The Future of Financial Advice (FoFA) was the Government’s response to the crisis in public confidence in the financial advice sector brought about by the actions of a small number of financial planning businesses that resulted in millions of dollars in investor funds being lost. The Government also announced that the so called “accountants’ exemption” in Regulation 7.1.29A would be removed and accountants would in future have to be licensed to provide advice in relation to the setting up and administration of a self-managed superannuation fund (SMSF).
The accounting profession had a decision to make: try to fight the removal of the exemption or try to create a more effective role for accountants in the provision of financial advice.
The three professional accounting bodies – the Institute of Public Accountants (IPA), CPA Australia and the Institute of Chartered Accountants in Australia (ICAA), through the auspices of the Joint Accounting Bodies – decided that the existing exemption was not very effective and did not provide accountants the breadth of advice powers they and their clients required. We therefore decided it would be better to support the removal of the exemption and seek in its place a solution that would provide accountants with a broader and more effective means of providing non-product financial advice. We believe that decision has now been vindicated by the Government’s announcement on the replacement for the accountants’ exemption.
Replacing the exemption
On 23 June 2012, Minister Shorten outlined how the Government will go about replacing the accountants’ exemption, which will cease to exist from 1 July 2016. After that time accountants must become licensed to provide advice that was previously covered by the exemption. They can do so either through the normal licence process, as an authorised representative of a licence holder or through the new limited Australian Financial Services Licence (AFSL) for SMSF and class of product advice.
What advice is allowed?
The new conditional licence will allow accountants to provide advice in relation to SMSFs and class of product advice about:
- superannuation products
- securities (as a class of product)
- simple managed investment schemes as defined in the Corporations Regulations 2001
- general and life insurance, and
- basic deposit products.
Class of product advice is financial advice that does not make a recommendation (in form or substance) about a specific financial product.
While accountants will need a licence, it will be a curtailed version of the current licence process such that:
- members of IPA, CPA Australia and ICAA with a practice certificate will be taken to meet the experience requirements for the new conditional licence until 30 June 2016, after which time they will have to prove their experience. Other accountants or professionals may apply for the licence but they will have to prove they have the relevant experience
- accountants must meet existing ASIC education requirements (such as RG 146 and any future requirements)
- rather than have a full audit (by a registered company auditor) the accountant will instead lodge an annual compliance certificate, and
- the licence application will be curtailed and accountants will be deemed to meet many of the requirements.
What does this mean for members in practice?
The announcement should be seen as a major achievement for the profession. It means that accountants in practice will be able to provide a much wider range of services to their clients and recapture much of the incidental advice powers they had prior to the licensing regime.
Accountants have long played an integral role in the establishment and administration of SMSFs. This was recognised by the creation of the accountants’ exemption. However, the exemption was impractical and had many inconsistencies. There has always been disagreement and lack of clarity about how much advice an accountant could provide about SMSFs.
Overcoming a point of difference
ASIC believes that an SMSF is a financial product, not a class of financial product, and that because the SMSF will generally involve the transfer of assets from an existing fund, any discussion to set up an SMSF requires a conversation about the existing fund and this is not covered by the (current) exemption. This has created the threat that ASIC may take action against accountants providing advice in relation to SMSFs.
The proposed licence will allow the accountant to discuss all issues relating to the SMSF, including whether or not another form of superannuation may be a better fit for the client and their needs. They will be able to talk about the advantages of consolidation and of contribution strategies.
Improving financial literacy
In relation to broad superannuation, under the new regime accountants will be able to assist their clients with general superannuation advice where they previously could not. It is well understood that there is a low level of financial literacy, particularly as it relates to superannuation. Most people do not even know where to turn for advice.
While around 70 per cent of taxpayers see a tax agent or accountant at least once a year, fewer than 25 per cent see a financial planner. Furthermore, many financial planners are interested in providing full financial plans and services rather than such simple advice. The new licence will mean that accountants will finally be able to fill that gap by providing broad but scaled superannuation advice that will help clients to better understand superannuation and assist them when they see a planner about making changes to their superannuation.
The limited licence will also clarify that accountants are trusted by their clients in relation to advice about the sharemarket and general financial issues, including banking products and insurance. Many accountants provide this advice inadvertently in breach of the current law. The new licence means they will not have to be worried about ASIC taking action against them. Furthermore, by undertaking appropriate training they will be equipped to provide better quality advice to their client.
No conflict
Does this put accountants in conflict with financial planners? We do not believe it does, in fact we believe it better integrates accountants and financial planners and should lead to better outcomes for clients. The accountant will be able to educate their client about financial issues that are important and help them to identify matters they should raise with their financial planner. Those clients needing specific financial advice and financial products can then be recommended to a financial planner who is trusted by the accountant to act in their client’s best interest.
We are already seeing accountants and financial planners teaming up in referral arrangements. The new licence will give the accountant further power in the relationship by ensuring they have an ongoing role in providing advice to clients. We believe there are natural synergies between accountants and financial planners that the new arrangements will facilitate.
The change will also open the door for accountants who may wish to consider providing broader financial advice services to their clients themselves. They will have the basic education needed to provide broader advice and an understanding of the complexity of providing advice. They will also have a better understanding of the needs of their clients and whether it is worthwhile integrating financial planning into their service offerings.
What should members do?
The IPA has long urged members to look to the future, both for themselves and their practice. Financial advice services open up the possibility of not just new revenue streams but potentially interesting new opportunities for professional development. With the increasing commoditisation and computerisation of many traditional accounting and taxation functions, financial advice may provide answers to a changing a world. For members who may be uncomfortable with providing financial planning services themselves, there may be other staff in the firm who would relish the opportunity to gain new skills and further their professional development by offering such services within the existing firm. Furthermore, firms with financial planning services are more valuable than those that do not. For these reasons we encourage members to consider how they will go about integrating financial advice into their practice.
A number of broad options are available, including:
- do nothing (but risk losing valuable clients to firms that do offer this advice)
- provide limited advice in relation to SMSFs and broad financial advice (through one of the Financial Services Package offerings or the proposed limited licence)
- provide the above but with a referral arrangement with a fully licensed financial planner (such as through the IPA’s referral portal)
- employ a financial planner in-house to provide financial planning services to clients
- become fully licensed yourself (or get an employee to become fully licensed)
- outsource all financial planning services via a referral arrangement.
No one solution will provide the best outcome for all members, rather you will need to evaluate your practice, your current and future expectations and the type of clients you have and the services they are going to require in the future.
We believe it is an exciting opportunity for accountants that they should take advantage of. One needs only look at the turmoil in the newspaper business to see that industries under structural change must adapt and seek new revenue sources and ways of doing business. If they do not, even the most powerful can be left with a business of diminishing value.
