InvestorDaily got together with three of the industry's heavyweights just before the final announcement was made to discuss the issues involved.
DT: So to start with, do you think the scrapping of the accountants' exemption was a positive move?
LW: There's no question that there were some flaws with the accountants' exemption. It was very limited in its scope and what a lot of people haven't fully understood or appreciated, was that it literally only gave professional accountants the ability to talk about the set-up or closure of a self-managed super fund (SMSF). I think people thought it was something much bigger than what it actually was. So it was very restrictive in that if an estimator said it wasn't appropriate for someone, it didn't actually give you the ability to say don't set one up, and it didn't give you the ability to talk about what the alternatives were. And when you talk about clients' best interest, you often need to have a much fuller discussion about what their options were and where they should go.
GC: Well I agree with Liz, I think that it was far more limited than people have ever thought, and all it basically allowed accountants to do was give information about self-managed funds.
LW: You've got to remember also that people assume that the recommendations always come from the accountant. My background is in public practice and frequently your clients would come to you having made the decision to set up a self-managed fund, and it could have been on a recommendation from a colleague, from a friend, on a family member. So you actually needed to be able to have a conversation with them to confront them on their decision-making process. Was the SMSF appropriate for them, where they got that recommendation from and maybe to be able to say you might want to rethink your decision.
GC: And then when you got into the contribution space, the worry was always wondering: "Are we providing financial advice there?" And then the commencement of pensions there in self-managed funds was the same sort of thing. So it really put the accountant in a real dead end.
DT: Do you think there are any other motives at play here?
GA: I think personally they're trying to put a brake on self-managed super funds because they're actually putting some hurdles in now. I mean if you have a look, there's what, 30,000 set up each year, and primarily they're obviously not all being established by baby boomers. So it means generation X are now starting to make a decision as to what to do with their super, and generation X and Y are pretty smart. What I've seen, from fielding questions at a seminar, they've already done their research before they even get there as opposed to the war generation that had the attitude of "oh my accountant told me to do this". Baby boomers question it a bit. But now gen X and gen Y are saying, 'well this is what I want', and I think that's a different sort of paradigm. In fact, you see a lot of them that are really trying to do it all themselves, whether that's right or wrong, with no specialist advice is probably going to be a hard thing for us all.
LW: There's so much information easily available now isn't there?
GA: Well I saw one yesterday, this group that's doing basic accounting through a cloud platform, and they're going to be offering it to the SMSF market for nothing. And it's just all double-entry bookkeeping, you know, the whole thing. And they're going to get it sponsored, so that's going to shake up the accounting and the other market. Now the baby boomers won't use it, but the younger guys will and that will suddenly drop the fees quite considerably.
KL: I wanted to ask what you think would be the best time frame for the implementation of a new licensing regime?
LW: I think a lot will depend on what the requirements will be. There are potentially around 10,000 accountants in public practice that might need to come under this licensing regime. If all of those 10,000 people have to do some training, fill out forms, get access to consultants, whatever the requirements might be, you have to give them an ample transitional period to be able to meet whatever criteria comes in. You have to give people the means and the time to get through and get across the line what they need to get across the line on.
GA: To me it should be 2015 or something like that, or 2014 at least has to be the designated time. But then I suppose from the government's point of view, it's a bit of a worry, because there's no guarantee that they will be in office. We don't know what the opposition is going to do in that period of time.
LW: You're absolutely right when you talk about those time frames. We will be providing a lot of tools and a lot of checklists and a lot of assistance to our members, but we need to know exactly what's going to happen and then we need to build a lot of that stuff and then we need to roll it out. We've done a lot of work around communication to our members because we're talking about a lot of accountants, 10,000 accountants potentially in this regime, so it won't happen overnight. I suppose the other comment around time frames and things is there will always be another view that you are better off taking that little bit longer to get it right, than trying to rush things through and end up having another review in five or 10 years' time.
DT: What impact is cost likely to have, especially seeing that an increase in Australian financial services licence (AFSL) fees was contained in the most recent budget?
GA: We surveyed our members at ASMA (Australian SMSF Members Association) and, like all the auditors and also the accountants, their major concern was increased costs and particularly over the last few years they've been hurting. They're seeing their capital dwindling away and then suddenly through no fault of theirs or the fault of their accountant, these measures will actually increase their costs for no material return.
LW: We've seen the costs are already going up, we know that. In terms of all the government budget announcements around funding for the Australian Taxation Office, for APRA (Australian Prudential Regulation Authority) and for ASIC, it's all a cost recovery. It's all about fees are going up, that was the fine print in the budget. In some cases it's going up by about 420 per cent. Accountants aren't in the regime yet, so they're probably not appreciating the fact that there's been this significant price hike. But we've got to look at it in the overall context of what we're trying to achieve here, like I said, you've got potentially 10,000 accountants coming in with a regime and you're about to impose this cost on them. Has that been factored in when they said we're putting the fees up by 420 per cent, have they factored in the fact that there's going to be a whole heap more people paying these fees? I don't know.
GC: But you've not only got those licensing fees if you're going to do something with advice on self-managed funds, it seems to be the accountants will then have another fee from the examination stuff that they do with ASIC. And then whether there's any CPD (continuing professional development) requirements after that. It's not only the fees, it's the cost of maybe their better competencies. I think the good thing about it is that at least the exam stays with ASIC, and while we might grumble about that, the training itself will be hopefully done by the organisations that represent those interests, which I think is probably the best way to do it. Because we know our members much better than what the regulators would, I would hope so.
DT: Is this counterproductive, seeing one of the aims of the reform process has been to make advice more accessible and more affordable?
GA: Hasn't that been your argument right from the start, Liz?
LW: Yes, counterproductive. And a lot of this is going to be 'let's see what happens'. I think there's no question that fees will have to go up, just because of the sheer compliance, application fees and training that needs to be done. I think it's inevitable when you put further regulation in and further requirements on people, costs will be affected.
GA: I think it'll actually come down to the fact trustees will want to save money and do it themselves. It actually changes it from an SMSF professional looking after trustees to people actually jumping into the true do-it-yourself situation. I think it's probably dangerous for the industry.
GC: But on the other side of things, it may mean that if accountants want to stay in a particular area, they'll specialise in that area. So while you say, will it have a dynamic effect, I think all they'll really do is balance their training, so that it is more directed to where they want to be. As a result they're just going to have to add up the costs and see whether it's worthwhile staying in the space they're currently in or maybe even specialise in that space or just get out of it altogether.
LW: Just back on your point about costs, a lot of our work we've been doing with the government about the replacement for the accountants' exemption has been very mindful of costs, and where those costs will be incurred and by whom. So for example, if you hold an AFSL, you have to have full AFSL audit done. A lot of that is around product advice, which, I mean the accountants, the replacement for the accountants' exemption wouldn't be product advice, so would full AFSL requirements be appropriate for accountants? And if the answer is no, then we should not impose them on accountants, we should have some other form of audit or compliance activity in that area.
DT: Has there been any indication as to the direction practitioners might take in regard to potentially leaving the sector?
GC: Well I think some auditors may consider leaving the SMSF space. A lot of them only service up to 10 funds, and they may drop out of it. But I mean it depends how strong the link is with their client, because it might be a package deal with their accounting business, and the audit of a self-managed fund might keep them in that so maybe it won't be a problem. But if they do drop out, I suspect you'll end up probably with some sort of deficiency in the number of auditors of self-managed funds. And for how long that lasts, I don't know. Maybe more specialised firms will come into the industry.
GA: There're certainly some audit firms that are getting quite large, you know, getting 5000 to 10,000 SMSF audits and they're specialising in them. It's probably one area I think you can industrialise, you know, as long as you're getting all your work papers right. And I would say that a lot of accountants I don't think would be really worried about passing that business onto a firm like that.
LW: Oh we're seeing more and more of it, absolutely. But at the time of the Cooper review about half of SMSF auditors were doing less than five audits. I would suggest the vast majority of those will not go through the registration process, and it really is those auditors who will have to say, 'well look maybe I need to do this competency test or maybe I won't'. The regulators have sort of been saying to a lot of firms is you need to make a decision, are you going to continue to operate in this field or not, and if you are, then you need to work out which partners within your firm are actually going to conduct the audits and what they need to do to get registered and that type of thing. So there are a lot of decisions to be made, and I think we'll see a lot of rationalisation in this industry, growth of the bigger firms, the specialised SMSF audit firms.
KL: Is there a danger of accountants having too many compliance regulations to satisfy now?
LW: Yes, the sheer volume of regulation that is being imposed on accountants is something I'm concerned about. We have to be registered company auditors, now we are going to have to be registered SMSF auditors, we have to be registered tax agents, and we're going to have to be licensed for financial advice. At what point does it just become too much, and do we run the risk of the accounting profession becoming less appealing, because not only have you got all these government regulations imposed on you, all these licensing and registrations, you have your professional obligations as well. We adhere to three independent standard setting bodies, with the Auditing Standards, the Accounting Standards and the Professional Ethical Standards. So you have this sheer volume of professional obligations, plus all this regulation. It's got to have an impact.
GC: I think that's also compounded by the average age of practitioners right now. Is a 58 year old going to go to school again when they're going to retire at 60?
GA: No. It'll drive a lot of people out.
KL: In regard to the point of operating under an institution's licence, how significant is the issue of independence for clients as well as practitioners?
GA: What will be interesting for the accounting profession is the first conversation the accountant has with the client telling them about the new affiliation with an institution. It will be, not a wake-up call, but a bit of a change in the nature of the relationship between the client and accountant.
LW: I think trust within the financial planning industry is still an issue. They do have a lot of work to do to gain the trust of the public, there's no question about that. So for accountants, the trust and the independence piece is really important and if there's any perception that it may undermine the relationships that they have with their clients, and they're very mindful of that. They don't want to be affiliated with a financial planning group, even under a perception that I might send you off to a dealer group or a particular institution. Because perception - I mean we talk about this in the audit world, perception's just as real as reality.
GA: Another problem will be that a lot of accountants put their toes in the water with agribusiness and became corporate authorised representatives of the likes of Great Southern and Timbercorp and it came back to bite them. So now they're just like 'I don't want anything to do with that sort of stuff anymore'.
LW: A lot of accountants also they really like their role as the trusted adviser. They are the trusted adviser to their clients, they hang their hat on that. Some of the accountants have got these magnificent relationships that go back generations in families and things like that, especially in the rural and regional areas. They won't undermine those types of relationships because it's too important to them, particularly in those communities.
GC: I know from experience myself, because I've been involved with Quirindi, which is a country town in northern New South Wales, and yeah, I know how people see their accountants. And the people within the town are basically the service providers and they might go to Tamworth for things, but for the bigger firms they'll use firms in Sydney. But those firms have got an affiliation with the country sort of way of doing things. Now I was thinking, on the other side of it, Australia's the most urbanised country in the world, and we're talking about the country people, you know. It's probably the cities we probably should be more worried about.
DT: There is an extra element clouding the licensing issue and that is the proposed amendment to the Corporations Act requiring anyone providing advice on limited recourse borrowing arrangements to hold an AFSL that covers securities or derivatives. What effect do you see that having?
GC: It's puzzling because a limited recourse borrowing arrangement is not a derivative, there's no question of that because you can't trade them. They're more of a loan and security arrangement that shouldn't even be called a product. They're just a series of transactions that meet the requirements. And the changes to the corporations law are very difficult to understand, because it's not only people who would give financial advice about that product, but also the trustee of the holding trust that owns the property. To me it's just really absurd. The regulators are trying to cast the net to control something, but they're covering everybody that even touches the transactions. There is also a question as to whether the lawyers need to have some sort of derivatives licence, and I mean the lawyers were just boiling, you know, their blood was boiling over that.
LW: A limited recourse borrowing arrangement is uniquely super. And yet it's not covered in the specialist knowledge area of superannuation. I would have thought that that would be the logical place to put it. I also think that to make a decision in this area without knowing the accountants' exemption outcome, is...
GA: Stupid.
LW: I didn't say that.
GA: Stupid. I'm going to say it.
GC: I don't really know what's behind it. Maybe it's to stop people who aren't licensed from giving advice on real estate because it's mainly real estate that has impacted at the adviser level.
LW: The other issue is do you really want to get people to have to become licensed for derivatives just to give advice on limited recourse borrowing arrangements, which actually then allows them to give advice on some pretty complicated and complex financial products. To move someone from limited recourse borrowing arrangements to derivatives and give them the licence to go and give advice on those items is something I just don't see the logic in.
GA: Particularly when the last finetuning of the borrowing rules saw the regulations make it really difficult to borrow to acquire shares. So they've really isolated the limited recourse borrowings to the property side of things. I mean if people buy a property outright, it's not even a financial product, it's outside the realm. But then if a person does it with a borrowing, somehow it's in this licensing area and the derivatives area which generally tends to be all share based, which would seem a bit crazy.
LW: Look, a lot of these arrangements, you can pretty much effect them online. So if you don't appropriately bring the limited recourse borrowing to the licensing model, whatever the final outcome is, you run the risk of people going without any advice, if they're trying to undertake it online. I'm sure that's not the objective that we're trying to achieve here. We need to make sure that people have access to advice on these arrangements, so it's got to be practical and workable.
GC: Yeah, I think that legislation for limited recourse borrowings is so prescriptive and so tight, that you look at it and you say 'it's just a real estate transaction'. Well it's not, because you've got a whole range of ways in which that money's got to get into the superannuation fund to purchase the property held in that holding trust and so forth. So it's complex.
LW: But understanding some of the implications at the other end, you might think it's something straightforward but, you know, for example, when you pay out the loan, can you continue to hold the asset within a trust? That's a big issue at the moment, because it comes into then a whole heap of other areas, and that's why the advice is actually important to understand. You need the advice, but we need to make sure that people get access and use that advice.
GA: I've seen people absolutely botch it, and a lot of it's because lawyers got involved. We've now actually got and essentially we're going to be getting more and more of the lawyers getting in and actually advising on self-managed super funds. And they're using the lawyers' exemption to not be licensed. So we've got the planner to have to be licensed, now we're going to have accountants licensed, it now opens the door for lawyers to come out to give true advice around self-managed super funds, taking clients off the accountants and building their own practices.
GC: Yeah, it's a good point too, not only from that perspective but under the Legal Practitioners Act their CPD requirements are quite free and open, whereas what is going to happen with accountants and financial planners is that if they want to give advice on self-managed funds, then they're going to have to show they're competent in that area.
KL: So how do you think the changes will shape SMSF advice and advice in general?
GC: That's a tough one. People are looking at how the Future of Financial Advice reforms will impact upon them more so than thinking about this licensing system that's going to come in, and how their businesses will need to change to meet that. Now whether that means we'll have something that's closer to a financial services business, and I don't mean that from a financial planning point of view, it's whether that'll include a range of skills in the individual or we were talking about specialist parts of it. I think that maybe one way it'll all come out. I think that maybe, like I was saying, you might see more specialised people come in or specialised firms that do part of whatever that job is that they'll need to do, and maybe they'll have some licences and maybe not some other licences where they don't want that.
LW: But on the basis that the new licensing regime enables accountants to continue to talk about the set up and closure of SMSFs, that aspect won't change, but it's going to come down to the scope of advice. It'll enable accountants to talk about a range of other things; I remember I had a client that had a million and a half dollars sitting in a cash management account, and my hands were tied in terms of talking to him about what his options were. He didn't trust financial advisers, they were his words. He did not want to go and get financial advice as much as I suggested to him that there might be other options available to him. So he had his million and a half dollars sitting in his bank account for a couple of years, and you just would have loved to have had a broader conversation with him about 'Look, let's just say you went to securities, these are the advantages, disadvantages. I'm not going to tell you what shares, but securities might be a, you know, valid option for you,' and imputation credits and all that sort of thing. So if we get this scope of advice, I think it will change the face of the advice that certainly accountants can give, you know, and much broader conversations with it. The important point too is that it will provide a lot more clarity around what accountants are able to give, that we will finally see some parameters around the type of advice that they can give. Because under the old model you just didn't know and sometimes it was difficult in determining where your advice stops and starts. So for example, there's never been a problem giving factual information, tax information, it was never included in the AFSL regime. But where's the next step? When would I have stepped over the line? They are questions that were hard to answer. So this new regime will to the extent that it can be clarity around what accountants can and can't do, I think is fabulous, and will be embraced.
GA: Well it's also part of the law now that if you are licensed you have to know your client, and tell them about the right product that fits their circumstances. So it's hard if you're just going to suggest an SMSF without being able to give advice about industry and retail funds. So accountants will need to have that breadth, so they say to the client, 'Well I know what you're like, you're probably better staying in an industry fund.' I'd also suggest flipping the proposition around, because under those rules which are enshrined in legislation, advisers in industry funds and banks should also know that there are some clients that may need to be in a self-managed super fund. But they're not giving them that option, all they're doing is talking about their relevant funds. I can't imagine there are many advisers working for industry funds saying, 'Well I think if you've got $300,000, a self-managed super fund would be great for you.' They're required to know whether it's best for them or not.
