FASEA's proposed exam: Looking for a complication

I’m looking for a complication, Looking ‘cause I’m tired of trying
— Foo Fighters, Learn to Fly

Consultation Paper 3: Financial Adviser Examination

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Those advisers still reeling from the spectacular collapse of Dover, or those worried about the practical consequences of the LIF or the vertical dis-integration being embraced by ANZ and explored by CBA, were no doubt thankful of the distraction provided by the Financial Standards and Ethics Authority (FASEA).

On 11 July 2018, FASEA provided some additional detail on the AQF7-equivalent examination that "all financial advisers are required by law to pass before they can provide personal advice to retail clients". 

For a summary of FASEA and their mission read  "What wound did ever heal but by degrees". 

It's important that you appreciate how FASEA's proposal may affect you and your business.  We'd like to help so we've made their Consultation Paper available to you on our site.

Just press the following button to download their paper. 

Mandating consistent, minimum standards

In a previous article, we noted that the popular view of acceptable 'training and education' for financial advice professionals seems to increase with each new licensee failure and public scandal. In reality, few licensee failures can be directly attributed to adviser competency, but there's sufficient political pressure (and popular outrage) to require action.

It may misrepresent the problem, but FASEA's proposed solution may be an essential step in the transformation of an industry to a profession. While some criticism may be justified, this push towards professionalism is not happening in isolation; irrespective of these regulatory catalysts, the Hayne Royal Commission may deliver the coup de grâce the friendless financial services industry is hoping to avoid by embracing restructures, risk management and reforms.

The examination is not the sole test of a practitioner’s competence to provide financial advice, however failing to pass the exam means that an individual cannot be authorised to provide personal financial advice to retail clients.
— FASEA Consultation Paper 3

Exam Preparation: Course Content

FASEA state that the exam is intended to test candidates' capacity to apply their knowledge and experience to "actual advice scenarios".

Their approach, while a significant departure from most CPD solutions, should assuage the anxiety of most competent advisers.

By testing application, rather than recollection and rote learning, FASEA are intently focusing on competence, capability and character in a manner unlikely to disadvantage 'experienced' advisers.  

The scope of the proposed 3-4 hour exam will address: 

  • Corporations Act (with a focus on, but not limited to, Chapter 7).  To comprise 30% of the exam.             
  • The FASEA Code of Ethics. To comprise 15% of the exam.
    • Ethical Behaviour
    • Client Care
    • Quality Process
    • Professional Commitment
  • Behavioural Finance. To comprise 10% of the exam. 
  • Financial Advice Construction. To comprise 20% of the exam. 
  • Applied ethical and professional reasoning and communication. To comprise 25% of the exam.

We're not looking for complications, but while few advisers may be concerned with the proposed scope, they may reasonably wonder whether, and to what extent, their professional focus will be accommodated.

For example, will an adviser who specialises in life risk advice be required to apply Modern Portfolio Theory? Will those persons that predominantly advise wholesale clients or businesses, be tested on the disclosures required when advising retail clients?

One could infer from the paper that the exam will be both general and universal, with the construction and behavioural finance elements crafted in such a manner that candidates will not be required to apply knowledge that is not relevant to scope and subject matter of the advice they are authorised to provide. 

TIP: To improve your knowledge of behavioural finance connect with Simon Russell on LinkedIn or visit Behavioural Finance Australia

Exam Preparation: Testing comprehension and construction 

FASEA's commitment to ensuring that exam questions will be randomised, retired and rotated is not only nicely alliterative, but establishes the credibility of the exam process itself. In fact, the credibility of the process is only increased by their adoption of a mix of:

  • Multiple Choice/Selected response style questions; and
  • Short answer and report writing questions.

The unlooked for complication of this approach is that the use of 'short answer responses' not only introduces a level of subjectivity, but shifts from testing application and comprehension to testing candidates capacity to construct, in English, clear and convincing explanations.

This may be more problematic than FASEA anticipate.

TIP: Read Liam Shorte's views on exam in Professional Planner

Exam Planning: the proposed timetable

Persons listed on ASIC's Financial Adviser Register prior to 31 December 2018, need to pass the exam by 01/01/2021.

From January 2019, new entrants need to complete the exam before the commencement of their Professional Year. 

FASEA intend to pilot the exam in early 2019 with full availability from mid-2019. 

Exam planning: Marking

It’s not whether you win or lose, it’s how you play the game.
— Grantland Rice

First, the good news.

FASEA propose that marks will not be deducted for incorrect answers. In theory, this will encourage candidates to attempt all questions.

However, candidates need to score 65% to pass. 

Furthermore, the 65% pass mark needs some clarification. Candidates need to score 75% or more to pass "the Code of Ethics Knowledge area". It's unclear whether the "the Code of Ethics Knowledge area" is limited to the FASEA Code of Ethics (15% of the exam) or includes the "applied ethical and professional reasoning" (25% of the exam). 

In any event, the weighting seems to suggest that the Government believe that character, rather than competency, is the lever that will shift the industry. Note that neither Bank or Licensee Management are required to pass this exam. 

Consultation, causation and curiosities 

There's an interesting omission from FASEA's paper - there's no discussion of consequences.

FASEA clearly state that "all financial advisers are required by law to pass before they can provide personal advice to retail clients". They also state that "test questions will be changed regularly so candidates who will be required to resit the exam will get a different set of questions"

First, the construction of the sentence is curious - "candidates who will be required to resit the exam" - suggests that sitting the exam again is not an option that a candidate can make, but rather one made for them.

Second, how many attempts will a candidate be allowed to make? The paper states a "maximum of 2 resits" but also seems to allow for 'exceptional circumstances'. 

Third, FASEA note that the "publication of examination results will be online" but provide no detail on the form or location or accessibility of this data.

  • Will the results be secured on the FASEA site?
  • Will the results be published on ASIC's published site as part of the Financial Adviser Register?
  • Will the results be automatically shared with the candidates' licensees and professional associations?

FASEA have invited you to make submissions on this paper. If you have feedback or suggestions submit them to FASEA before 31 July 2018 using consultations@fasea.gov.au