We believe that such a statutory code would form the minimum requirements, with professional groups such as the accounting profession supplementing that statutory code with their own stricter codes.
A statutory code has the advantage of being clear and ensuring that all financial advisers have the same minimum requirements. It also leaves the professional bodies to develop their own additional requirements and to have control over their membership.
A statutory code would be relatively inexpensive to bring in and would provide confidence to the public at large that there are regulatory minimums they can rely on.
It is important that ASIC does not usurp the role of professional bodies. ASIC does not have the capacity or the willingness to do this work on its own. It requires the assistance of groups such as the Joint Accounting Bodies to put in place robust rules and supervision mechanisms. In order to do this, professional bodies must retain control over their own codes and how they enforce them.
Clarity hoped for
While still supportive of the overall intent of the FoFA reforms, the Institute of Public Accountants is wary that the debate is dragging on too long on certain issues and that the valid concerns of those in the industry are not being given appropriate weight.
These reforms are going to be comprehensive and it is important to get them right in first instance rather than make patchwork changes and amendments down the line.
It is hoped that by the time this journal hits members’ desks, we will have greater clarity on the proposed removal of the accountants’ exemption and what will replace it. It will be important to see any proposed legislation before it enters parliament, although the clock is ticking to get it in before the end of the next sitting period.
