Government Proposal: Raising the Standards of Financial Advisers

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TrainingLast week the Government released draft legislation and an explanatory memorandum in relation to the reforms to the training standards of financial advisers. As foreshadowed in the Government’s response to the Financial Systems Inquiry in October 2015, the draft legislation includes reforms to raise the education, training and ethical standards for financial advisers. Stakeholders are invited to comment on the draft legislation prior to 4 January 2016, with Parliament expected to consider the legislation in early 2016.

The draft legislation in its current form includes significant changes to the current training standards for financial advisers. There are four new education and training standards, three of which are preconditions to being authorised to provide personal advice to retail clients and one of which is an ongoing obligation. The legislation also provides for the establishment of a standards body which will set education standards and develop a code of ethics for advisers.

The new requirements apply to all advisers providing personal advice to retail clients in relation to relevant financial products.

You are not covered by this draft legislation if you:

  • only provide advice to wholesale clients; or
  • only provide general advice or factual information to retail clients.

Relevant financial products cover financial products other than basic banking products, general insurance products, consumer credit insurance or a combination of any of these products. Accordingly, the new requirements apply to the majority of the industry, particularly financial planners.

The three preconditions which advisers must meet, prior to being authorised, are:

  1. Complete a bachelors degree, or equivalent qualification, approved by the standards body;
  2. Undertake a year of either (or both) work and training that meets the requirements set by the standards body; and
  3. Pass an exam approved by the standards body.

The fourth obligation is ongoing and requires financial advisers to meet continuing professional development requirements as set by the standards body.

These new requirements are a significant change to the existing training requirements contained in ASIC’s Regulatory Guide 146. At present, advisers are not required to hold a degree, complete a professional year or pass an exam. The current continuing professional development requirements are not set by a single independent body and are not consistently met throughout the industry.

Financial advisers will need to review their current qualifications and determine whether they will need to conduct additional training to ensure compliance with the three preconditions. Undertaking additional training may involve significant cost and time. Once the standards body has been established and additional information regarding the preconditions has been released, Australian Financial Services Licence (AFSL) holders will need to conduct a thorough review of the qualifications held by all financial advisers who provide personal advice to retail clients in relevant products under their AFSL.

In relation to the ongoing CPD requirements, AFSL holders will need to ascertain what the relevant requirements are once these are put in place by the standards body and ensure their current CPD training meets these standards. Given many AFSL holders allow their financial advisers to undertake a variety of ongoing training, ranging from attending seminars held by industry bodies, to internal training courses, to reading industry publications, this may require a significant overhaul of their current practices. AFSL holders will also be required to notify ASIC whether their financial advisers have completed the required CPD hours at the end of the financial year. Accordingly, AFSL holders will need to keep detailed records of all ongoing training completed during the year and ensure the relevant notice is lodged each year within the required timeframe.

For those existing advisers who have provided advice to retail clients prior to 1 July 2017, the legislation provides transitional arrangements in relation to the three preconditions. Existing advisers will be required to meet the following standards by 1 July 2019:

  • Complete the relevant bridging course (as determined by the standards body);
  • Pass the exam as approved by the standards body.

The details of the bridging courses are yet to be determined however the level of additional education which a financial adviser is required to undertake will depend on their current level of qualification. Existing advisers will have two years to meet the requirements. Those who do not meet the requirements by 1 July 2019 will not be authorised to provide personal advice to retail clients from this date onwards.

ASIC’s powers in relation to educational and training requirements include the ability to refuse AFSL applications to provide personal advice to retail clients where the applicants do not meet the training standards and the ability to ban a person if ASIC has reason to believe that the person was authorised when they had not met the three preconditions.

The legislation also restricts the use of the terms “financial planner” and “financial adviser” to those people who have met the three preconditions. These restrictions also extend to terms of like import, for instance, “financial advice expert”. Given this change, advisers who do not meet the requirements of the new legislation within the required timeframes will need to carefully review their marketing and promotional material to ensure they do not breach these provisions.

In July 2019 a Code of Ethics for financial advisers will come into force. The Code will be developed by the standards body and all financial advisers will be required to comply with it. Financial advisers must also be covered by a monitoring and enforcement scheme which is responsible for setting out how compliance with the Code will be monitored and enforced. The introduction of a Code of Ethics is in response to the various complaints and findings of misconduct by financial advisers.

Compliance with the new standards, CPD requirements and Code of Ethics will be included on the Financial Advisers Register. This has significant implications for financial advisers as the information regarding their CPD compliance and any breaches of the Code of Ethics will be publicly available.

Given the many changes coming into force over the next three years, financial advisers and AFSL holders will need to be on the front foot in relation to compliance and training. We anticipate minimal changes to the draft legislation based on industry consultation, however the introduction of the standards body will see further clarification around the preconditions and the transitional requirements. This will provide AFSL holders and financial advisers alike the ability to accurately determine whether they will be compliant or the relevant steps they need to take to ensure compliance.

About The Author

Alicia Pevely

Alicia works across both Sophie Grace Pty Ltd and Sophie Grace Legal Pty Ltd with a particular focus on compliance and legal services. She manages the licensing and compliance aspects of the business. She is responsible for AFSL and ACL applications, variations and assists the compliance team in the implementation of compliance reviews. She provides ongoing compliance support and assists with the preparation of legal advice, commercial agreements and disclosure documents. 

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