An evolving beast
While the new professional standards for advisers continue to be fleshed out, it’s clear these changes will force some critical career decisions for many SMSF professionals.
From 1 January next year, a new professional standards framework will come into force for financial advisers. The reforms will apply to anyone who is authorised to provide personal advice, either as an AFS licensee or on behalf of an AFS licensee. The new requirements will therefore have implications not just for financial advisers, but also for accountants authorised under an AFS licence.
Under the new requirements all advisers must have a bachelor degree, pass an exam, meet continuing professional development guidelines, comply with a code of ethics and be covered by a compliance scheme.
Requirements for existing advisers
While the standards for new entrants are fairly clear cut, the requirements for existing advisers who are already in the industry are still uncertain and are much more complex by comparison, explains The Fold Legal director Jaime Lumsden Kelly.
The Financial Adviser Standards and Ethics Authority (FASEA), the body responsible for setting the professional standards for advisers, released proposed guidance on the education pathways for existing advisers in March, with the consultation closing 29 June. It has announced that it will be undertaking a second consultation period on the proposed pathways.
Based on what has been proposed in the consultation paper, Ms Lumsden Kelly says it’s expected that advisers who have a degree or postgraduate degree in a related field of study, will only need to do a bridging course.
“A related field of study basically means a degree in financial planning, financial advice or financial services, accounting, finance, tax law and economics. So any one who fits into that bucket will only have to do a bridging course,” says Ms Lumsden Kelly.
The number of subjects they’ll need to do for that bridging course will depend on what qualifications they hold, she explains. For example, if they have a bachelor of business, a bachelor of commerce or a bachelor of accounting, as many accountants would, but they don’t have a postgraduate qualification, they’ll need to do a bridging course made up of three subjects.
“If you have a degree in a related field, together with a post graduate qualification in a related field, then the bridging course is only one subject,” she notes.
“For any one that fits into that bucket, they're looking at a lot less study. For existing advisers who don't have degrees, or who do have a degree but it's not in a related field, such as science or IT, for example, they're going to have to do the full graduate diploma, which is a full eight subjects and it's 120 hours per subject - that's the study load.”
Licensing for Accountants chief executive Kath Bowler estimates that for most graduate diplomas, the cost of each unit is around $2,500 to $3,000.
“So you're looking at upwards of $20,000 to do a graduate diploma,” said Ms Bowler.
Advice firms will, therefore, be hit with costs from two fronts, she warns, with ASIC’s new funding model set to start charging firms for anybody who is on the financial adviser register.
“Again there is more uncertainty, that figure is not known yet, but it is probably around the thousand dollar mark, per annum, per adviser. So it's getting quite costly, particularly for accountants who are not in this space full time,” she says.
The reforms will have the most adverse impact on mature advisers, she says, because they’ve gone about their education and training in a different way, because more structured options weren't available when they entered the industry.
“So advisers are being disadvantaged for not having formal education which just wasn't available,” she says.
FASEA has also flagged that some form of recognised prior learning (RPL) may be available for advisers who do not meet the related degree or approved degree categories.
The standards body mentioned in the consultation that advisers may be able to obtain recognition for prior learning obtained for professional designations, Ms Lumsden Kelly notes.
The draft guidance provided by FASEA says that “advisers may be eligible for exemptions via recognised prior learning for certain approved qualifications”.
It states, however, that it does not intend to allow recognised prior learning in the bridging course programs.
“What FASEA have said is that people who find themselves in that situation where they’ve got other types of qualifications that don't fit neatly into the related bucket or the unrelated bucket - for example it may be diploma or advanced diploma instead of a degree - they may still be able to get RPL for that,” Ms Lumsden Kelly explains.
“[However], they're not going to allow RPL for the bridging course program. It will only be for anyone who has to do the full graduate diploma.”
There is the potential to obtain recognised learning for up to 50 per cent of the graduate diploma, she says.
“So that could potentially halve the course depending upon what qualifications somebody has.”
Ms Lumsden Kelly notes, however, that FASEA has delegated this matter to the higher education providers, which are supervised by Tertiary Education Quality and Standards Agency.
“It appears that FASEA is basically going to say whatever rules higher education providers have for RPL, they’ll accept that and the Tertiary Education Quality and Standards Agency will be responsible for reviewing that,” she says.
Requirements for new entrants
While there are transitional arrangements for existing advisers who are authorised before 1 January 2019, for new entrants, the requirements will start from 1 January 2019.
New entrants will need to have completed a bachelor degree or equivalent which is approved by FASEA. They will also need to complete a year of supervised work and training.
“In the future everybody in the industry is going to need to have completed a degree which is on the list of curated qualifications that FASEA will accept,” explains Ms Lumsden Kelly.
Students that are already studying particular courses could find themselves in a similar bucket to existing advisers, as their degree may not end up being one of the degrees approved by the standards body, she explains.
“The qualifications haven't yet been set by FASEA so for people who are thinking about [entering the industry], it obviously leaves it a little bit open as to what they do,” she says.
“I suspect there are a group of people who are presently studying with the intention of moving into this industry who may well find themselves having to go through the same process as existing advisers because they will complete their course during the transition phase and their course may not be considered to be acceptable.”
For students who are looking to enter both the accounting and financial advice industries, Ms Bowler says there are a number of combined degrees emerging which will allow entry into professional accounting as well as financial planning.
“You [now] need to be far more selective with your degrees if you want to pursue a professional career in financial planning,” she notes.
It’s currently quite difficult for universities to put these courses together, she says, until they have certainty around what the governing body is going to require.
“It’s quite an unsettling and uncertain time for everyone really at the moment.”
Licensing decisions for accountants
In order to meet the definition of an existing adviser under the new standards, advisers need to be authorised by an AFS licence by 1 January 2019. This means that if an accountant is not on a licence by 1 January and they want to provide advice, they’ll be required to complete an approved degree instead of just completing three units of study, explains Hayes Knight chair Greg Hayes.
“This is the period of time where accountants really need to be thinking about the types of services they want to provide their client base and what services their clients may require in the future,” says Mr Hayes.
While accountants who leave the decision to get licensed till after 1 January will likely receive recognition for prior learning, it will still be at least two and half years of study, Mr Hayes warns.
“Making the decision before or after January really is the difference between completing one to three units over the next five years and still being able to provide advice throughout that period because it’s under that transition piece, or alternatively, having to do a full financial services degree and not being able to give advice till that’s finished,” he explains.
Mr Hayes estimates there are still over a thousand accountants undecided about whether to become authorised under an AFS licence.
“I think in the coming months we’ll see a lot of those firms making a decision about whether they’re in or out and preparing themselves for the new environment we’re entering into,” he says.
Decisions for those approaching retirement
Most of the accountants and advisers within 10 years of retirement will be questioning the value in completing additional study under the new standards, says Ms Bowler.
“I know people who were planning to retire in ten years. That’s now five years. They won’t do the extra study, particularly when there is no perceivable value in the extra study and it’s expensive,” she says.
This is particularly the case for accountants, she says, who already had to cover ethics and the Corporations Act in the study they completed to become an accountant.
Ms Lumsden Kelly expects it will be a similar outcome to when the accountants exemption was removed, and accountants who were already thinking about retirement simply decided to exit the industry and sell their business.
“Some professionals will be at a point in their life where investing in a course won’t make sense for them,” she says.
Older financial advisers she expects will be most impacted by the reforms, as many of them will have to complete the full financial services degree which amounts to around 960 hours of study, if they choose to remain in the advice industry past 2024.
“If you're talking about having to do several years of study and you were thinking of perhaps exiting in the next five years, are you actually going to get value from it at the end of that study period or is the study period going to carry you through to the point at which you were going to retire anyway?” she says.
IOOF senior technical services manager Julie Steed says a lot of the senior managers plan to avoid undertaking the study for the new requirements by fulfilling a purely managerial role in their firm without giving advice to clients.
“Some of the practitioners that I have spoken to seem to believe that they will be able to stay on in the practice in a management or advisory capacity to the advisers, rather than giving advice to clients,” says Ms Steed.
It is unlikely senior advisers in this position will be able to maintain the same level remuneration they receive now, however, as the firm will need to offer younger advisers who are qualified under the new standards with higher salaries in order to attract and retain them, she warns.
The SMSF Association also sees this as a potential outcome of the new education standards and has concerns about what impact this will have on the advice received by clients.
“While this may encourage a changing of the guard with an experience[d] mentor in place, it may also lower the standards and quality of advice given to the public,” it said.
“Furthermore, older advisers will be able to exert influence over their younger employees and in essence be responsible for the provision of advice from advisers who have decided to not meet the legislated education requirements.”
Ms Lumsden Kelly says licensed accountants may simply decide to move out of the SMSF space and focus purely on accounting and arrange for someone else to handle the SMSF advice within their practice.
Ongoing requirements and exam
As part of the new standards, advisers will also be required to undergo continuing professional development every year. FASEA released draft guidance on the CPD requirements for advisers in July. The guidance has suggested a 50-hour minimum for CPD each year, 70 per cent of which must be approved by their licensee.
FASEA has prescribed a specific amount of CPD hours for each type of skill or competency, including a minimum of 10 hours for professionalism and ethics, 10 hours for regulatory compliance and consumer protection, five hours for client care and practice, five hours for technical competence and the remaining 20 hours to be selected by the adviser or their licensee.
Ms Bowler considers 50 hours of CPD to be “completely over the top” given that it’s higher than what is currently required for a professional accountant, and is the same amount of CPD hours that would be required from a medical practitioner.
While there will be some overlap for licensed accountants with the CPD they need to complete as an accountant, she says it will still mean accountants have to dedicate 50 hours to financial planning when it’s often an area they only work part time in.
The amount of hours attributed to each skill or knowledge area is also inflexible, she says.
“There seems to be no flexibility for years where there's no regulatory change. In those years you will still have to do ten hours,” she notes.
“At some point people do come up to speed with the rules, and yes there does need to be ongoing CPD, but it's not like professionals need to re-learn everything every year.”
Under the new standards, both new entrants and existing advisers will also need to pass an exam. New entrants or those returning to the industry will be required to pass the exam once they have completed their tertiary degree and before they have commenced their professional year. Existing advisers will need to pass the exam before 1 January 2021.
FASEA released draft guidance about the exam in mid-July. One of the concerns Ms Bowler has with the exam is that it doesn’t cover any technical areas, including topics such as superannuation, investments and insurance. It could, therefore, create a false sense of security for consumers.
“I understand that to create an exam that can apply across the industry regardless of your field of specialisation they haven't included any technical content, but by the same token, if this exam and process [are] promoted to the end consumer as a level of quality, then there's a high risk the consumer will misunderstand that this exam doesn't actually cover [these] technical [areas],” she says.
“You might have a situation where someone can pass this exam but have no idea how to actually give quality superannuation advice.”
She also sees a bit of a double up between the exam and the extra study that many existing advisers will have to undertake.
“Why mandate extra study if you're going to make them all do an exam anyway? Why not give them the option to do extra study and then the exam will assess whether they need to go back and do extra study or not?” she questions.