The financial services system is broken.
It is too tight.
The concept of loose and tight systems is typically the domain of science and engineering but it is just as applicable to other fields, professions and industries.
The current financial services regulatory regime is the perfect example of a tight system and what can go wrong when extremely prescriptive, rigid controls are in place.
A decade after the introduction of the Future of Financial Advice and MySuper reforms, and four years after the Life Insurance Framework, adviser numbers have been decimated, growth has stalled, and fewer people are seeking professional advice.
The mounting compliance burden has pushed up the cost to serve and subsequently advice fees, quashing accessibility and affordability.
The key to this industry’s future lies with entrepreneurs. Entrepreneurs are bold and innovative. They challenge conventional thinking, develop new products and services, and create jobs. They drive economic growth.
Unfortunately, entrepreneurs don’t thrive in tight systems. They need room to play to their strengths, move quickly and take measured risks. They need the ability to try and succeed, and potentially fail.
But there’s no appetite for failure in financial advice, particularly after the Hayne royal commission. Advice must be perfect; people’s retirement savings are at stake.
In trying to ensure quality advice, the regulators have dictated the advice process and, in doing so, business models.
Now, as part of the Quality of Advice Review, Treasury wants to examine if “simpler principles-based regulation can replace any of the current detailed requirements” to reduce the cost of compliance, encourage “new forms of advice” and stimulate growth. In other words, it is looking to loosen things up.
The advantages of a loose system can be seen in new, largely unregulated sectors. The rise of the sharing economy saw companies like Airbnb, Uber and Amazon expand quickly. More recently, the buy now, pay later (BNPL) sector has boomed, epitomised by the success of Afterpay.
Looking back at the heady days of financial planning in the ’80s and ’90s, growth was underpinned by the enthusiasm and ambition of hungry advisers and a relatively loose regulatory setting.
There is no question that rules are critically important. They build trust and confidence and ensure appropriate consumer protections. We’ve seen the devastating consequences of being overly lax. Regulators and policymakers need to get the balance right.
Similarly, business leaders need to ensure robust systems and processes, and appropriate governance and oversight, without stifling joy and enthusiasm.
The importance of joy and enthusiasm can’t be underestimated. Learning plus excitement equals growth, but there’s little joy in tight systems. Just look around.
In my experience, the best places to work have a leadership group that encourages entrepreneurial thinking.
The board and senior leadership team articulate the company’s vision, strategy and values, ensure the right people are in the right roles and then take a step back and let people to do their job.
With this Keynesian-style approach, employees/member firms/subsidiaries are backed by a central governing body that provides resources, oversight and stability. However, responsibility for things like operations, recruitment, pricing and marketing is decentralised.
People are empowered and incentivised to think for themselves, solve problems and pursue opportunities.
For regulators and business leaders, adopting a loose system isn’t easy. It is counterintuitive to traditional approaches and it requires trust. boards and management need to trust their people. Those that can’t be trusted shouldn’t be there.
Consider how the workplace has changed since the onset of Covid-19.
Today, many employees have the flexibility to work remotely, choose when they go into the office and stagger their hours around school pick-up and drop-off, gym classes and other appointments.
Away from their manager’s prying eyes, employees are happier and more productive.
With that in mind, the prospect of a looser system flowing from the advice review is exciting.
As an emerging advice profession, a more principles-based approach to regulation makes sense.
Advisers should be encouraged to use their professional judgement, based on their education, skills and experience. Entrepreneurs should be released to think creatively, build strong businesses and prosper. In this eco-system, backing entrepreneurs is a winning strategy.
Read more of Paul Barrett’s articles in Professional Planner.