Assignment 1
Q1- The recently adopted Corporations Amendment (Financial Advice Measures) Bill allows financial advisers 60 days to provide renewal opt-in notices to their clients. In this context, explain the difference between opting -in, and opting-out.
(Outline the key requirements of relevant legislation and regulation impacting on financial planning and explain their application to financial planning job roles).
Q2 – Donald Smith comes to you, his financial planning adviser, wanting to review his term life insurance. He has an existing death benefit of $250,000 and wants to increase the death benefit to $350,000. Your recommendation is for Donald to take out a new policy supplied by your AFSL employer for $350,000, with terms that are otherwise very similar to the existing one. You, as the adviser, will receive a commission on the $350,000 policy, rather than commission on a $100,000 increase.
Explain some of the ethical issues related to your recommendation, quoting supporting regulation.
(Describe the principles and standards of ethical behaviours in financial planning).
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Scenario 1:
In August 2014, as Tom Harris studied for the continuous professional development (CPD) test – a requirement all financial planners must meet to continue practising – he became aware that not everyone was taking it as seriously as him.
After hitting the send button on his computer, he did a double take a few days later when he overheard some colleagues joking about the test and the manila folder being passed around containing cheat sheets. When he went to a team meeting he was even more horrified when some planners discussed working together, saying “just do one each and swap the answers”.
This contemptuous attitude to continuous professional development training was symptomatic of a far deeper problem as an industry whistle blower was about to dob in the Commonwealth Bank, which involved allegations of forgery and fraud and a cover up by management that would result in losses to clients of tens of millions of dollars.
The Commonwealth Bank financial planning scandal, which triggered a Senate inquiry, a recommendation for a royal commission into the bank and the opening up of compensation to hundreds of thousands of customers, has thrown the spotlight on some dark places in the financial planning industry, including the disturbingly low levels of education required to qualify as a financial planner and provide advice to customers managing their life savings.
In 2014, completion of an eight-day diploma known as RG146 was all it took to qualify as a financial planner in Australia. No higher school education was required, tertiary education, work experience or professional accreditation.
RG146 stands for Regulatory Guide 146, which requires advisers to complete approved training courses that cover the products on which they provide advice. However, it does not dictate how training providers should assess candidates – exam or no exam, supervised or not supervised – which has led to a plethora of different courses and models provided by a dizzying array of “training institutes”, some of which are tiny private operations.
The guide also refers to an approved list of training bodies maintained by the corporate regulator which hadn’t been updated since September 2012 and no longer required trainers to register with it. As that time, hairdressers, tyre fitters and mechanics required more onerous standards of education and work experience than a financial planner.
The lax standards, open book test and lack of supervision on continuous professional development exams have prompted a parliamentary joint committee to examine proposals to lift the “professional, ethical and education standards in the financial services industry”. A topic of discussion was the issue of widespread cheating, and the best way to stamp it out, to rebuild the tattered credibility of an industry that has been dragged through the mud in recent years by a string of scandals, including those involving CBA and Storm Financial.
It follows reports earlier this month by Fairfax Media that some advisers at Macquarie Private Wealth cheated on exams using a document known in Sydney as the -Penske File-. The file contained answers to continuing examinations advisers are required to take annually in order to keep their professional accreditation up to date.
Macquarie refused to comment on the Penske File but after the publication of the Fairfax Media report it posted a statement on its website saying it had -examined the claim and found no evidence of it-, and that it would complain to the Press Council about Business Day’s coverage of the issue. However, ASIC commissioner Peter Kell says the regulator is -aware of allegations that it exists-. Macquarie is being examined, with the corporate regulator announcing the private wealth unit would write to 160,000 customers, as part of an enforceable undertaking slapped on Macquarie in January 2013.
It follows revelations in Fairfax Media earlier this month that hundreds, and possibly thousands, of customers of Macquarie may have been wrongly classified as sophisticated or wholesale investors rather than retail investors to get around the extra regulatory requirements and paperwork that advisers must complete for retail clients.
It also enables advisers to push investors into more complex exotic products, many of them Macquarie-related products, which pay the advisers higher fees and commissions. Of the country’s 18,000 financial planners, 80 per cent work directly or are associated with the big financial institutions. An estimated 5,500 are Certified Financial Planners, who are tertiary educated, have three years’ work experience and are required to sit and pass far more onerous courses than RG146.
The statistics on the correlation between low education and misconduct are compelling. In the past five years the corporate regulator has banned 85 financial planners and only six of them were certified financial planners. Of the six, two were associated with CBA’s two financial planning divisions.
Senator John Williams, who is a member of the parliamentary joint committee, says: “You can walk out a shearing shed and do an eight-day crash course and then go and tell people how to invest their life savings. Something is wrong.” Senator Williams says he supports the drive to lift standards and clean up the industry.
Scenario 2 – Gillian Brown
You are a financial planner, employed by ABC bank. Gillian Brown has been referred to you by her accountant, as she was paying a significant amount of tax and is extremely risk adverse. In the past, Gillian suffered a bad experience with a Financial Advisor, and is not very keen on coming to see you. (Don’t take it personally). Gillian’s funds are all in cash and term deposits with ABC bank.
From your discussions with Gillian it is obvious she is looking for someone she can trust to help her to secure her capital, control her funds, and minimise her tax. She is interested in managing this, all with minimal time input on her side, as well as being able to understand everything that is being said and undertaken in simple terms. Most importantly, Gillian wants to have sufficient capital to retire on. She is a government employee with a government funded Super, and it bothers her that she doesn’t have any control over it. She is very wary of large financial institutions.
Requirements:
1- . Read Scenario 1. Then conduct some research of your own to identify and describe what changes to regulations and organisational procedures are being planned to address the educational issues identified in the scenario.
2- Read Scenario 2. Assume you ignore the concept of conflicted remuneration, explain how you would maximise the return for both you and the ABC bank, when providing advice to Gillian.
3- Read Scenario 2 again. Now, identify what sort of recommendations you might make if you considered the client’s best