"If you can't explain it to six year old, you don't understand it yourself"
I've been watching and listening, observing and analysing, and generally trying to absorb and understand all the twists and turns involved in the Financial Advisers Act review. There have been some pretty obvious and welcome measures recommended by the Minister to Cabinet.
Abandoning the ill-advised category 1 & 2 product demarcation was a no-brainer. Never made any sense in the first place so nobody will mourn the passing of this anomaly.
Similarly, the removal of the confusing AFA, RFA, QFE alphabet soup that only served to confuse the consumer, according to all research recently produced.
But here's where I call upon Einstein's quote in the title to this piece as I can't explain to anyone, never mind a six year old - why are we seeing the removal of three confusing mnemonics - only to be replaced by another three equally confusing set of initials - FAs, As, and FAFs?
How has that simplified anything for the consumer?
And what can be done to deliver a more succinct message so that the consumer is no longer confused?
Tell me what is confusing, hard to understand, or difficult to relate, about the following statement -
"Anyone making recommendations on buying, selling, or holding investments, insurance, securities, or finance should be suitably qualified to do so, and subscribe to a uniform Code of Conduct"
And no, I don't claim that being suitably qualified is a panacea, but combined with a Code of Conduct, it's a fair start to providing the consumer with some comfort that any recommendations presented are based on knowledge and understanding.
It doesn't matter whether you recommend your own company's product(s) exclusively, somebody else's products on a selective basis, or no products at all, in drawing up your recommendations, everyone should understand how the financial instruments they are recommending work - whoever they work for and whichever way they obtain reward for their services.
The consumer should be entitled to expect that whoever is making a recommendation can demonstrate evidence that there is a thorough knowledge of what is being recommended and why.
Simple? Yes. Easy to understand? Yes. Any alphabet soup involved? I'll leave that to others to decide - I was never that big on titles (except, of course, my traditional Lairdship!)
It has been suggested that this would be an expensive course of action - particularly for banks and vertically integrated organisations.
Excuse me, are these the same institutions that reported billions of dollars profit from their NZ operations - most of which has probably been repatriated to Australia and beyond?
I don't grudge them their profits, but there seems to be a disproportionate burden of regulatory cost falling on the private advisory sector.
All very well operating as a risk-based regulator - a far superior structure and model to the ASIC or FCA models in Australia and UK respectively - but surely the risk to the consumer of being given naff recommendations is at least the same from the bank-retained person as someone in private practice?
Back in the days, being employed by a bank or an insurance company came with the expectation that if you wanted to make progress in your career, you studied to pass the banking or insurance institute exams - and you were rewarded accordingly. At least, there was an assumption on the employer's part that you cared enough about your career and your prospects to show willing to acquire knowledge about the industry, its products and services, and the environment in which your employer operated.
That seems to have gone by the board now - more's the pity.
However, it appears that complexity and confusion are not to be relieved for the consumer in the FAA review, and the simplification that was expected and recommended is not in evidence.
Of course, we have to wait and see the precise content of the Code to which all will be subject, and this may well address some of the issues raised.
However, there is a school of thought expressing concern that the emerging amended legislation will miss the opportunity to rationalise and simplify the regulatory regime for the benefit of the consumer, and that the 'big end of town' will be the only winners from the exercise.
Slainte
The Laird