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WA Regional Congress 2016

Future of Financial Advice

Reforms:

ARE YOU READY?

Flight or fight: the future of financial advice; regulation impacting the future of the accounting profession; what else is happening – research and trends; and what does

it all mean for you

Vicki Stylianou

IPA, Executive General Manager

May 2016

Overview

• Background

• Options

• Practical solutions

Future of financial advice reforms

• New financial advice reforms

• Numerous inquiries and reports

• ATO reinvention Regulation

• Latest research and trends

• Technology

• Opportunities

Research, trends and technology

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FoFA: Background

• Accountants’ exemption replaced by limited license under FoFA• Transition period for accountants from 1 July 2013 to 30 June 2016• During transition period accountants’ prior experience will be recognised

for licensing – if have PPC with either IPA, CPAA or CAANZ• From 1 July 2016 accountants wanting to provide advice on SMSFs will

need an AFSL or be an authorised representative (AR) of an AFSL holder• Much broader scope of advice than under exemption (see below)• Review of knowledge 3 yrs after license granted• Administered and enforced by ASIC under Corporations Act

Scope of advice

• Limited AFSL holders will be able to provide advice on:

– SMSFs as a product ie personal or general product advice

– Superannuation at the class of product level

– Securities at the class of product level

– Simple managed investment schemes as defined in the Corporations Regulations

– General and life insurance at the class of product level

– Basic deposit products

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What is financial advice?

• A statement, report or opinion that:

o Is designed to influence a person or persons to make a decision on a financial product or class of financial product; or

o Can be reasonably regarded as being intended to have such an influence

Personal Advice General Advice

• The provider of the advice has considered one or more of the person’s objectives, situation and needs; or

• A reasonable person might expect the provider to have considered one or more of these matters

• All other product advice that does not consider these matters; or

• A reasonable person would not have expected one or more of these matters to be considered

Education requirements: RG146

• ASIC’s Regulatory Guide 146 relates to knowledge and skill requirements for individuals

• Modules required for each type of advice eg superannuation, life insurance, securities etc

• Minimum is 3 modules – financial planning, superannuation and SMSFs • Licensees require all ARs to hold RG 146 at least• Ongoing CPD requirements once licensed• Many different offers in the market – check provider is registered with ASIC• IPA preferred partner is Mentor Education – refer to IPA website for details

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Accountants licensing regime – summary

• License issued by ASIC

• New AFSL available for all participants in financial services

• Accountants with PPC can gain access to transition provisions

• Corporations Act applies

• The licence will allow:

- SMSF recommendations

- Class of product advice (ie asset class not actual products)

What is it?

• SMSF

• Class of product advice on:

• Basic deposit products

• General & life insurance

• Securities

• Simple managed investment schemes

Advice scope

• Broad compliance obligations

• Internal system obligations

• People obligations

- Compliance with laws

- Adequately trained

- Maintain competency to provide advice

• Resourcing obligations

- People requirements

- Technical resources

- Financial resources

Licensee responsibilities

Options under FoFA

Option 1: Get out of the sector altogether

Option 2: Stay in the sector but refer clients

Option 3: Become an AR of an AFS licensee

Option 4: Apply to ASIC for a limited/full license

Option 5: Obtain a limited license and have a referral network

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Decision-making process

Provide SMSF advice to clients

Yes

No

Provide in-house?

Yes

No

Professional referral

relationship

Revenue sharing

Authorised Representative

Own AFSL

No action required

1

2

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What to consider

– Essentially a business decision – what is your business model

– Consider opportunities and challenges

– Determine if you are impacted

– Assess services you currently provide

– Assess services you want to provide in the future

– Assess services your existing and potential clients want from you

– What are other, similar practices doing

– Consider the options

– Meet education requirements (RG146)

– Meet other requirements (fit & proper person, PI insurance, responsible manager etc)

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Authorisation or own license?

Independence• Client ownership• Ability to use own brand• Ability to recommend a wide range of

products (if applicable)• Creation of an asset• Autonomy • Structure – JV with equity, merger etc

Resources• Advice document templates etc• Ongoing CPD• Technical support• Monitoring and supervision• Business resourcing and preparation • Ease of implementation • Marketing and differentiation• Additional skill sets needed

Cost• Working capital • Initial and ongoing costs• Professional Indemnity insurance• Profitability • Productivity• Efficiency• Diversity of income sources

Risk• Reputational risk• Monitoring from ASIC or licensee• Responsible Manager• Overall compliance• Referral effect on clients• Client base protection• Capacity to seize growth opportunities,

especially SMSFs

Authorised Representative

• Letter of Authority to provide advice is issued by a licensee

• Access to licensee resources

• Access to practice management support

• Benefit of scales of economy

• Transfers risk and responsibility to licensee

• However, resources, cost structure etc vary greatly by licensee

What is it?

Usually 3 options:1. SMSF advice2. SMSF advice, strategic advice

and class of product advice3. Strategic and product advice

• Options vary by licensee –make sure you compare the detail, not just the upfront price

Advice scope

• Comply with standards set by the licensee

• Comply with obligations associated with providing financial advice

• No financial obligations

• Licensee is held ultimately responsible for the advice provided

AR responsibilities

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Limited license

• Apply for a license directly with ASIC (limited or full); refer to 3 part kit and refer to Information Sheet 179:

http://www.asic.gov.au/asic/asic.nsf/byheadline/13-140MR+ASIC+releases+information+sheet+about+applying+for+a+limited+AFS+licence?openDocument

• Refer to other RGs 2, 36, 175, 244 etc – must comply• During transition period ONLY – PPC holders of three accounting bodies do not have to prove relevant experience, it will be

deemed – huge advantage

• Still need to meet financial and compliance requirements including: have a system to manage risk; membership of an external dispute resolution scheme like FOS; must have internal dispute resolution scheme; adequate training of certain employees; ongoing relevant CPE; appropriate business processes in place; adequate PI insurance to cover areas of authorisations

• 90% of Corporations Act applies to the limited license – you take on the risk of compliance • Many applications have been rejected as incomplete – if applying make sure you have accurately completed all requirements

and provide ALL documents before pressing ‘submit’ • IPA has launched offer from Cleardocs to assist with applications

• ASIC is taking 2-3 months to assess applications• Must have license by 30 June, not just be in the pipeline

Referral

• IPA has developed a hands-on referral solution which actively matches accountants and planners through one of our partners (which has salaried planners) –Shadforth Financial Group

• The service is for Members who don’t wish to become licensed but still wish to offer financial services, including SMSFs, to their clients

• Members can make additional revenue from referrals – contractual arrangement in place which formalises the arrangement

• IPA has used collective bargaining position to secure superior revenue sharing arrangement

• Members can be referred by contacting IPA and being put in direct contact with Shadforths

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Financial services: IPA preferred partners

• IPA has preferred partners for members wishing to become authorised reps:

o SMSF Advice; and Capstone Financial Planning

• IPA’s preferred supplier for referral service is: Shadforth Financial Group

• IPA offers to assist any members wishing to apply to ASIC for a limited license; and also has offering from Cleardocs to assist with preparation and for vetting (for a fee)

• Material being prepared for members in referral arrangement on how not to give advice and how not to breach the Corporations Act (including disclaimers, disclosures etc)

Cost

• Application fee to ASIC for individual for limited license: $883

• Application fee to ASIC for company: $1,588

• Increased PI insurance (min $2m): could be significant

• Membership of external dispute resolution scheme: $500 - $1,000 but free during transition period

• Ongoing training and education of relevant staff: depends

• Adequate practice management processes: may be minimal if already in place

• Annual compliance certificate instead of full audit: not listed

• Cost of preparing full AFSL application: could be $50k-$100k with annual cost of $10k to $20k

• Annual fee to licensee to be an AR depends on the level of authorization – usually starts at about $3,000 pa, payable monthly in arrears – only worth it if you are making revenue from financial advice

• No fees for referral but may offer revenue stream – IPA arrangement provides revenue share with IPA preferred partner, Shadforth

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Regulation

Context

• What’s happened in the last six years since Minister Bowen announced FoFA?

• How has the political, regulatory and technology landscape changed?

• How do these changes impact accountants and financial advisers?

• How do they impact your response to FoFA, your clients and your practice?

• What are the opportunities within your grasp and how do you seize them?

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Implementing FoFA

• FoFA announced by Labor Govt; Coalition Govt has tried to change rules but failed in the Senate on major measures

• Removal of accountants’ exemption for SMSFs was never in doubt

• Limited license – very low take up – too much risk for the responsibility

• ASIC funding has been restored so expect more enforcement activity, including more shadow shopping

• Financial advisers must register with the Tax Practitioners Board – level playing field

• New register of financial advisers for the benefit of consumers – includes accountants

• Default may be accountants entering referral relationships

• Govt focus now shifted to improving standards of advisers and advice

Improving standards for financial advice

Draft legislation has been released on raising the education, training and ethical standards for financial advisers. Under the proposed legislation (which has been revised):

• New advisers will require a degree, undertake a professional year (PY) and pass an exam• Govt will recognise an independent, industry-established standard setting body, operational from 1

July 2016, which will develop and set education standards, PY and CPD requirements and develop code of ethics

• Existing advisers will be provided a transition process and required to complete an appropriate degree equivalent (or have a recognised transition pathway determined by the body ie bridging course) and pass an exam

• All advisers (new and existing) will be required to undertake CPD and be party to a code of ethics• The new education and training requirements will be effective from 1 January 2019 with existing

advisers having until 1 January 2024 to reach degree equivalent status and until 1 January 2021 to pass the exam

• IPA and others are still seeking prior experience to be recognised and continue to lobby • Only draft at this stage but overall consensus that standards need to improve

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Reviews, inquiries and reports

In last 2yrs since change of Govt we’ve had:

• Financial System Inquiry (Murray Review)

• Competition Policy Review (Harper Review)

• Intergenerational Report

• Tax White Paper, then a Green Paper and now no meaningful tax reform

• Federation White Paper

• National Innovation and Science Agenda

• Senate Inquiry into the scrutiny of financial advice

• Parliamentary Joint Committee (PJC) report into proposals to lift the professional, ethical and education standards in the financial services industry

• And much more

ATO reinvention program

• Reinventing the ATO: What does it mean and who is driving it?

• MyTax

• Third-party reporting and data-matching

• Standard Business Reporting 2

• Vision 2020: Real-time data transmission between business and the ATO

• Deadline 2016: Introduction of SBT2 and integration of the Portal

• ATO has released and is continuing to develop digital tools and resources for small business – not just for tax and super, also how to manage their business

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Streamlined Business Reporting

ATO Warns of Radical Change Ahead for Tax Agents

http://www.digitalfirst.com/2014/07/11/ato-warns-radical-change-ahead-tax-agents/

• Within two years, there is an expectation that the way businesses interact with the ATO – and by extension, the way they communicate with their agents, and the role those agents play on behalf of their clients – will be totally re-engineered

• The focus will be on real-time reporting, and new accounting systems will transmit data directly to the ATO every time a sale or a purchase is made, every time a payroll transaction goes through, every time an employee is hired or fired

• The days of businesses storing data internally, passing it to their tax or BAS agent to be synthesised into BAS or tax returns which are then transmitted to the ATO by the agent are coming to an end

• Instead, data will flow directly to the ATO, allowing the pre-filling of forms by the ATO based on exactly the same data transmitted by the business. In short, the systems used by businesses will talk directly to the systems used by the ATO, with data flowing between the two automatically as transactions occur

What else is impacting accountants?

• Anti-money laundering – more regulation is coming – need to catch up with other countries

• Tax – changes to superannuation, workplace deductions, negative gearing, CGT ??? – it’s an election year

• FTAs and other trade agreements – can we expect competition from overseas firms – Govt is keen to ensure that Australian businesses take advantage

• At 19%, Australia has the lowest usage of FTAs in the developed world

• Policies to promote innovation are the latest trend

• Competition policy – misuse of market power (section 46); and unfair contract terms extending to small business

• Govt has introduced legislation for equity crowd funding – and more to come re access to affordable finance for small business/SMEs (Moula is new IPA partner)

• Huge growth in peer-to-peer lending – IPA has been very supportive – refer to the IPA Deakin University SME Research Partnership Small Business White Paper

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Research, trends and technology

Challenges and trends

• Research (Beatons, Bstar, CommBank, CoreData, Investment Trends etc) indicates concern around digital disruption, automation and the impact on compliance work

• In response: IPA has been urging members to specialise, diversify, consolidate, embrace, optimise the opportunities, gain new skills

• Research shows alternative in-demand areas for accountants: financial services, management accounting, strategic tax planning, technology adviser, wealth management, succession planning

• Supporting members to grow and prosper is core business for the IPA

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Challenges for SMPs

IFAC Global SMP Survey 2015 shows top challenges for small to medium practices:

• 58% said attracting and retaining new clients

• 51% said pressure to lower fees

• 57% said keeping up with new regulations and standards

• 50% said rising costs

• 50% said differentiating from the competition

What’s keeping accountants up at night?

2015 Bstar Accountants Research Report findings on the top five strategic threats facing the accounting profession:

1. Digital disruption and technology

2. Government regulation

3. Changing client loyalties

4. Shifting demographics

5. Increased competition

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What are accountants thinking?

2015 CommBank Accounting Market Pulse report results:

• Upsurge in optimism about business conditions but negative view of the Austn economy

• Firms in NSW, ACT and NT are most optimistic about revenue growth in next 12mths

• Ongoing concerns with traditional accounting and tax-based work becoming more commoditised and price driven

• Most firms looking for cost reduction strategies to protect margins

• Trend to outsource or offshore continues unabated

What are accountants planning?

2015 CommBank Accounting Market Pulse report results:

• Increased investment in staff training, IT hardware and software

• Larger firms exploring new revenue streams like legal services, recruitment and digital services

• Top 3 challenges for accounting firms: negotiating price with clients; keeping quality staff; finding quality staff

• Top service lines to enter and grow in next 12-18 mths: management and consulting services; business advisory services; superannuation, wealth management and financial planning, tax consulting – for all sized firms

• Apart from restructuring firms – all firms were in a better revenue position relative to previous year

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What do clients want?

• 45% of SMSF investors currently using an accountant solely for tax advice said they would consider using them for financial and investment advice if they offered it

• 286,000 SMSFs would pay $2,500 for advice

• 301,000 SMSFs have an advice gap

• Many areas of advice in demand including inheritance and estate planning, age and SMSF pension planning, asset and income protection etc

• Number of SMSFs open to using advisers expertise is at highest levels seen

Investment Trends, April 2014

Transitioning

• Increasing numbers of tax agents leaving the profession – retirement, business exits, moving into new markets, moving to complex tax returns, advisory/consulting, merging, selling

• Timing is critical

• Need new or enhanced skills – technology, marketing, networking, staffing; plus new markets, new client segments, new business models, new partners

• Engage with clients; embrace technology and change; education is key; expand your services and markets

• IPA has adapted BStar framework for members who wish to transition – focuses on alignment, engagement, specialisation and support

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Changing demographics - take advantage

• Intergenerational Report 4, 2015 – ‘challenge of change’• Govt believes opportunities exist to boost productivity and economic growth by: o increasing female participation, through policies to support parentso harnessing potential of all demographic groups including older Australians, youth,

disabled etco focusing on reforms that improve competitiveness of businesses and markets, and

encourage entrepreneurship and innovation • This will include taking advantage of opportunities presented by changing

technologies and new markets, both at home and abroad• What does this mean for accountants – more people needing more advice to

support living longer; more people to choose from for staff; incentives to promote competition and innovation (usually tax benefits)

Live longer – get an SMSF

In a study of 65,000 SMSF actuarial certificate clients, Accurium found that on average their life expectancy was about three years longer than those who didn’t have an SMSF.

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Technology

Leveraging technology

Mobile technology

Outsource technology

Resources – egdecent CRM

Investment -not a cost

Don’t technologisebad process

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Digital First

• Govt is largest procurer of ICT in Aust, so public service has major role in shaping Austn ICT sector

• Govt introduced eGovernment and Digital Economy Policy

• Includes digital service standards, smarter investment, better reporting, accountability and transparency, shared and cloud services, access to open data

• Digital mailbox for govt communications including Standard Business Reporting

• Examples include Single Touch Payroll and ATO single chart of accounts

• BUT only 40% of accountants believe they are utilising technology effectively to improve practice efficiency; and 61% don’t have a formal social media strategy to attract new clients (Bstar 2015)

Rise and rise of robo-advice

• What is it – robo-adviser is an online wealth management service that provides automated, algorithm-based portfolio management advice without the use of (or limited use of) human financial planners. Investopedia

• Robo-advisers directly manage worldwide $19 bn as of Dec 2014, with 65% increase in 5 mths; rising to $250 bnin next 5 yrs, of which $200 bn in the US (Forbes)

• In US must be registered investment advisers and regulated by SEC• Betterment, Wealthfront and FutureAdvisor – are major US robo-advisers • Most deal with portfolio management, not estate and retirement planning or cash flow management• These tools already exist but distribution is different – Charles Schwab pioneer as with online share trading • Jury is out on future of robo-advisers: lots of different views about future success – maybe robots just need to

improve • Good in rising markets with low cost ETFs and profit margins don’t look so great BUT millenials are apparently

more cautious than gen x-ers so online easy access to simple portfolios may be attractive • Whether profitable or not, robo-advisers are changing the financial advice model – humans can’t compete with

lower fees, 24/7 access and algorithms• BUT advisers can adapt and add more technology to their offerings – blending benefits of robo-adviser with

experience and wisdom of a human

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Fintech

• New industry has emerged – fintech – technology applied to financial services

• Fastest growth in UK – deal volumes grown 74% pa since 2008, cf27% globally and 13% in Silicon Valley, www.gov.uk

• Four sub-sectors – payments (eg crypto-currencies), platforms (egpeer-to-peer lending), software and data analytics

• UK Govt support for fintech includes various investment schemes, entrepreneurs’ relief, R&D tax credits, ESS, Patent Box Scheme (companies pay lower rate of tax on profits from patented inventions and innovations)

• Australia – Stone & Chalk has launched in Sydney as a fintech hub –independent and NFP

• Fintech has attracted many high profile and celebrity investors like Richard Branson and Snoop Dogg

Other trends

• Data analytics, predictive analytics – advising clients on what’s ahead, not just reporting on what’s in the past

• Digital marketing – inexpensive tools for attracting new clients, managing your practice/business etc

• Social media – don’t need to be everywhere say the experts – choose your channels and do them well, authenticity – though you can outsource some of it

• Develop centre of knowledge on your website and keep updating

• Consider how your clients want to interact with you – could be by Skype, phone

• Client-centric model is key with focus on relationships – but needs commitment

• Great innovations all around us eg Saasset – they have reports on comparing software for your needs, implementation and training plans

• Rise of ethical/social impact investing – integrated reporting

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Contact us

If you have any questions or would like further information or wish to discuss your particular situation then please call either:

• Vicki Stylianou: vicki.stylianou@publicaccountants.org.au or mob. 0419 942 733• Andrew Best: Andrew.best@publicaccountants.org.au or (03) 8665 3148For education or training queries please refer to:• Jenny Toh: jenny.toh@publicaccountants.org.auFor insurance queries please refer to:• David Martin: david.martin@publicaccountants.org.au or 03 8665 3139