Regulatory Burden Report: Impact of complex regulatory frameworks

Intro:
Hello, and welcome to the CPA Australia podcast, your weekly source for accounting, education, career, and leadership discussion.

Keddie Waller:
Hello, and thanks for joining us today. My name is Keddie Waller and I'm the Head of Public Practise for CPA Australia. This week on CPA Australia's podcast, we will be discussing the newly released Regulatory Burden Report with my guest, Stephen Jones. During this episode, we will be discussing the impact of complex regulatory frameworks, five key recommendations that have come from the research, and where to next.

Today we'll look at what it means for CPA Australia to have real, tangible data and insights into these issues, and what this means for CPA Australia members and their clients. Our guest today is one of the founding partners of ATM Consultants, a tax trainer, and Chairman of the Public Practise Advisory Committee of CPA Australia. Welcome, Stephen Jones.

Stephen Jones:
Thanks, Keddie.

Keddie Waller:
So we're just going to start today by talking about why we did this report and how we actually got to this point. It's no surprise, then, for those of you working in public practise that regulatory burden has been an ongoing issue, and it's something that has become more of an issue over the last decade. What we wanted to do through this research was not only identify and understand what this means for you, but also understand the impact on your clients, including your small business clients.

So how did we go through this process? First, we started with a green paper. The green paper was really trying to pull together the issues that we have understood and listened to you from feedback, and also trying to articulate and demonstrate the actual complexity that we have. I think a lot of people forget that when you're actually providing advisory services as a professional accountant, you're not under one legislative framework, you're under many, and that actually has a complex and costly impact on you.

So when we launched the green paper, we also launched a survey to our members in public practise. We had over 600 responses from our members, which was fantastic. It really shows the importance of this issue. Following on from the survey, we then actually held focus groups around Australia, and we had 60 members attend that in total. So in a separate survey, we actually canvassed the responses from over 1,000 consumers and small businesses, and we actually also held two focus groups for consumers as well, to further understand and unpick their thoughts in how this works.

We've released the report on the 1st of October, and it comes through and it shows the regulatory impact and how it's actually bringing out the complexity and the cost. But what it actually does is bring to life what that really means in practise, and what the results are for you and for your consumers. It also detailed five potential recommendations that had the support of consumers and members who've completed that survey. What we're going to do today is talk to Stephen and actually understand, what does that mean potentially for a member in practise?

So one of the areas that came through as a potential recommendation was reviewing some of the key terms and definitions that we have across the legislative frameworks, so things like general advice, financial product advice, and credit advice. Nearly 70% of public practise members offering financial planning advice believe the definition of general advice needs to be reviewed. Another nearly 80% said the definition of financial product advice needs to be reviewed, which is actually not a surprise, given that every time you talk about a product, even if you're talking about a strategy, you're deemed to be giving product advice, and that brings all the implications in.

So, Stephen, thinking about changing some of these key terms, how would that impact and change the way you currently do business?

Stephen Jones:
Well, Keddie, putting financial planning advice to one side for a moment, in public practise we're constantly providing financial advice and information of one sort or another to a client, and I know it can be a bit of a minefield at times to determine what we're allowed to advise on and what we need to be licenced for. I know there's lots of tools and examples from CPA, but the definitions are not always that clear-cut.

For example, we deal a lot in tax, tax cuts across most financial areas, including financial products. So it becomes difficult to determine the line if we are advising our clients on the tax implications of, for example, making contributions into super or taking out more than their minimum pension, for example. So even though we're not telling them what super fund or pension fund to use, in many occasions, those questions are really more tax advice, but because they involve a financial product, we have to be really careful or we have to provide them with a statement of advice.

So I think having those definitions a bit clearer would make that a lot easier for us. The other thing I find really frustrating, I'm often sitting across the table from a client who has got a simple question that related to perhaps the tax implications of something, and I'm sitting there knowing I could answer it in a few minutes, but I've got to tell them, "Sorry, I need to do a statement of advice, and for that, it's going to take me a few weeks by the time I get through the compliance issues, and probably going to cost you a few thousand dollars." So I find that a really frustrating aspect of it.

I suppose one example of that is, one question we sometimes get, we might have a client who has two different pensions, maybe from the same super fund, or maybe from their own self-managed super, and if they want to take out more than the minimum of one of the pensions, one of those pensions might have a taxable component, the other one might be tax-free, that's a really simple tax question to answer. But because it involves a financial product, I can't answer that question without doing a statement of advice. To me, that seems crazy in some regards, because I'm not actually advising them on what product, what they're investing in, I'm just talking about the tax implications of that.

Keddie Waller:
I think from your clients' perspective, and some of the feedback I would get from members when talking to them, you're sitting in front of the client, they are asking for what they deem to be simple advice, but they need the expertise of a specialist to give that. Yet, like you just said, even if they're wanting this simple advice, it needs a statement of advice that could take a couple of weeks for it to be vetted, and they're sitting, going, "Why can't you just give me this advice?"

Stephen Jones:
Yeah, and it's interesting, the term advice itself I always find interesting. Because, I mean, in my case, we've dealt a lot with small businesses over the years. They tend to make their own financial decisions. What they need from us sometimes is some information, and some guidance around the rules and so on. So, often, they're not looking for us to actually give them the advice or make the decision for them, but to fill in the gaps in their knowledge so that then they can make the decision themselves.

So there's this really crossover between what's advice, and what's not advice, and what is that term general advice? Are we giving them general information? Are we giving them tax information? If it involves a financial product, then we have issues in terms about what we can and can't say.

Keddie Waller:
Having provided a lot of guidance on this area, and even providing some of the conferences and things where we talk about it, it's this continual struggle, trying to understand what is factual information, what is general advice, what is financial product advice, what is tax advice, when does tax advice become product advice? I think that there is a real blurring of the lines, and sometimes it is really hard to navigate.

I know we get questions from members all the time asking about specific instances and we don't always have the clarity on that. So I think it's really important, and one of the things we want to explore is, how do we actually pull this apart? How do we actually start making this more pragmatic, so as an advisor you can service your clients and the clients are starting to get the advice they need?

Stephen Jones:
Yeah, and I think in some of those areas, ASIC have been a bit uncertain themselves. I was reading the other day about wholesale clients and whether a self-managed super fund can be a wholesale client, and there seems a fair bit of uncertainty about whether they needed to meet the $2.5 million test, whether they needed to meet the $10 million test, and there's been a couple of different bits of guidance. So some clarity around all of those things would be really good.

Keddie Waller:
That also brings in another element, that ASIC say that if you are actually licenced in any capacity, even if you are a tax agent, for example, that you should actually be acting as the financial advisor when your client's seeking advice. But in reality, like you said, quite often it's the tax hat you need to be wearing because you need that expertise and that specialist knowledge. They're two different fields, even though they overlap.

Stephen Jones:
So that's crazy in our office. So I'm an authorised rep. I'm the only one in our firm that does financial planning. So if a client comes in to see my partner, he can give them tax advice on a particular matter, and I can't because I'm a financial planner.

Keddie Waller:
Yeah, because you're authorised, so you're already excluded from doing what you already need to do to service your client.

Stephen Jones:
Yeah.

Keddie Waller:
Going back to your point before, the wholesale definitions, interestingly that was the first consultation that FoFA brought out, back in I think it was 2012. Yet we're nearly 2020, and we've had no resolution on that. We've got this uncertainty on how you, like you said, apply these rules to not only the individuals, but to things like superannuation.

Stephen Jones:
Yeah.

Keddie Waller:
Yeah. Look, I think definitions is really important, and I think one of the things that we need to explore as part of our next steps in this research is not just looking at definitions within single regulatory silos. So not just looking at the Corporations Act, but we need to understand how they actually then interact with the Tax Agent Services Act, and even things like SIS, because there's so much crossover when you're giving this advice that if it's not explored, it can lead to further complexity and cost.

Stephen Jones:
Yeah, certainly. Yeah. Yeah.

Keddie Waller:
So another thing that came out of the report that we were canvassing, and it had support, was looking at the definition of financial product advice. Stephen, you and I have spoken about this a few times, because even if you are providing, like you said before, your client's seeking advice about how to actually start their pension depending on their fund, the minute you start talking about what is deemed product, in this case super, you're in product land and you have to go through the advice process, and the statement of advice, and everything that comes with it, even though it could be realistically strategic advice and quite simple. If the concept of strategic advice was introduced, how do you think that would actually change the way you could talk to your clients?

Stephen Jones:
Well, that'd make an enormous change because in reality, that's what I like to do, and I think that's what we're good at. I think we're really good at developing strategies, and helping clients do their plans and a framework for their decisions. When it comes to the actual product advice itself, I think that's a whole other field again, and involves another range of specialist skills, and my preference would be to refer that to somebody with those skills.

I mean, I know a reasonable amount about those, but when you talk to the people who deal with that sort of stuff every day, they just know so much more than me. But in terms of strategy, I think that's an area that really fits with the normal skillset of practising accountants. I've actually always thought the term financial planner is an odd term or broad term, because many of the financial planners I've met are really investment advisors, and I think the two should be separate. One is about financial planning, which is the strategic side of it, and the other one is about investment products and actually investing.

So I think they're two separate sets of skills, and I think accountants generally are pretty good at the sorts of things around strategies. Most of us have dealt with small businesses over the years. We deal with them in terms of strategies and planning around their business, talking about cashflow, talking about succession planning, all those sorts of things, and they're the sorts of things that we can also deal with in terms of individuals in their financial plans.

Keddie Waller:
Yeah, and I think you pull out a really good point there. The term financial planner is really broad. One of the things we don't always think about is that under an AFSL or the term financial planner, you're not only picking up the investment specialists, but you're picking up stockbrokers, you're picking up life insurance advisors, you're picking up people who have got limited advice and scope that they can talk about, you're picking up holistic advisors. Yet that one term covers all of those people, and from a consumer point of view, how would you know any different.

Stephen Jones:
Oh, that's right. Yeah.

Keddie Waller:
So one of the things that ... and feedback we've been receiving from members more recently, but even when the accountants' exemption was announced, is that accountants don't want to be financial planners and they don't want to be productive advisors. That's been a consistent theme, and I think that's where the strategy advice could be really strong.

There's been some recent commentary about the accountants' exemption, and that should be basically reinstated as a way of trying to address some of these issues. I think it's important to understand and remember what the accountants' exemption actually allowed. It was so narrow that it only permitted a recognised accountant, so you had to be a full member of one of the three professional bodies, to only recommend the setup or wind-up a self-managed super fund.

It was so limited that it didn't even allow you to say to a client, "You shouldn't set up an SMSF," or take into account any of their existing super a client may have. It didn't allow pension advice, contribution advice, or even investment strategic advice. So I think the return of the exemption itself would be not the [inaudible 00:12:42] that everyone thinks it is.

Stephen Jones:
Well, it'd be fair to say, Keddie, in my travels around, that has been very largely misunderstood amongst public practitioners who probably thought that the accountants' exemption gave them an awful lot more than that, but it really gave them very little.

I mean, we had time to prepare for a lot because of the accountants' exemption went in, what, 2016. But in reality, it dates way back to the early 2000s when FoFA was introduced, and was really only a temporary measure to help us across that bridge. But in the end it ... well, when it disappeared, there was lots of people who weren't happy that it had gone, but I thought they actually thought that it gave them far more than it really did.

So you're right, I don't think it's the answer. I also personally don't think that the limited licence is the ideal scenario either, because having given financial advice for a few years now, I think it's really difficult to limit it in some circumstances. So I think the limited licence probably should only be seen as a short-term gap, in reality, as well.

Keddie Waller:
Yeah, I would agree with you. I think that it's clear that there was a intention for the limited licence to fill a broader need, and to try and enable that pension contribution strategic-type advice to clients. But like you said, because you were always tied back to that product definition, it's hard to get away and actually really do what accountants want to do, which is focus on that strategy. I think that's where one of the opportunities about introducing a term like strategic financial advice could actually solve that gap and actually enable that type of advice.

Stephen Jones:
Yeah. I find it interesting, the Financial Planners' Association have got a client needs wheel, which lists six different needs they think that somebody needs as part of their financial plan. Only one of them involves investment, which is really the investment advice. The others are all the sorts of things that we deal with daily with our clients, particularly in business, but also individuals. So the rest of that is largely strategic. As I say, I think that really fits with our skillset, and if out of that strategic plan that we help clients with, they end up needing a product or some sort of product advice, well, we can get that when it's needed, from the right people with the right skills.

Keddie Waller:
I was going to say, I actually see this as a really great way that we could actually improve access to advice within the community, but actually compliment the existing framework. So as you said, there's a need for strategic advice, some of that strategy about contributions, pensions, saving, debt, all of those areas, risk management, but you don't always need a financial product and it doesn't always need the, should I set-up, or wind-up, or invest in this product?

I think if we had this concept of strategic advisors, you could service all those clients who may not be able to access advice because of the cost. Because we could have a reduced complex system, so you're not actually going to bring in those costs, but then actually have that ability to refer to the product advisors when they do need that advice, so you can have a complimentary relationship.

Stephen Jones:
Yeah, and as you say, a lot of the advice, whilst it involves a product, is not advice about the product. So I was talking to some people yesterday who are getting close to retirement and reaching age 60, and his question was around whether he should take a transition to retirement pension or not. There's no question about whether the super fund that he's in is the right super fund for him or anything like that. It's more around his strategy and how he's going to be better off retirement-wise, which again, is largely tax type questions, and planning and strategic type questions around their cashflow and living expenses, et cetera.

Keddie Waller:
Yeah, and my real concern at the moment is, with the changes going through the financial planning sector, and we've got FASEA coming through with more costs, we've got the ASIC funding model that's having a real impact, on top of some of the things we've found in the survey. So my real concern is that we've got this real change in the financial planning services sector.

So we've got increased costs through the ASIC funding model. We have FASEA coming through with further costs and requirements, and we're starting to hear the impact that's going to have. If we end up having this attrition of, we're hearing up to 30% of financial advisors a year for the next five years, we won't have enough professionals to actually service consumers.

What we'll end up with it is a sector that can only service high net worth clients in an environment that's all really costly to get advice. So I think if we can look at other ways to actually improve access to advice through things like strategic advice, that's a way that we can actually help a broader amount of the community in its needs.

Stephen Jones:
It's an anomaly, isn't it, that the people that the legislation is designed to try and protect are the ones who probably most need the advice, but it's putting it out of reach financially for them.

Keddie Waller:
Well, exactly, and ironically, that was the objective of FoFA, to improve the access of affordable quality advice in clients' best interests. Yet some studies show that a decade on, FoFA has doubled the cost of advice. So it's put it out of reach of many of the Australians, like you said, who actually need the advice. I think a lot of people forget that some basic financial strategies can really improve someone's financial wellbeing.

Stephen Jones:
Yeah. That's certainly my experience across our client base over the last few years. In terms of profitability for me personally, if I could just deal with high net worth individuals, that would be terrific. The issue is that the demand is really coming predominantly from people who are well enough off, but not high worth individuals who just need a bit of advice. But it becomes a really costly exercise for them because of the level of compliance and effort I have to go in to actually provide that advice.

Keddie Waller:
You bring up a point about your client demographic. We've got an ageing population. We've got concerns around financial literacy levels in Australia. We've got forced retirement savings, so we've got a generation coming through who's always had superannuation and need some advice around how to do that. With this ageing population, we can't sustain supporting the Age Pension. We need people to actually think about partially or fully funding their retirement. If they can't access the advice to do that, how are they going to do it?

Stephen Jones:
Yeah. That's certainly the case with my client base. I'm 60 now, and a lot of our clients are heading towards that age group as well. Many of them are in small businesses. They want help in how they're going to exit their small business, to be able to crystallise that into some cash, then be able to get it into super, for example, and then plan for their retirement from there. So it ties in a little bit, and there's some really complex tax issues there around the small business concessions-

Keddie Waller:
Great point.

Stephen Jones:
... getting your money into super and so on, that are probably a bit outside the scope of many of the financial planners. So a lot of that, again, is that strategic advice, moving from where they're in the workforce or running a small business, and being able to get to the point where they can retire.

Keddie Waller:
Yeah. It's a great point. So once we're back, we're going to be talking about individual licencing or registration, and aligning codes of ethics and changes to the tax registration system.

Intro:
If you're liking this episode so far, visit intheblack.com. Intheblack.com is a leading source of information on business, finance, and accounting analysis and commentary, with articles on the accounting firm that works a five-hour day and the top eight issues facing accounting practises today. You'll find ideas to help your career and work life. Now, back to the episode.

Keddie Waller:
Okay, so welcome back. What we're going to do now is talk a little bit about licencing and individual registrations. So, Stephen, you're a financial advisor, you're a tax agent. I think you said your company is a tax agent. You've got multiple registrations with multiple costs to provide the same sort of advice to your clients. So if we explore this theory around individual registration, how could that impact your business?

Stephen Jones:
So, yeah, talking really about registration of a financial advisor. So, for example, I'm an authorised rep of one of the large financial institutions, and there's some real advantages of that because I get access to some terrific resources that they provide. However, I still have to run my own business, which is a small business, and it's just another layer of regulation that I have to comply with. So in some regards, that might restrict the advice that I might provide as well.

So to me, it makes sense that the licence be with the individual. So the hoops I had to go through to become an authorised rep are probably very similar to what I would need to, to have a licence that means I can provide financial advice. I understand that there is an element of business side to it, and being able to operate a financial planning business, but that can be some sort of small addition to that licence. It doesn't need to be through a large licensee, necessarily. I think it makes sense that the individuals are the ones who are licenced, who have the skills.

Keddie Waller:
I think the other thing that it can do is actually put greater accountability and responsibility on the individual, instead of it sitting with the licensee, and that actually gives you more ability to influence conduct and behaviour.

Stephen Jones:
Oh, well, it would if I was dealing direct with ASIC, for example. So at the moment, I'm registered as a tax agent, so I have to deal with the Tax Practitioners Board, et cetera. So that makes sense to me. Whereas as an authorised rep, I really deal with my licensee, who then deals with ASIC. So their requirements sometimes, I think, are stricter than what ASIC require as well, so that does restrict me as well.

Look, it also impacts on the sort of advice I might be able to give clients. So, for example, they have a particular type of client that they're used to dealing with. If I've got a client that doesn't quite fit that mould, then it may be difficult to give them advice. So, for example, my licensee has rules around people's risk profile and what their asset allocation should be. So if we have somebody then who has an investment in a negatively geared rental property-

Keddie Waller:
[crosstalk 00:22:02].

Stephen Jones:
... that doesn't quite fit that risk profile and the asset allocation. So that can be difficult then, in terms of how we deal with those people and meet the licensee's requirements, even though we might be comfortably meeting ASIC's requirements.

Keddie Waller:
So speaking of licensee requirements, you and I have spoken before about CPD and your obligations. So as you said, you're a financial advisor, you're a tax agent, you're under a larger licensee, and you're a CPA, so you've got multiple requirements around CPD. I think last year you said ... how many hours did you do?

Stephen Jones:
Yeah, so crazy. You're right. I've got to do CPD for CPA, FPA, Tax Practitioners Board, my licensee, the AICD cause I'm a member there, and we'll soon have FASEA, or FASEA is really part of that now. They all have different requirements, not so much in terms of hours, but in terms of the topics that have to be covered.

So I keep a big spreadsheet that has all my hours in, et cetera, and I got to December last year and had a look to make sure I was meeting my requirements, and I had done 247 hours of CPD for the year, and I hadn't met my licencee's requirements-

Keddie Waller:
Yeah, that's crazy.

Stephen Jones:
... so I had to go and do a couple of other little courses and things to make sure that I met the particular topics that they needed. To some extent, it's still the same with ... All those bodies have different codes of ethics. They do cover the same sorts of areas, but there's nuances and so on, so I've got to make sure I comply with all of those, when in reality, a code of ethics should be a code of ethics.

Keddie Waller:
Exactly, and I think that's a really good point. We need to understand, how can we actually start to harmonise and align these obligations? Because like you said, having ethical obligations and adhering to conduct and behaviour standards, it shouldn't matter what type of advice you're providing, it should be the same standard of behaviour.

Stephen Jones:
Yeah, that's right.

Keddie Waller:
So following on from talking about this harmonisation and trying to have more streamlining around these areas, one of the other things that came through from our report was calls for changes to the tax registration system. Again, you've got multiple levels of registration, so you're an individual and you have a company tax registration.

Stephen Jones:
Yeah, I find that crazy, and I think a lot of practitioners do. Yeah, so as an individual, I have to be registered as a tax agent, but because I've got a company, it also has to be registered as a tax agent, and there's no additional requirements for the company. So, again, as I said before, I understand the individuals have the skills to carry out the job or the role, and there may be some additional requirements for somebody to operate a business in that area, but there is no additional requirements for the company to be registered. It's just an additional registration.

Keddie Waller:
Yeah, and cost.

Stephen Jones:
In our case, I've got a business partner who's also registered as a tax agent. In fact ... No, not annoyed, annoyed is not the right word. But years ago, I had my tax registration number that I had for many, many, many years, and then when they introduced the company registration, it took over my individual one and I got a new individual number.

Keddie Waller:
Yeah. Almost like you've been forgotten and started again. So I think one of the things that's been really highlighted through our chat today and our discussion is it's such a complex area. As a CPA, as a financial advisor, as a tax advisor, you're operating under multiple regulatory frameworks with different obligations, different costs, different requirements, which adds cost, complexity, and impacts the way that you actually deal with your clients and your SMEs.

Stephen Jones:
Oh, yeah, I like to know what I'm dealing with. I'm always worried about what's going to sneak around behind and catch us out, and when you're trying to deal with a number of different regulators, and you think you've got it all covered, and then something comes out of left field from a different regulator that you hadn't considered was involved in that area, that becomes an issue.

Keddie Waller:
Then we've got the Royal Commission Roadmap being implemented, so we've got, I think it's nearly 70 recommendations and legislative changes coming to be tabled over the next two years, which is going to impact again how this all operates and comes together. So from our perspective, I think one of the things we're really keen to do is pull apart this regulatory framework and actually understand what needs to change to actually improve the way that professionals can actually service their clients, but also how we actually build a system, to your point before, that engages and actually encourages people to get advice, because at the moment it's such a disincentive with the process they have to go through.

Stephen Jones:
Yeah, well, I'm certainly considering my future in terms of offering financial planning, and I'm a relatively new entrant to it, but ... I did an awful lot of study a few years ago to make sure I went down that path, and the road hasn't been as easy as I thought it might've been, and it's just got a bit harder with some of the roadblocks ahead in terms of, I'll have to go back to school again and do the FASEA exam and so on, or FASEA. However you like to pronounce it, Keddie, that's okay.

Keddie Waller:
You're already degree qualified, CPA qualified, multiple other qualifications behind you, and yeah. So it's no wonder that as a professional accountant, the frustration comes through, because you're just trying to, as you said, service your client, and at the end of the day, you just continually have these legislative changes or roadblocks and barriers being put in front of you.

I think from our perspective, what we really want to do is understand, how can we pull this apart and rebuild an efficient regulatory framework to actually enable advice. So that's exactly what we're going to be doing as part of our next steps. We'll be looking to seek further engagement with members like yourself, Steve, and working through our committees, and our discussion groups, and out to the broader membership. We'll also be looking to collaborate with our other associations where possible, see if we can get alignment so we can actually engage more broadly and actually advocate for change.

So, Stephen, thank you very much for coming along today. You're very experienced, and your insight and your thoughts have been really appreciated, and I'm really confident that they reflect many of your peers and the frustrations they're feeling as well.

Stephen Jones:
Okay. Thanks, Keddie.

Keddie Waller:
Thank you very much for joining us today. This is an ongoing journey for all of us, and it's not going to be an overnight response to be able to pull this framework apart and come up with the recommendations and the white paper we need to advocate for change, but it is something we're working very hard on. So thanks again for listening, and if you'd like to actually view and read our Regulatory Burden Report that is available now, please visit the show notes to this podcast.

Outro:
Thanks for listening to the CPA Australia podcast. For more information on today's episode, please visit the show notes at www.cpaaustralia.com.au/podcast. Never miss an episode by subscribing to our podcast on Apple Podcasts, Spotify, or Stitcher.