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Financial Planning Advice Process Review

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Tony Negline

I am sure you have read about the upcoming parliamentary review of the laws governing the provision of financial planning advice. The review will be conducted by the Parliamentary Joint Committeeon Corporations and Financial Services.

The terms of reference for the committee makes interesting reading. The committee will review most of the financial services advice process but principally in relation to non-superannuation products and services. Does this mean that the Industry Super Network need not get involved?

It is interesting that the ALP have elected to conduct this type of review and not have another Financial System Inquiry (or Wallis Inquiry as it is sometimes called).

Most of us could probably write the positions and views of most of the industry players even before the Committee begins the process of accepting and analyzing submissions and commencing public hearings.

It would be truly surprising if something meaningful and memorable came from the process. I don't want to be seen to be pooh-poohing the whole affair but it's not as if most of views are unknown. It's to be expected that those views will be forcefully put.

One quote which is apt at this point comes from Oliver Wendell Holmes, an American physician and professor who lived in the nineteenth century. He said that, "a good catchword can obscure analysis for 50 years." Misleading and manipulation using words is not new.

This is certainly true in the lobbying and jockeying that goes on between the various profit and reputedly not-for-profit organisations that feed off financial product and services.

There is a thought which is important here. It comes from George Stigler who won the Nobel Prize for Economic Sciences in 1982. He developed (as detailed in Wikipedia) "the Economic Theory of Regulation, also known as 'capture', which says that interest groups and other political participants will use the regulatory and coercive powers of government to shape laws and regulations in a way that is beneficial to them." According to Sinclair Davidson, Stigler argued that "rent-seeking is cheaper than competition ... there are four ways regulated industries attempt to subvert regulations in their favour: subsidies, barriers to entry, controls over substitutes and complements and price mechanisms."

Clearly all four of these elements are found in the regulation of financial services and products.

Stigler would not be everyone's cup of tea, he and Milton Friedman were close associates.

The Committee is expected to hand down its report in late November this year.

As we all know the main problem with the current financial services law is that it regulates advising on certain products not on regulating the financial advice process. Moving to a formal regulatory environment looking at the advice process will be complex and will be tricky for ASIC to supervise.

It will also involve a major alteration in the mechanics of supervising financial advisers at the licensee level.

Some might be wondering if the Committee would be bold enough to recommend ASIC regulate of individual advisers as opposed to advice groups. Under this model advice groups wouldn't disappear but would operate in a similar way to accounting and solicitor partnerships. Perhaps a better question is to wonder how the government might react to this type recommendation.

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