David Whyte

A Final Word on Trowbridge LIF is upon us, and a retrospective gnashing and wailing is not particularly helpful. But it should serve as a warning for the future – as Santyana observed: “Those who do not remember the past are condemned to repeat it”.

The publication of the Trowbridge Report in Australia contained proposals that were destructive, and anti-competitive.

Creating an extreme position on compensation structures may well have been a negotiating tactic, but the outcome of adopting the LIF measures, driven by the so-called ‘findings’ in the Trowbridge will have a negative impact on the personal risk protection industry in Australia.

This will, in turn, disadvantage the wider Australian community to the detriment of the public purse, enterprise, families, and individual Australian citizens.

This article is not written in support of high commission levels, nor does it seek to justify the various reward structures that prevail in Australia and New Zealand.

In the main, financial advisers in Australia and NZ serve the public well, and stakeholders in the NZ financial services industry have rejected the recommendations of the Trowbridge report.

In Australia, the prescriptive regime and adversarial nature of the regulatory bodies will merely drive dishonest practitioners to invent ever more ingenious ways of bilking the public.

And if you think the Australian regime has been effective in making markets more secure for Australian citizens, ask the victims of the recent Commonwealth Bank and Macquarie Bank scandals how they feel.

And don’t think Australia escaped the GFC unscathed. Capital + Merchant, for example, had their Australian operation in full swing under the Cymbis Finance banner, and stitched up Australian citizens just as effectively as did their NZ counterpart.

So much for a “rules-based” regulatory environment.

But ignoring the effectiveness of the Australian regulatory environment for now, and looking at the lead up to the Trowbridge Report, there was a discernable pattern of behavior that should be of deep concern to all Australian and NZ financial services industry stakeholders.

ASIC produced “Report 407 – Review of the financial advice industry’s implementation of the FOFA reforms” in September 2014. The research for the report was conducted by ASIC between September 2013 and July 2014. From the arbitrarily filtered research sample of 749, a mere 80 licensees were approached, and only 60 participated – out of a total of 5,100.

These licensees embrace an individual adviser population of 9,918.

To measure accuracy and validity, researchers use confidence interval calculations. These are really only valid when a truly random sample of the relevant population is accessible.

However, if we give ASIC’s methodology the benefit of the doubt for illustration purposes, to be confident that 95% of the licensees would produce the same results (with a 5% margin of error), the sample size would need to be 357.

The sample selected produces a margin of error of 12.5% – the generally accepted margin is between 4% and 8%. This fundamental flaw in the research leaves the statistical integrity of the research open to question.

There are therefore aspects of the representative nature of the research that are at best suspect, at worst dubious and/or statistically not significant, accurate, valid, or reliable. ASIC published “Report 413 – Review of retail life insurance advice” in October 2014.

The research concluded that 37% of the 202 files reviewed from 7 licensees, representing a total adviser sample of 79 individuals, contained advice that failed to meet the relevant legal standard. In this research, the concepts of accuracy, reliability, and statistical significance based on random sampling were completely abandoned.

Taking 202 files from 79 advisers (out of a total population of 18,000 according to the Ripoll Report), representing 7 licensees (out of a total of 5,100 on the ASIC database), is, quite simply, of no meaningful significance.

Put simply, there was no statistical evidence to suggest that the Australian financial advisory industry indulged in widespread ‘churn’ or malpractice. Subsequently, a Life Insurance and Advice Working Group (LIWAG) created by the Association of Financial Advisers (AFA) and the Financial Services Council (FSC) was instructed to develop an industry response.

As it turned out, not all submissions to the LIAWG were made public – whither transparency? And there were parties that gleefully alit upon ASIC’s flawed research.

The Trowbridge Report from the LIWAG was nothing more than a response to the blatant political pressure being exerted to “do something”.

An indicative proclamation at the time by Assistant Treasurer, Josh Frydenberg, that threatened Federal Government intervention was evidence of this pressure.

Mr. Frydenberg’s reference to “poor levels of compliance highlighted by ASIC” stemmed from the flawed research previously mentioned.

So the “something” that Trowbridge took aim at was the commission levels available to financial advisers recommending life risk products to clients.

Despite the presence of risk product options on all Superannuation and Industry platforms, Australians remain steadfastly underinsured, as reported by KPMG in 2014 and by Swiss Re in 2007.

Adopting LIF based on the measures recommended by Trowbridge will render many business models uneconomic, cause a move away from non-aligned advice, and bolster the market position of vertically integrated organisations that both manufacture and distribute risk products.

Consumers will suffer a reduction in choice, access, and availability of any semblance of impartial advice as these vertical organisations dominate the market by pushing their in-house proprietary products – “in the best interests of the client”.

So there are obvious consequences for consumers in diluting the viability of some independent adviser business models. But there are wider issues at play here which contain warnings for the future of the industry.

LIF/Trowbridge-style measures are anti-competitive as they penalize cost-efficient organisations that can contain expenses by attracting market share through the use of leading-edge technology and product development.

If a product provider’s business model has a heavy new business dependency (and which new life company doesn’t?) why should they be prevented from allocating expense within the premium structure to stimulate the required new business flow?

If pricing and product quality become uncompetitive, the market will react accordingly – as it did in the 1990’s in NZ when the market share previously enjoyed by the mutual life offices was successfully challenged in NZ by Sovereign’s arrival, product innovation, and subsequent success.

This success was fuelled by (then) radical product design, innovative technology, and an unshakable belief that great service would bring great results.

The company gave advisers and their clients a choice, something the mutual life offices singularly avoided doing at the time.

And ultimately, the mutual companies paid the price – consumer sovereignty prevailed.

So in addition to exacerbating the underinsurance problem in Australia and NZ, the idea of mandated commission levels works against consumer choice.

Adviser organisations and companies that draw their support from advisers need to be more vigilant, vocal, and vociferous when faced with such ill-considered measures.

Repeating the mistakes of history is a costly and sometimes fatal exercise – the financial adviser industry on both sides of the Tasman needs to be wary of ignoring these lessons.

By David Whyte, Chairman

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David Whyte

Since FSRA hit the market in 2004, NZ observers have been watching the progress and developments of the post-regulatory experience in the financial services industry in Australia.

With the introduction of the Financial Advisers Act 2008, New Zealand took the first steps toward the regulation of the behaviour and practices of investment and life insurance advisers. This had been accelerated by the collapse of the Finance Houses and sub-par lending institutions, and the haste with which the legislation was framed and introduced was reflected in the quality of the statute.

While ASIC continued to seek ways to prove its effectiveness as a regulator, enforcing and punishing miscreants based on the rules to be applied, NZ sought to establish a principles based regime overseen by the Financial Markets Authority, the body set up to implement the provisions of the FAA 2008, and to work with the newly established Financial Services Provider Register.

From the outset the two regimes chose different paths and a brief overview of the impact of those paths follows.

The Australian regulator announced its arrival with an aggressive, punitive, and adversarial regime, which made little or no attempt to seek co-operation or collaboration from the industry it was charged with regulating.

Having spent 3 years leading one of the Life Companies in Australia through the early years of the regime, I found ASIC to be unhelpful, reluctant to engage in constructive dialogue, and with little appetite for improving the industry by enlisting support from participants.

Relationships between those regulated and the regulator were, and continue to be frosty at best, antagonistic at worst.

Nothing illustrates this more than the oft-cited example of the Toll/Patrick case in 2007, brought by ASIC against Citigroup alleging insider trading.

Dealing in the companies shares at the Equity Desk, and acting as the intermediary via their Merchant Banking arm in the merger activity smacked of illicit practice, and ASIC proceeded accordingly. Had the action succeeded, the implications for the merchant banking industry worldwide would have been traumatic.

As it turned out, the judge gave ASIC a bloody nose – in effect, telling the regulator not to waste taxpayers money with frivolous actions based on unfounded allegations, and dismissed the case without too much ado.

The audible sigh of relief was only drowned out by the popping of champagne corks in the various Bank boardrooms in Sydney and elsewhere.

Of course, heaven help any FSRA licensed entity that got their punctuation wrong in a public issue document in the immediate aftermath as ASIC sought to recover its position.

However, the nature of the environment and the position of the regulator was well and truly confirmed and the consequences are still with us today.

The passage of time has not softened ASIC’s adversarial stance, and the industry regards the regulator as existing at the other side of a never-to-be-crossed divide.

By contrast, the New Zealand regulatory environment has been characterised by a lighter, more collaborative touch, with less litigation, prosecutions, and penalties recorded.

The recent consultative process embarked upon the Financial Markets Authority (FMA) during the scheduled legislative/regulatory review process is an indication of the regulators intent to achieve a consensus. The regulator’s stated goal is to develop regulation that can be an effective path to establishing efficient capital markets, creating confidence among consumers that advisers and providers are acting ethically, and to build a framework for stimulating appropriate governance practices across the industry.

Initially, NZ chose to require individual advisers to register themselves on the Financial Services Provider Register (FSPR) with only those wishing to recommend investment products required to meet a higher qualification standard to achieve Authorised Financial Adviser (AFA) status.

Separating the advisers into those able to access risk products only (Registered Financial Advisers) and those able to access risk and investment products (Authorised Financial Advisers) was widely regarded in the adviser community at the time to be a structural defect.

However, individual adviser responsibility was regarded as a strength, particularly in view of the experience in Australia.

The initial proposed regulations had everyone who purported to be a financial adviser to qualify via examination, and many smaller adviser entities embarked on this path to compliance before the intervention of the ‘big end’ of town.

In the face of intense lobbying from the banks, and to provide large institutions with an acceptable pathway to compliance, the Government of the day developed the concept of a Qualifying Financial Entity (QFE) that was charged with taking responsibility for those advisers who chose to become a member of a QFE.

Limited product choice was the price to pay for the adviser, but the QFE-owning entity avoided the expense of having their aligned advisers meet the individual compliance obligations.

And so the consumer was faced with confusing and complex categories of advisers, products, and distribution entities.

Miraculously, the incidence of a QFE being held responsible for one its members breaching the regulations are practically non-existent – in 5+ years!! A truly remarkable achievement from an industry that was supposedly in such dire need of regulation.

However, compared with the Australian experience such observations sound trivial and trite. The issuance of an Enforceable Undertaking by ASIC has practically become an expectation in Australia as the combative nature of the regulator persists, ably assisted by statistically flawed reports issued by the body itself, with dubious support from the Trowbridge Report and similar.

NZ had its own version of Trowbridge – the Melville Jessup Weaver Report – which was a ‘lite’ version of its Australian master template.

Indeed, Trowbridge conducted the actuarial peer review, and, not surprisingly, gave the MJW document his stamp of approval.

However, unlike the experience in Australia, the NZ industry and the Government rejected the findings of the MJW report, preferring to let the market decide.

The current regulatory review in NZ proposes to introduce entity licensing, the wisdom of which remains to be seen.

Overall, the NZ industry is moving toward a more consumer-sensitive regime, and the advent of a united adviser body is a direction that Australian advisers should urgently contemplate.

In the face of such an aggressive, adversarial regulator, there is more that unites advisers than divides them and a strong, representative body provides a better opportunity for consumers and the wider community to gain real benefit from the industry.

By David Whyte, Chair, SuiteBox

For more information about SuiteBox see our Resources Section.

The post CER – Comparative Emerging Regulations appeared first on AdviserVoice.

Ian Dunbar, SuiteBox CEO, said, “With our planned geographical expansion and user-growth plans, SuiteBox management and founders believe that an experienced board is critical in providing sage guidance and direction to our growth focused strategy. I’m delighted that David has agreed to Chair SuiteBox’s board and also to have Craig’s corporate advisory skills on the board.”

Mr Whyte formerly led American International Group (AIG) life operations in NZ and Australia, and served on the Board of Fidelity Life and Southern Response Earthquake Services Ltd, a Crown-owned entity. He is a Chartered Member of the NZ Institute of Directors, and serves on a number of privately owned financial services organisations’ boards.

Mr Anderson is a securities and property investor and a specialist in insurance risk assessment of listed securities’ offers and IPO’s. He was formerly the Founder and Managing Director of Dual Insurance NZ and prior to that General Manager of QBE’s Corporate and Specialist Risks Division NZ. Mr Anderson runs his own capital advisory and management consulting firm.

“Financial services professionals, such as financial advisers, mortgage brokers, accountants and insurance providers face challenges on multiple fronts, but we’re convinced that the best businesses will not only survive, but thrive. By embracing technology and innovation financial services professionals have the opportunity to create truly mobile virtual meetings between themselves and their clients and SuiteBox is excited to be at the forefront of delivering mobile office solutions globally,” said Dunbar.

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