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Limited Licensing: in or out?

By Katarina Taurian
01 January 2014 — 9 minute read

Financial planners have long argued that the playing field, when it comes to the provision of SMSF advice, is uneven. Historically, accountants have been able to provide SMSF advice under an exemption, while planners are required to be licensed under an Australian Financial Services Licence (AFSL).

However, following lengthy Future of Financial Advice negotiations, from July 2016 accountants will also need to be licensed, either under a limited or a full AFSL, to provide advice on SMSFs.

The new limited licence, initially proposed in 2012 and finalised in 2013, allows practitioners to advise on setting up or closing SMSFs and also to give class of product advice.

The licence does not, however, allow the recommendation of specific products or allow accountants to provide more complex or holistic types of advice, such as transition to retirement or insurance advice.

With accountants and planners soon having to meet the same compliance and regulatory standards to provide SMSF advice, the playing field has, arguably, now been levelled. Still, debates concerning the effectiveness of the new regime have raged since it was announced by the corporate regulator.

Several key industry figures have been vocal in criticising the options now available for accountants wishing to provide SMSF advice – to operate under a licence that is restrictive or to venture into unknown territory and operate under a fully-fledged AFSL.

As expected, some industry associations have fiercely defended the structure of the limited licence, and praised the new regime as an opportunity for accountants to develop and grow their existing business models.

In spite of the mixed reactions, one thing’s for certain: change is again on its way for the SMSF regulatory landscape, and those in the business of SMSF advice will need to decide soon whether they are in or whether they are out.


Limited licence: Where are we now?

The industry had more than one year’s notice that the SMSF exemption would be phased out. However, three months after the initiative’s launch, ASIC reported that just 19 applications for a limited licence had been received – from an industry of approximately 180,000 practitioners.

This follows many predictions of a sluggish take up, with MLC’s national manager Nick Hilton previously telling SMSF Adviser’s sister publication InvestorDaily he believes as many as half of accountants will not transition into the limited licensing regime by the time the accountants’ exemption ends.

Count Financial’s managing director and chief executive officer David Lane, who has been openly critical of the limited licence, also says he is not surprised by the slow adoption rate.

“I didn’t think accountants were going to move incredibly quickly; there’s no reason to. At this point, each day the uncertainty grows less, as the accountants are trying to come to terms with what is actually required and what they want to do,” Mr Lane told SMSF Adviser.

However, Mr Lane says he would be surprised if there was a “landslide” towards the limited licence when the accountants’ exemption is officially phased out.

Although some are attributing the slow start to lack of interest in the limited licence option, the Institute of Chartered Accountants Australia’s (ICAA’s) head of superannuation Liz Westover says there is no need for accountants to rush into a decision.

“[Accountants] have a three-year transitional period, which means that they have plenty of time to do their homework and consider what their options actually are,” Ms Westover says.

“We’re actually quite pleased that the numbers haven’t been huge to start with; that means that people are taking the time to make their decisions.”

Opportunity knocks

As the regulatory landscape shifts for accountants providing SMSF advice, traditional client bases are also evolving. An accountant continuing to rely on purely compliance-based work and income tax returns may find their business drying up, according to the Institute of Public Accountants’ chief executive Andrew Conway.

“Increasingly, clients want to discuss their wealth beyond the basics, and professionals should equip themselves with the tools to provide these services,” Mr Conway told SMSF Adviser.

The evolving accountancy landscape combined with new licensing requirements means accountants need to consider how their business models fit into the advice world, particularly if SMSF service offerings play a role in their practice’s future.

“The bar is rising significantly for accountants because clients are expecting more. However, in many cases, they’re not getting it or receiving the advice they deserve,” Jonathan Reynolds, director at accounting and financial planning firm Skeggs Goldstien, told SMSF Adviser.

“Businesses that are only offering basic compliance and taxation advice are not being as competitive as they could be in the marketplace, and certainly are not offering as much as they could be to their clientele,” he adds.

While this shake-up period is a nervous time for some, Mr Conway says this is “undeniably” a time to embrace the opportunity for growth. In particular, Mr Conway suggests accountants should consider being licensed under a full AFSL to provide both SMSF and financial advice.

Mr Conway also says early signs indicate accountants are “very keen” about learning more about the financial advice world, and exploring the possibility of moving away from a compliance-centric practice.

“There’s estimations [that] with the increased efficiency of income tax returns… it will result possibly in about a million taxpayers opting for automatic tax returns rather than going to see their tax agent,” Mr Conway says.

“So whether people like it or not, the reality is that the market is shifting. Our advice… is we are sort of at the dawn of a new era and [we] encourage people to think more broadly about the directions of their practice,” Mr Conway says.

Financial advice offerings could potentially add value to an accountancy practice when it comes time to sell, Mr Conway suggests, adding there could potentially be a declining market for practices that are purely compliance based.

“There is no question that… providing a diversified service to the client base including tax and financial advisory is a very strong proposition for those who are wishing to sell their practice,” he says.

“Building financial advice into a practice does almost in all cases increase the value of the practice.”

Risky business

For the first time, accountants are being actively encouraged to consider being licensed under an AFSL, or to seek their own. However, David Moss, director at Accountable Financial Group, says accountants with no experience running their own AFSL could be a recipe for disaster, with the limited AFSL being no exception.

“Having a limited licence is still going to be a lot of work. It’s still going take people out of their practices,” Mr Moss says.

“It will be promoted and talked about as the best thing since sliced bread for the next two and a half years… And over time, some of those will start to close when people realise it’s not that easy to keep and maintain, it’s not as simple as it seems.

“A lot of people will not have the skills… and if they do, they’ll have it for a few years and realise what a nightmare it is to run a licence,” Mr Moss adds.

Having your own AFSL is also a “giant liability” for practitioners and not generally cost-effective for smaller practices, Mr Lane adds.

“The costs of running it are high, the concept of having that liability is not so exciting, and most people do it to get scale benefits. I think that’s relatively consistent,” he says.

Mr Lane has also been vocal about the limitations of the limited licence, questioning how many accountants would want to commit to so much extra training for a small increase in their capabilities.

“It really is a very limited licence,” Mr Lane previously told SMSF Adviser’s sister publication InvestorDaily. “In reality, you’ll see very few accounting firms take this up.”

Mr Lane says the training required for a limited licence is also not significantly different from what is required to get the RG146 qualification.

“In the conversations I’ve had with accountants, they’ve said, ‘why would I do 95 per cent of the training required to become a fully authorised rep [if] I can only do 10 per cent of the advice work?’”

Under the limited licence, an accountant can only have limited conversation about where an SMSF trustee wants to put their money, Mr Lane adds.

“I think that’s a very strong limitation. You can’t have specific product conversations about insurance, you can’t have strategy conversations. So the question is, is that beneficial?” he says.

Mr Moss, meanwhile, says there are early indications that professional indemnity insurers will not be viewing a limited licence any differently from a full AFSL.

“[The] feedback we’ve received to date is [that] so far the market is so small, and there is so little interest in this space, the insurers aren’t providing any special deals for accounting licences,” Mr Moss says.

“[Insurers are] treating it just like a normal financial planning licence which means you’ve got normal financial planning professional indemnity insurance,” he adds.

“Do not expect a break when it comes to limited licences and professional indemnity insurance unless you can demonstrate that you’ve basically run a full licence before, so you’ve got the history of a full licence and you know what you’re doing.”

What do planners think?

Some planners have been openly critical about accountants being exempt from the licensing obligations required of other SMSF advisers, and have also suggested the terms of the limited licensing regime have been overly generous towards accountants.

The Financial Planning Association has openly criticised the phase-out period for the accountants’ exemption, saying it lacks “action points”.

The association’s general manager for policy and standards, Dante De Gori, told SMSF Adviser that the transition period planners received for the Tax Agent Services Act has phases that require specific actions of financial planners.

“The accountants’ exemption is effectively a three-year phase-out, which means there is no incentive… to try and encourage accountants to go before 30 June 2016. So they can continue using the exemption for another two and a half years,” Mr De Gori says.

“We wanted some sort of phased program where those who really wanted to get licensed, and were committed to it, could notify ASIC and ASIC could then start delivering education and training,” he adds.

“There [are] effectively no action points within that three-year period to encourage accountants to go through the process and understand their obligations, and there is no awareness for ASIC to understand how many will want to become planners.”

Where to from here?

Although there has been no clear indication of which route accountants will take, the IPA’s executive general manager, Vicki Stylianou, believes 2014 will be the year accountants decide their fate in SMSF advice.

“There is a lot of work involved in getting a licence; it’s not something that can be left to the last minute. We don’t want members to rush their decisions, but they need to allow themselves enough time to deal with ASIC’s educational requirements,” Ms Stylianou says.

The ICCA is also encouraging accountants to consider the future of their practice, and not leave it too late to make their decisions about where they sit in the new regulatory landscape.

“I think any accountants at the moment have to make an assessment of the type of services they offer. And depending on what services they currently offer and would like to offer in the future, they really need to consider how their firms fit into the new limited licensing regime,” Ms Westover says.

“Accountants that are giving any form of structural advice or are operating in the SMSF space really will need to consider what their options are,” she adds.

Looking ahead, the accounting sector is facing extensive change as traditional client bases continue to evolve and the accountants' exemption phase-out looms.

From 2016 and beyond, the sector “will be very different” for practitioners, Mr Moss says.

“You have the government seeking to… make [it] so simple individuals do not have to go to a tax agent to get a tax return done,” he says.

“Accounting firms [are] going to be under pressure, knowing that their client base is being eroded, or their simple tax return client base is going to be eroded.”

With the industry almost halfway through the phase-out of the accountants’ exemption and the sector bracing for further action by the regulator, for those who haven’t acted yet, 2014 is set to be a year of critical business decisions that go to the very heart of their practices.

Limited Licensing: in or out?
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