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Future of Financial Advice Reforms

Future of Financial Advice Reforms. Vicki Stylianou IPA EGM, Public Affairs April 2014. overview. Context: Recent research Challenges Trends and opportunities. Recent research: size of practices. 2013 IFAC SMP poll shows: 32% of accounting practices are sole practitioners

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Future of Financial Advice Reforms

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  1. Future of Financial Advice Reforms Vicki Stylianou IPA EGM, Public Affairs April 2014

  2. overview

  3. Context: • Recent research • Challenges • Trends and opportunities

  4. Recent research: size of practices 2013 IFAC SMP poll shows: 32% of accounting practices are sole practitioners 30% have 2-5 professional staff IPA: 50% sole practitioners 36% 2-5 practitioners

  5. Drivers of profitability – global 2013 IFAC SMP poll shows: 45% said acquisition of new clients 23% said better retention of existing clients

  6. Drivers of profitability – australia 2013 IFAC SMP poll shows for Australian SMPs: 31% said new clients 28% said increased productivity 18% said better retention of existing clients 17% said increased average fee size

  7. Sources of new revenue – australia Fastest growing source of new revenue for Australian SMPs: 36% said tax 27% said advisory and consulting services 27% said accounting/compilation services 10% said audit These percentages held across all SMP size segments

  8. SWOT: Challenges for SMEs 2013 IFAC SMP poll shows that greatest challenges for Australian SME clients: Burden of regulation – by far the greatest challenge Economic uncertainty Pressure to lower prices Rising costs

  9. Challenges for SMPs 2013 IFAC SMP poll shows: Burden of regulation – by far the greatest challenge – moreso for sole practitioners Ability to attract/retain clients Pressure to lower prices

  10. Surveys – what’s happening 2013 partner survey of 500 accountants: • 30% said they were interested in getting their license soon after July 2013 (the innovators) • 25% said they were interested in getting their license during 2014 (the early majority) • 50% have made a decision about how they will get licensed (majority looking to an institution for solutions) • 50% were interested in starting education solutions to meet RG146 qualifications 2014 CoreData survey shows that 37% of accountants are more likely to get a license closer to the 2016 deadline

  11. IpaFoFA Survey Recent member survey: • 39% said they were interested in getting licensed in 2014 • 39% said they were interested in getting licensed close to June 2016 • 19% said they were interested in getting licensed asap • 40% are already RG146 compliant • 17% said they were not sure when they would become RG146 compliant • 12.5% said they were not going to worry about education yet • 17% said they were going to get their own license • 56% said they were not sure about who they were going to get licensed with • 12.5% said they were going to get licensed with a boutique • 14% said they were going to get licensed with an institution

  12. Challenges – macro • Technology commoditising compliance work – common message • Technology increasing efficiencies including pre-filling, e-tax etc • Globalisation through offshoring and outsourcing putting pressure on margins and profits • Govt policy and regulations resulting in increased complexity and need to keep up to date becoming relentless • Succession planning – who will buy or take over • How much is your practice worth – financial services increase the multiple • Increased competition from various sectors including banks, planners, lawyers, brokers, internet, offshore etc • And more

  13. trends and opportunities – SMSF SMSFs using financial planners declined in last 6yrs despite significant increase in number of SMSFs SMSF specialisation growing within financial planning, with more revenue for specialists v generalists Managed funds now over $2 trillion milestone OPPORTUNITY: 45% of SMSF investors currently using an accountant solely for tax advice said they would consider using them for financial and investment advice if they offered it Source – Investment Trends and Vanguard, April 2013

  14. Trends – technology 55% CEOs stated technology as the greatest driver for bringing new financial services and products to Asian markets Technology trends include – solutions rich and mobile technology across all platforms Australian big 4 banks cite competition from Google, Apple, PayPal as their biggest threat given the challenge to core business ie banking services Business and banking solutions to boost productivity IPA looking at solutions for engaging clients in superannuation, budgeting, investment etc – new product based on bundle of 9 Apps to offer choice and allow for active engagement with clients

  15. Future of Financial Advice reforms: • Background • Update • Options for Members

  16. BACKGROUND • Accountants’ exemption replaced by limited license under FoFA • Transition period for accountants from 1 July 2013 to 30 June 2016 • During transition period accountants’ prior experience will be recognised for licensing • From 1 July 2016 accountants wanting to provide advice on SMSFs will need an AFSL or be an authorised representative (AR) of an AFSL holder • Much broader scope of advice than under exemption (see below) • Review of knowledge 3 yrs after license granted • Administered and enforced by ASIC under Corporations Act

  17. Scope of advice • Limited AFSL holders will be able to provide advice on: • SMSFs as a product ie personal or general product advice • Superannuation at the class of product level • Securities at the class of product level • Simple managed investment schemes as defined in the Corps Regulations • General and life insurance at the class of product level • Basic deposit products

  18. definitions Term Meaning Product advice Influencing a decision about a particular financial product or intending to influence the decision Class of product Advice and recommendations relating to a class of product but not a specific product – ie financial advice that does not make a recommendation (in form or substance) about a specific financial product Personal financial advice That the provider of the advice has considered one or more of the person's objectives, financial situation and needs; or a reasonable person thinks one or more of those factors have been considered General financial advice Not personal financial advice (see above) Limited licensee - A recognised accountant (member of IPA, CPAA or ICAA) or hold an ASIC approved practicing certificate - Applied for a limited license between 1July 2013 and 1 July 2016 - Does not deal with money Deal in an interest Applying, acquiring, issuing, underwriting, varying, or disposing of a financial product on behalf of a client

  19. WHAT IS FINANCIAL ADVICE? • A statement, report or opinion that: • Is designed to influence a person or persons to make a decision on a financial product or class of financial product; or • Can be reasonably regarded as being intended to have such an influence Personal Advice General Advice • The provider of the advice has considered one or more of the person’s objectives, situation and needs; or • A reasonable person might expect the provider to have considered one or more of these matters • All other product advice that does not consider these matters; or • A reasonable person would not have expected one or more of these matters to be considered

  20. Examples of fofa advice Examples include advice on: • Types of life insurance cover, total and permanent disability, trauma cover, income protection, whether to hold directly or through superannuation fund • Which simple managed investment scheme is the most appropriate, eg cash or equity fund • Which class of product is the most appropriate for the client, what is their risk profile, what are the options • What type of basic deposit product, eg cheque or savings, term deposit, online savings account, various business related accounts

  21. Education requirements: rg 105 ASIC’s Regulatory Guide 105 relates to Licensing and the Organisational Competence Requires you to be competent at the organisational level Nominate a Responsible Officer(s) ASIC assesses compliance by looking at the knowledge and skills of Responsible Officer(s)

  22. Education requirements: rg 146 ASIC’s Regulatory Guide 146 relates to knowledge and skill requirements for individuals Courses required for each type of advice eg superannuation, life insurance, securities etc Education must cover generic knowledge, specialist knowledge and relevant skills Licensees require all ARs to hold RG 146 at least Ongoing CPD requirements Many different offers in the market

  23. Accountants licensing regime – summary What is it? Advice scope Licensee responsibilities • SMSF • Class of product advice on: • Basic deposit products • General & life insurance • Securities • Simple managed investment schemes • License issued by ASIC • New AFSL available for all participants in financial services • Accountants with Public Practicing Certificate can gain access to transition provisions • The licence will allow: • SMSF recommendations • Class of product advice • Broad compliance obligations • Internal system obligations • People obligations • Compliance with laws • Adequately trained • Maintain competency to provide advice • Resourcing obligations • People requirements • Technical resources • Financial resources

  24. Govt position Policy is based on consumer protection Scaled advice expected to make advice more accessible and affordable Expected that 10,000 accountants will apply for a limited AFSL Treasury states the reforms will expand new markets for accountants Increased monitoring from ASIC expected ASIC to conduct review at end of transition period Coalition Govt supports the principles of FoFA which were introduced by previous Govt However, Coalition Govt wishes to make amendments to key aspects of FoFA

  25. Update: Legislation • Govt made election promise to amend FoFA • Govt has just released proposed changes to FoFA legislation and regulations • There are NO changes to the accountants’ exemption – accountants will still have to be licensed to provide advice about SMSFs and other financial advice • What are the main changes: • removal of opt-in • annual fee disclosure statement for post-1 July 2013 clients only • amend best interests duty to remove ‘catch all’ from scaled advice • scope of scaled advice can be explicitly agreed with client • general advice exempted from conflicted remuneration (but not personal advice) • amend grandfathering to allow for adviser movements

  26. Update cont Govt estimates that changes will save industry about $190 million pa in ongoing compliance costs and about $88 million in once-off implementation costs Consultation on draft legislation and regulations ongoing Reaction has been mixed – financial services industry has welcomed some changes; with industry super and some consumer groups not as welcoming; banks will benefit from general advice exemption; financial planning sector disagrees with general advice exemption IPA sees main change affecting accountants around scaled advice and removal of catch all to best interests duty, as positive Having a catch all meant uncertainty and going through much longer process than may actually have been needed in the circumstances It does not mean that advisers are relieved from acting in best interests of client

  27. UPDATE: asic and licensing • ASIC has released license application – 3 part kit and 65 page form (not all applicable) – refer to: http://www.asic.gov.au/asic/asic.nsf/byheadline/13-140MR+ASIC+releases+information+sheet+about+applying+for+a+limited+AFS+licence?openDocument • Initial form has been streamlined by ASIC with removal of some questions • ASIC no longer has training register of accredited RG 146 providers – many entrants in this market • Still need to meet financial and compliance requirements including: have a system to manage risk; member of a dispute resolution scheme like FOS; adequate training of employees; ongoing relevant CPE; appropriate business processes in place; adequate PI insurance • Other FoFA reforms contained in Corps Act all apply • Annual compliance certificate rather than full AFSL audit • Knowledge review after three years of obtaining license

  28. Four main options under fofa Option 1: Get out of the sector altogether Option 2: Stay in the sector but refer clients Option 3: Become an AR of a licensee Option 4: Apply to ASIC for a limited/full license

  29. What to consider • Consider opportunities and challenges • Determine if you are impacted • Assess services you currently provide • Assess services your clients want from you • What are other, similar practices doing • Consider the options • Meet education requirements (RG146) • Meet other requirements (fit & proper person, PI insurance, responsible manager)

  30. Cost of license • Application fee to ASIC for individual: $825 • Application fee to ASIC for company: $1,485 • Increased PI insurance (min $2m): unknown but could be significant • Membership of external dispute resolution scheme: $500 - $1,000 • Ongoing training and education of relevant staff: depends • Adequate practice management processes: unknown but may be minimal if already in place • Annual compliance certificate instead of full audit (latter can be $2,000 to $10,000) • Cost of preparing full AFSL application: $10,000 to $20,000 or more

  31. Financial services: • Decision-making process • Authorised representative or own license • What is IPA doing for Members

  32. DECISION-MAKING PROCESS Professional referral relationship 3 No 2 Revenue sharing Provide in-house? 1 Yes Own AFSL Provide SMSF advice to clients Yes No No action required Authorised Representative

  33. Why consider financial services • Client demand for holistic advice and additional services • Revenue and profit growth (client base penetration from 10% - 90%) • Ring-fence your clients – revenue and profit protection – being the only or main trusted adviser in the financial or business life of your clients • Diversify, grow and sustain client base and revenue sources • Consider challenges to traditional accounting work – refer above to macro challenges

  34. Preparation is the key Yourself Your business Your clients • Education • Training • Authorisation/license level required • AR or AFSL? • Consider additional resources required • In-house or outsourcing? • New entity / trading name • Referral relationships • Competitive advantage • Delivery of advice to clients requires templates and processes such as: • Statement of Advice • Fact Find • Financial Services & Credit Guide • Record of Advice • Statement of Further Advice • File Notes • Advice Processes • Registers

  35. Incorporating Financial services According to various commentators the keys to success in financial services are: Integrated business model Client-centric attitude and approach Client engagement model Cohesive, quality delivery of advice Consistent remuneration and fee approach Recognition of separate and distinct skill sets

  36. COST V. OPPORTUNITY

  37. AUTHORISATION or OWN LICENSE? • Cost • Working capital • Initial and ongoing costs • Professional Indemnity insurance • Profitability • Productivity • Efficiency • Diversity of income sources • Risk • Reputational risk • Monitoring from ASIC or licensee • Responsible Manager • Overall compliance • Referral effect on clients • Client base protection • Capacity to seize growth opportunities, especially SMSFs • Independence • Client ownership • Ability to use own brand • Ability to recommend a wide range of products (if applicable) • Creation of an asset • Autonomy • Structure – JV with equity, merger etc • Resources • Advice document templates etc • Ongoing CPD • Technical support • Monitoring and supervision • Business resourcing and preparation • Ease of implementation • Marketing and differentiation • Additional skill sets needed

  38. Authorised Representative What is it? Advice scope AR responsibilities • Three options: • SMSF advice • SMSF advice, strategic advice and class of product advice • Strategic and product advice • Options vary by licensee • Letter of Authority to provide advice is issued by a licensee • Access to licensee resources • Access to practice management support • Benefit of scale of economies • Transfers risk and responsibility to licensee • However, resources, cost structure etc very greatly by licensee • Comply with standards set by the licensee • Comply with obligations associated with providing financial advice • No financial obligations • Licensee is held ultimately responsible for the advice provided

  39. Limited license Apply for a license directly with ASIC (limited or full) Must have education requirements and experience deemed until 2016 Comply with all FoFA measures including disclosure obligations, documentation, processes etc Refer to ASIC website, www.asic.gov.au for details of all applicable Regulatory Guides Must be member of external dispute resolution service Three part application kit with 65 pages (not all applicable) and need to compile docs around core areas Min $2 million PI insurance cover and must cover license authorisations ASIC and IPA can assist with applications

  40. What is ipa doing for members • Updating information • Ongoing consultation with ASIC re implementation • Partnership with DeakinPrime to provide RG146 and DFP • Partnerships with AFSL holders including SMSF Advice to provide AR licensing • Free online network to match accountants and planners • Limited license solution: currently being developed including online client engagement tools and training solutions • Insurance solution: in-house broker to negotiate better deals • Tell us what else you need or want from IPA

  41. IPA solution for AR Over two years ago IPA launched its Financial Services Package to assist Members who wished to introduce financial services into their practices To provide delivery of the package IPA partnered with SMSF Advice (formerly AXA and now AMP) and MLC IPA is currently revising its Financial Services Package given the withdrawal of MLC from the direct channel following MLC’s recent restructure IPA has gone to tender to seek replacements, which may be more than one provider including non-aligned licensee IPA Members had previously indicated the preference for a choice of providers A revised Financial Services Package is to be launched in May 2014 SMSF Advice continues to offer AR solutions to IPA Members including education, with monthly payments

  42. Ipa solution for Limited license • To be launched May 2014 • assistance to Members to compile, complete and lodge license application • once licensed: documentation, templates, checklists, how-to guides (especially disclosure obligations), samples (fact finds, FSGs, SOAs, engagement letters, invoicing for scaled advice etc), technical assistance • IPA’s PPQA Online (quality assurance program) has added SMSF and financial advice modules; and can also be used as business diagnostic to show compliance and practice management system • IPA considering other technology/online based solutions to meet FoFA requirements • ongoing liaison with ASIC to avoid being non-compliant (ASIC has warned against FoFA ‘window dressing’)

  43. IPA referral service IPA developed and launched an online referral service to match accountants with financial planners, through a search function based on certain criteria Financial planners are from a ‘filtered pool’ based on experience and qualifications The service is for Members who don’t wish to become licensed but still wish to offer financial services to their clients The arrangement between parties is totally up to the discretion of the parties but can lead to additional revenue for the accountant The service is for IPA Members only and is free of charge

  44. Ipa solution: education IPA has developed in association with DeakinPrime, the Diploma of Financial Planning, launched in Sept 2012 Tailored for accountants Modules meet all RG146 requirements Eligibility for DFP includes skills based assessment, to suit accountants Experienced professionals may be able to complete the DFP in 12 mths Fully online distance with self-directed learning materials Accessed via online portal with dedicated DeakinPrime IPA helpdesk For more information call IPA Head Office

  45. Contact us If you have any questions or would like further information or wish to discuss your particular situation then please call either: Vicki Stylianou: vicki.stylianou@publicaccountants.org.au or mob. 0419 942 733 Tony Greco: tony.greco@publicaccountants.org.au or 03 8665 3134 For education or training queries, please refer to: Jenny Toh: jenny.toh@publicaccountants.org.au For insurance queries, please refer to: Josh Stilwell: josh.stilwell@publicaccountants.org.au or 03 8665 3139

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