The will and the way: Self-regulation in financial services

A hallmark of a professional association is the willingness and ability to independently and impartially discipline its own members. During the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, two key financial planning associations were grilled over how they handle complaints against their respective members.

At first glance, both the Association of Financial Advisers (AFA) and the Financial Planning Association of Australia (FPA) scored poorly on this basic test. But as with so many things in financial planning, there’s more to it than meets the eye.

Underpinning the inquiry’s line of questioning was the assumption that there’s a conflict of interest when an association relies on membership to raise revenue, while also purporting to discipline those members, and potentially expel them, for breaches of a code of ethics or professional standards.

But that’s not a conflict. On the contrary: the fact that an individual chooses to belong to an association that can, if the need arises, expel them, is the very thing that makes membership of the association meaningful, and therefore valuable.

If it actually means something to be disciplined by an association, then it reflects a significant commitment by a member to be held accountable to the association’s rules.

The member wants to be able to look a client in the eye and say they belong to an association that has a code of ethics and a comprehensive set of professional practice standards, and they will cop the consequences of breaching the code or the standards, all in the name of enhanced consumer protection.

But that’s not the only reason an adviser might join an association. They might also want it to lead the way in promoting their industry and their services, extolling the virtues of the industry to the public and generally fighting the good fight, in the interests of practitioners and practitioners’ businesses.

 

Understand one thing

Those objectives might appear to be contradictory, as the royal commission seemed to suppose, but they can be carried out by the one association as long as its members clearly understand one thing: in a contest between the public and clients’ interests, on the one hand, and the interests of the association’s members, on the other hand, a professional association must always afford priority to the interests of the public and clients.

Any adviser who doesn’t fully understand that, misunderstands the role of a professional association. And that’s what was on display in the royal commission, when it referred to an email sent by an adviser who was subject to the FPA’s disciplinary process, which read, in part: “This is a very disappointing process after my many years of support for the FPA, but whilst I’ve tried being open and honest about the situation, I’m afraid my support for the FPA is at a conclusion.

“There is zero support for members. I am very disappointed with this process and the FPA’s treatment of members …

“My peers would be interested in the workings of this process and what it means to be a member of the FPA.”

This seems to reflect the common misconception that a professional association exists primarily to aggrandise practitioners and their businesses. An association may indeed promote a profession and its practitioners as part of a range of activities it undertakes, but when push comes to shove, it’s there to protect the public interest and consumers’ interests.

If advisers want to belong to an association that prioritises their own business interests, they should join a chamber of commerce. One of the reasons some organisations will never be professional associations is because they exist explicitly to advance the commercial interests of their members ahead of all other concerns.

 

Distinction between industry and profession

There’s a clear distinction between what financial planning associations have been in the past, and which many continue to be today (that is, industry or membership associations), and what they need to become to play a role in financial planning profession.

But what the Royal Commission didn’t dwell on for long is that there has been a glaring gap in the ability of any financial planning association to effectively police its own members, and it is not the fault of the associations themselves.

Membership of any association is optional. A financial planner can leave the AFA or the FPA or any other association at any time, and it will have no bearing on their ability to practice as a financial planner (it may affect their Certified Financial Planner status, but that’s another issue). 

A planner who leaves an association can’t be disciplined by that association – the ultimate step of being thrown out clearly is meaningless to someone who isn’t in – but the planner can continue to give advice. That’s an issue that needs to be addressed in order to give properly constituted associations the teeth they need to impose meaningful discipline on members.

But the FPA also got into a bit of strife at the royal commission, because it appeared to intervene in a dispute against a member and accede to the member’s request to suppress his name.

Independence is the key

The Conduct Review Commission (CRC) is the body that handles complaints against FPA members. It is an independent body, and once a complaint is in train it should not be open to influence by the FPA itself.

The FPA seemed to reason that it was better to keep the adviser inside the tent and subject to its disciplinary procedures, than have the adviser leave the tent where any disciplinary action would be futile.

Appeasing the adviser was a way of doing that – but in fact the FPA should have shrugged its shoulders, told the member its disciplinary process was independent and therefore out of its hands to influence; and then even if the member quit, the FPA could have loudly publicised its disciplinary decision anyway.

The CRC panel consists of an independent chair, a former member of the Administrative Appeals Tribunal, Graham McDonald; and a deputy chair, a former chairman of the Tax Practitioners Board and a former Australian Government solicitor, Dale Boucher; and a range of identities from across the financial planning community, as it should – the “self” bit in “self-regulation” implies that peers should sit in judgement of peers.

But the point is that none of this means very much at all as long as membership of an association remains voluntary, with little practical consequence for an individual flowing from expulsion. That’s not a shortcoming of the associations per se, and it does make the job of disciplining members just that little bit more complicated. But both associations could be doing a better job of administering disciplinary action – and will need to do a better job if they wish to transform from the industry associations they have historically been into true professional associations.

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