The seven year itch

Until recently, Peter Kell was the public face of ASIC. He talks to Jayson Forrest about his seven years at the corporate regulator and the challenges still facing the financial services industry.

Peter Kell is one of those individuals who doesn’t need an introduction. For seven years, he held one of the toughest gigs in financial services, working at the corporate regulator – ASIC – through a period of unprecedented change and transformation for the industry.

Before stepping away from the watchdog and his role as ASIC deputy chairman in December 2018, Peter oversaw a hectic period dealing with new policy and reviews, as the Government tightened its stance with the financial services sector.

Reflecting on those seven years, Peter concedes the industry has changed “massively”.

“Seven years ago, the Future of Financial Advice (FoFA) reforms were yet to be fully implemented, and laws dealing with the likes of responsible lending were only just coming into play. There have been many changes and there will be quite a few more to come, not least the push towards professionalism, which is very important for the financial advice sector.”

However, Kell is also quick to point out that during this time, a number of significant problems arose for the sector, undermining consumer trust, which culminated in the Hayne Royal Commission - not least being misconduct arising from conflicts of interest and conflicted remuneration.

Not surprisingly, on the regulatory side of the ledger, Peter identifies that a tougher approach to conflicts of interest as being one of the more significant changes to the industry, with a move from just disclosing conflicts to a greater emphasis on removing them altogether. This was part of a push by the regulator for stronger protections for consumers.

“Legal reforms banned some conflicts of interest, like certain types of commissions. So, from a regulatory perspective, one of the big changes has been moving from a position where ‘almost anything goes’ in the industry – as long as it was disclosed – to one where there is a stronger emphasis on the need to prioritise the interests of the client.

“Furthermore, there has been a growing expectation that outcomes for consumers should be fair, not just a focus on the process for sales and advice. Finally, there is clearly a greater expectation that industry will be punished or removed for wrongful conduct.”

Peter no longer speaks for ASIC, having moved on from his previous position in late 2018, but he points to three areas where the Government has introduced important reforms that the industry can expect will strengthen the regulator’s approach. These are:

  1. A significant increase in funding for ASIC. This will allow the regulator to increase its supervisory and enforcement activities;
  2. The implementation of Government reforms that will increase the powers of ASIC. Examples include the new Design and Distribution Obligations (DDO), through to stronger powers to regulate the insurance sector, and tougher requirements for breach reporting; and
  3. The recent introduction of substantially stronger penalties for the industry.

“You only need to look at penalties,” Peter says. “Until very recently, if a licensee breached its fundamental requirement to act honestly, efficiently and fairly, the maximum pecuniary penalty was zero - there was no penalty! Not surprisingly this was highlighted as a significant weakness during the Royal Commission.

“But that’s recently changed. As of a few months ago, that maximum penalty ASIC can now seek is $525 million. So, that gives you a sense of the impact of the Royal Commission and other inquiries have had on modernising ASIC’s enforcement powers.”

And in what ways will these changes affect ASIC’s relationship with advisers?

Peter says there are some important reforms that are already in play for the advice sector, including new professional standards and a code of ethics, which will impact the way in which ASIC deals with the financial advice sector, particularly when it comes to protecting the interests of consumers.

Notable achievements

While Peter is able to easily identify some of the significant changes to the industry over the past seven years, he was more reluctant to single out a particular achievement during his tenure with the corporate regulator.

“There were major outcomes across many areas – enforcement, law reform through to financial education. And I hasten to add that I was just one member of a team!”

One important achievement he highlighted was that ASIC was successful in making the case for a stronger regulatory toolkit, through some very important regulatory reforms, which will ultimately raise standards and improve consumer outcomes. ASIC was successful, for example, in making the case for the DDO.

The regulator was also successful in getting support for improved protections in relation to insurance claims handling, and these changes are now in the legislative pipeline.

“Interestingly, in my experience, the financial adviser community understood the need for better consumer protections and better data for life insurance claims,” he says.

Other achievements he highlights during his time with the watchdog include ensuring appropriate access for consumers to remediation or compensation in the event of industry misconduct, with billions obtained and more to come.

“Stopping misconduct is the first priority. But going the next step to obtain compensation is a lot more important in financial services than most other industries because, in financial services, a lot of money is at stake. In some cases you are talking about a person’s life savings. I expect this is an area that ASIC will continue to focus on.”

But perhaps closest to Peter’s heart was his involvement with enforcement actions ASIC undertook to address financial misconduct that impacted on vulnerable consumers in financial stress or with low levels of financial literacy. Examples included ASIC’s enforcement actions against a range of payday lenders, or work in indigenous communities.

“This is something that did not often receive much media attention,” he says. “In some remote indigenous communities, you had low-income consumers who were particularly exposed to financial exploitation. They were subject to some dreadful practices. I was pleased to be involved with taking action in these cases.”

Hallmarks of a profession

In referring to reforms aimed at transforming the financial advice sector from an industry to a profession, Peter points to the new FASEA education standards and a code of ethics.

And while he believes these are the correct steps for the industry to take, how will it know when it has arrived at becoming a full profession?

“It’s a good question,” he says. “I’ve said that the financial advice sector has some very good professionals but it’s not yet a profession.”

Peter believes the sector will know when it has become a profession in two ways:

Firstly, when there are a set of formal requirements in place around areas such as: minimum education qualifications, professional qualifications, continuing professional development, and a code of ethics.

And secondly, and perhaps more importantly, when stakeholders are confident that the needs of clients come first at all times.

“The hallmark of a profession is where the adviser, or specialist, puts the needs and priorities of their clients first. Only when we can look across the advice sector and confidently say that is happening, can we consider the advice sector as being a profession,” Peter says.

“There is obviously a lot of change in the sector at present, but I’m confident the reforms are on the right path and we will get there as a result of the changes that are now taking place in the industry.”

Challenges ahead

Even with the move towards financial planning becoming a recognised profession, Peter believes the financial services industry still faces a number of challenges in the years ahead. In particular, he identifies rebuilding trust, dealing with conflicts of interest, and managing consumer expectations.

“Consumer demand for financial services – whether it is advice or products – remains strong, particularly with superannuation. So, there is an opportunity to rebuild the consumer trust that has been significantly eroded. However, if this doesn’t occur, more regulation is likely.”

Peter also identifies the need for the industry to deal more effectively with the challenges of eliminating conflicts of interest and conflicted remuneration from business models, which the Royal Commission highlighted as a particular issue for the industry.

As for managing consumer expectations, he believes this is a challenge that should to be a positive one for the industry.

“It’s all about how to deal with increasing consumer expectations around the service and treatment of clients. Consumers are less tolerant of poor treatment, and while this is not unique to financial services, it’s something that all advisory firms need to be mindful of as they move forward.”

Managed accounts

And with the managed accounts sector now accounting for over $62 billion in funds under management, what is Peter’s opinion of this sector?

He has a pragmatic view: “To be honest, I’m not as immersed in how this is evolving as I’d like to be. However, it appears that managed accounts, if done the right way, offer a degree of flexibility and transparency that not only help the adviser, but potentially, the client as well.

“So, if this sector is growing for the right reasons, then that’s a good thing.”

However, as an ‘interested observer’, Peter does have concerns about whether the use of managed accounts is appropriate for all clients.

“Financial advice firms need to ensure they are not encouraging clients to adopt an investment solution, like managed accounts, when their needs are less complicated or do not warrant it. In such circumstances, clients shouldn’t be moved into products or services that they don’t actually need or understand, and that’s where the Best Interest Duty kicks in.”

Given all the regulatory changes currently happening in the industry, Peter is also concerned that some of the media and industry commentary seems to focus first and foremost on managed accounts as an alternative revenue stream, rather than being a genuine solution serving the client’s best interest. He concedes this is a controversial view, coming from his perspective as a third-party observer.

“History tells us if a product is introduced primarily to benefit the licensee/adviser then things can go wrong. The media commentary could be unfair, however, if revenue is the key motivator for the growth of managed accounts, rather than client needs, then that will be a problem for the sector,” he says.

“In such circumstances, advisers will need to think very carefully about why they are advising their clients to use managed accounts; what conflicts of interest might arise by using these products; and what requirements, like DDO, apply to the use of managed accounts.

“If planners and licensees can put their hand on their heart and say, ‘This managed account solution is right for my client and is in their best interest’, then that’s terrific. In this new world, the client must always come first.”

Looking forward

With his regulatory career at ASIC now well behind him, how does Peter see the industry developing over the next 5-10 years?

Firstly, he hopes the industry will be able to look back and appreciate that the regulatory changes being implemented now, whilst difficult, were a necessary part of the industry’s evolution.

“I hope people realise these changes will make the industry more professional, more accountable and hopefully, will restore trust with consumers. But that will require goodwill and commitment from all segments of the industry,” he says.

“I also hope we will not see lobbying against some of these necessary reforms and changes, which are genuinely aimed at raising standards.”

And finally, how does Peter want to be remembered for his work as deputy chairman at ASIC?

“Well, I’ll leave that up to others to decide,” he laughs. “If I want to be remembered for something, it’s that I have always emphasised the need to put consumers at the centre of what we do – that goes for industry, regulators, policy makers, whoever!

“People want and need good financial advice and financial products. And the client’s best interests must always come first. Combine those two things and the industry should have a positive future.”

He adds: “Remember, how do you make sure you meet the fundamental obligation to the client and avoid going down the wrong path? That’s the question the industry needs to regularly ask itself.”

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