The Great Divide: RG146, training and education
Consistency and commerciality
Honestly, the industry already has a lot to worry about.
There are changes to the Corporations Act through the Corporations Amendment (Professional Standards of Financial Advisers) Bill. These inevitable (but somewhat tardy) amendments will raise the training, education and ethical standards of financial advisers and requiring relevant providers (financial advisers providing personal advice to retail clients on more complex products) to hold a degree or higher equivalent. Then there’s the requirement to complete a “professional year”, pass an exam, commit to more rigorous continuous professional development and comply with a Code of Ethics.
It seems transformative but considering these changes I can’t help but ask, “what about the rest?”
It’s not unreasonable to expect that the drive to increase competency standards won’t be limited to those providing personal advice to retail clients on complex products.
You’ll no doubt remember that ASIC Regulatory Guide 146 Licensing: Training of financial product advisers (RG 146) divides financial products into two Tiers, Tier 1 and Tier 2.
Tier 1 products include those products that are the bread and butter for professional advisers - for example, superannuation, SMSF, Managed Investments, Derivatives and Securities. Tier 2 products are those products that are viewed as being generally simpler and better understood than Tier 1 products. They are therefore subject to lighter training standards.
Currently the educational level for provision of general advice in Tier 2 products is set at an Australian Qualification Framework “Certificate III” and “Certificate IV” level.
Both Certificate III and Certificate IV courses are equivalent to the Higher School Certificate.
Is it reasonable to require people advising on Tier 1 financial products to hold a Degree (or equivalent) and those advising on Tier 2 to possess a Higher School Certificate?
That’s a rhetorical question. There’s no need to speculate. ASIC has already indicated that they will be updating RG146 to address those advisers who provide general advice or advice on Tier 2 products. Unfortunately, While ASIC has indicated they will review and update RG 146, their broad statement of intent is curiously devoid of any real detail.
Consultation Paper 212: Training of financial products advisers – updates to RG 146 released in June 2013 may be more helpful in providing an insight into ASIC’s future direction. CP 212 suggests that with an increase to educational level requirements for Tier 1 courses, we should also see an increase in educational level requirements for Tier 2 courses. This is reasonable, retail clients will continue to suffer from any a gap between the training standards for Tier 1 and Tier 2 products.
While the industry is focused on operationalising the Corporations Amendment (Professional Standards of Financial Advisers) Bill 2017, and enjoying the reporting reprieve that pushes back mandatory reporting to ASIC to 15 November 2019, some Licensees are also turning their attention to the future of RG 146 more broadly; and, specifically, the impact to those operating under the Tier 2 regime.
Many institutional licensees rely on Tier 2 accreditation to facilitate the provision of advice on Tier 2 products. For many licensees, this is a significant distribution channel for the vast majority of Australians that they believe want advice but don’t want (or can’t afford) a financial adviser.
The May 2018 Industry Skills Forecast and Proposed Schedule of Work report prepared by PWC reported approximately 12,500 enrolments for Tier 2 qualifications in 2016.
In comparison, a total of 18,500 people enrolled in training to obtain Tier 1 qualifications.
But don’t place too much reliance on these figures because the Tier 2 numbers do not necessarily reflect the true number. Under RG 146, licensees are able to meet the Tier 2 training standards internally, so they don’t need staff to complete formal Certificate III and IV courses provided by the Vocational Education Sector.
Personally, I’d be quietly confident that the number of Tier 2 completions is much larger than the 12,500 reported.
The numbers speak for themselves. What gets left behind is just as important as what has already changed.
Bridging the great divide
While we’re contemplating what gets left behind in RG 146, and while we’re all focussing on financial advisers, it’s worthwhile pointing out that CP212 extends to a re-classification of financial products, and in particular personal accident and sickness insurance, as well as Consumer Credit Insurance (CCI). Furthermore, CP212 recognised the need to reconfigure RG 146 to reflect the primacy of advice skills in effective advice provision, as well as making changes to generic and specialist knowledge areas.
As a final thought, could a change in Tier 2 education standards drive a profound change in the way customers obtain advice and interact with these products.
As the costs and obligations for Tier 2 advice increase, won’t pragmatic licensees respond similarly to the way they approached Tier 1 and more aggressively pursue automation and digital-advice. Will the increase in educational levels and associated costs, perversely disrupt simple-advice and replace Tier 2 staff with digital solutions?
In their work report, PwC identified a number of factors are impacting, and have the potential to affect, the Financial Services sector; including FinTech and automation, increased regulation, demographic change and demand for future skills. The movement to digitised distribution of Tier 2 products may be the inevitable consequence of mandating higher minimum standards. Higher standards are essential but they won’t be painless changes.
There seems to be very little focus on the immediate and longer-term impact of revising RG 146 and imposing higher standards for Tier 2 products. Change is essential but the numbers suggest that any shift in training standards would have a significant financial impact. While some Licensees might reassure themselves that the potential impact will smother the drive for higher standards, I think they’ve failed to acknowledge that neither the regulator nor the legislature have any appetite for inconsistent standards.