1.2 Development of the regulatory framework

The regulatory framework that governs financial advice and product sales today was designed in response to, and in the midst of, these changes. A number of design decisions should be noted for their part in shaping the financial advice industry as it is today.

The 1997 Financial System Inquiry chaired by Mr Stan Wallis (the Wallis Inquiry) reviewed the then fragmented regulation of the financial system and recommended that there be a ‘consistent and comprehensive disclosure regime’ administered by a single regulator.[1] The adoption of this model marked the start of the uniform treatment of traditional intermediary services and of financial sales and advice relating to funds management. In 1998, the Australian Securities and Investments Commission (ASIC) was established, combining the responsibilities of the then Australian Securities Commission and the Insurance and Superannuation Commission.[2]

In April 1997, Treasury released its Corporate Law Economic Reform Program Paper No 6 (CLERP 6). Although extensive amendments have been made to the legislation passed to implement CLERP 6, a number of its underlying principles have endured. One of those principles was to fold sales and advice relating to insurance and superannuation into the regulation of securities.[3] That regulatory framework was premised on independent intermediation and the use of mandatory disclosure as a means of investor protection.[4] It did not take into account that insurance and superannuation decisions were usually made with consumption (a payment in case of injury; an income stream at retirement) rather than investment in mind, or that those products were usually sold by sales agents and not independent brokers such as those who traded in securities.[5]

Another key principle in CLERP 6 was to regulate intermediaries (including advisers) at firm level rather than at the individual level, in part to allow ASIC to target its resources efficiently.[6] Thus, under the Corporations Act 2001 (Cth) (the Corporations Act), individual advisers do not hold licences. The licensed entity is commonly the relevant financial services entity and individual advisers act as authorised representatives of the licensed entity. The firm has a statutory obligation to ensure that its authorised representatives comply with financial services laws.

Importantly, CLERP 6 did not provide that financial advisers were to be independent from product issuers. It is not clear whether the authors considered the possibility that financial advisers may be employed or authorised by issuers of products about which they advise, a situation that is now widespread. Nor did CLERP 6 engage with the fiduciary duties or other general law obligations that may attach to financial advisers but conflict with their employment conditions. The financial advice industry is still caught in this structural link between product issuers and the adviser’s legal obligation to act in the best interests of the client.[7]

Finally, CLERP 6 established that household access to wholesale markets and complex products would not be restricted.[8] Rather, it relied on mandatory pre-disclosure as the means to inform consumers about risks on the basis that consumers would then make informed and rational choices about the best investment strategies for them. That meant leveraged and complex investments could be marketed and sold in the retail market.[9]

[1] Wallis Inquiry, Final Report, 17.

[2] Background Paper No 7, 6.

[3] See Treasury, Corporate Law Economic Reform Program Proposals for Reform: Paper No 6, April 1997, 1, Proposal 1.

[4] Background Paper No 7, 8.

[5] Background Paper No 7, 8.

[6] Background Paper No 7, 9–10.

[7] Background Paper No 7, 10.

[8] Background Paper No 7, 10–11.

[9] Background Paper No 7, 10–11.