Doctoral thesis of philosophy legitimacy of the current australian financial services licensee authorised representative licensing model theory and australian empirical evidence

Legitimacy of the current Australian Financial Services Licensee-authorised representative licensing model: Theory and Australian empirical evidence A thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy Angelique Nadia Sweetman McInnes Master of Commerce and Management in Financial Management (Lincoln University, New Zealand), Diploma in Management (University of Canterbury, New Zealand) Baccalaureus Commercii Honores (Nelson Mandela Metropolitan University, Republic of South Africa) Baccalaureus Commercii (Nelson Mandela Metropolitan University, Republic of South Africa) School of Accounting College of Business RMIT University April 2018 DECLARATION I certify that except where due acknowledgement has been made, the work is that of the author alone; the work has not been submitted previously, in whole or in part, to qualify for any other academic award; the content of the thesis is the result of work, which has been carried out since the official commencement date of the approved research program; any editorial work, paid or unpaid, carried out by a third party is acknowledged; and, ethics procedures and guidelines have been followed I acknowledge the support I have received for my research through the provision of an Australian Government Research Training Program Scholarship Angelique Nadia Sweetman McInnes 30 April 2018 I TOEWYDING Aan my oorlede liefste liefdevolle ouers, Alettha, Elizabetha Sweetman (nee Horn) (7 Desember 1945 – 10 Oktober 2009) en Aidan Albert Fredrick Sweetman (2 Februarie 1945 – September 2014) Ek dra hierdie werk aan u toe Met u jare lange aanmoediging en geloof het ek uiteindelik 'n Doktor in die Filosofie behaal, net soos u verwag het Alhoewel u nie meer saam met my is om in hierdie prestasie te deel nie, Ek weet u is altyd met my in die gees Ek dank u vir u toegewyde offers en liefde wat my tot hierdie oomblik toe gelei het Met rose liefdevolle liefde, u dogter Angie II ACKNOWLEDGEMENTS Now this work is completed, I acknowledge foremost, my God and Saviour Next, I am eternally grateful to those who were knowingly, and unknowingly, part of this journey Most importantly, my earnest gratitude goes to Hugh, a husband like no other, as well as our loving children, Kaitlin, Calum and Tegan While you watched me sit behind my laptop in the living room for several years, together we experienced a rollercoaster ride of setbacks and breakthroughs Your love, sacrifices, understanding and support were the main contributors to the success of this research Sorry for the high emotional, mental, social and even physical price we all paid during this difficult PhD journey Apologies for my selfishness and neglect of my obligations and responsibilities as wife and mother to you all during this ride Forgive me for not being present when you needed me most Recognitions also extends to my extended family, friends and acquaintances for keeping in touch with the hermit I have become I specially acknowledge the dedication, patience and guidance of Associate Professor Abdullahi D Ahmed [Ahmed] Doctor Maryam Safari and Doctor Daniel Richards your encouragement, together with the support from the academic and professional staff at RMIT’s School of Accounting, Flinders University’s Business School, and Central Queensland University’s School of Business and Law, has also not gone unnoticed A special mention goes to Professor Pi-Shen Seet who, unknown to him, played a vital role in the success of this thesis To you I am sincerely grateful for your suggestion to read the literature on legitimacy and institutional theory during a question and answer session at one of my presentations on the topic Doing so led to the formulation of a key part of the theoretical framework for this study Next, I thank Simon Hoyle for giving this research media attention I am grateful to Tom Reddacliff, Russell Galt, Troy Penney, Sonnie Bailey, Aleks Vickovich and those many unnamed financial planners for their constructive critical commentaries via the survey, social media, email, face-to-face and telephone Thank you also to the attendees at the Annual Personal Finance and Investment Symposiums of 2014, 2015, 2016 and 2017 for listening and providing valuable critical feedback on several conference papers relating to this research My gratitude extends to the Financial Planning Research Journal team for publishing a paper on this controversial matter To Gill Lilley and my sister Antoinette Sweetman, thank you for taking on the daunting task of meticulously proof-reading your first PhD thesis Also, to the authors in the reference list, thank you for your dedication to publish your respected works for me to cite III EXECUTIVE SUMMARY The purpose of this research is to investigate the legitimacy of the current Australian Financial Services licensee-authorised representative licensing model [also referred to as the AFSL-AR or licensee-adviser licensing model] This research makes specific reference to the issue of conflict of interest from association and independence in relation to the Commonwealth Corporations Act 2001 [the Act] Negative media attention, unsubstantiated personal assertions and hearsay by lobby groups in practice, troubled the longstanding debate around licensing advisers through third-party product-conflicted commercially oriented licensees Surprising, this matter has not yet received any scholarly attention Looking at the existing literature, the absence of a normative theoretical framework within the financial planning discipline, limited the formulation of empirically testable models to properly define, measure and examine legitimacy to collect substantiated evidence To address some of the existing challenges and provide both theoretical and empirical analysis, this research examines the extent to which the current individual advisers’ licensing through third-party licensees is problematic To this end, the study assessed the legitimacy of the current AFSL-AR licensing model using principal-agent theory in conjunction with four identified objectives of the Act Further, the researchers applied the legitimacy types conceptualised within financial planning theory by adopting, extending and applying the legitimacy theoretical framework Suchman (1995) developed Finally, this investigation studied the independent professional individual self-regulation mechanism, based on the regulatory regimes of other well-establish professions, to determine how financial planning adviser regulation compares Within the current regulatory structure, Australian financial advisers face a dual-agency role when licensed via third-party product-conflicted commercially oriented licensees While considering the need for regulatory compliance and viability of commercial activities, advisers serving both the commercial interest of licensees and the best interests of clients simultaneously, leads to conflict of interest from association Thus, the current licensee-adviser licensing structure raises serious doubts in its consistencies to achieve four identified objectives of the Act Consequently, these inconsistencies delegitimise the current licensee-adviser licensing model when tested against Suchman’s legitimacy criteria Furthermore, if the claim of illegitimacy is true, then a strong argument exists to replace the current, institutional licensing via multiple licensees with individual licensing via a single independent body, like other professions, such as doctors, lawyers and accountants IV While noting the existing licensing model could be a potential source of lack of public confidence and trust in financial services delivery, the analysis focussed on four key objectives when examining the legitimacy of the current licensing model First, the research investigated to what extent advisers perceive a dual-agency role arising from licensing advisers through third-party licensees, as specified in the Act, where they service both the interests of licensees and their clients simultaneously, leading to conflict of interest from association Second, the investigation examined the extent to which advisers perceive licensing authorised representatives via thirdparty licensees is inconsistent with four identified objectives of the Act Third, the extent advisers perceive the current licensee-adviser licensing model as legitimate based on Suchman’s (1995) legitimacy academic framework applied to financial planning theory was assessed Fourth, the extent financial advisers perceive individual licensing through an independent professional standards body, like other professions, is a worthy replacement alternative for consideration was considered Initially, a critical literature review of the principal-agent theory, regulatory obligations, legitimacy theory and expected standards of an accredited true professional to develop the theoretical underpinnings of an acceptable licensing model was undertaken To achieve the abovementioned research objectives, a post-positivist research paradigm formed the basis for the choice of research strategies, methodology and research design Using mixed methods methodology, the researchers conducted an empirical survey of 4,000 authorised representatives selected from the Australian Securities and Investments Commission [ASIC] Adviser Register via a probability random sampling approach Utilising a parallel convergent design, both quantitative and qualitative data was collected simultaneously to integrate together into the overall interpretation of the results Data collection involved emailing participants across Australia an online, semi-structured survey questionnaire of open-ended and closed-ended questions developed and hosted on the Qualtrics server Structural equation modelling [SEM] technique empirically analysed the quantitative data, while identifying causative pathways In undertaking the qualitative data analysis, the investigators applied constant comparative technique with a focus on content analysis of the specific words written by respondents To generate common concepts, categories, patterns and themes the researcher sorted and analysed the data in terms of frequency, meanings, and associations of words quoted by survey informants During analysis these commonalities were integrated into the the overall interpretation of the results of the quantitative data V Empirical results revealed advisers felt licensing via third-party product-aligned commercially oriented licensees turns them into dual agents facing conflict of interest from association For different reasons, the regulator ASIC, AFS licensees, their advisers and clients face caveat emptor, when advisers serve the commercial interest of licensees and best interests of clients simultaneously For example, ASIC, licensees and their advisers risk their reputations While their clients risk suffering financial losses when receiving recommendations biased by conflicted licensees’ in-house products and commercial interest In support of the dual-agency role findings, empirically clear from the perspective of advisers, this structure of licensing displays inconsistencies with four identified objectives of the Commonwealth Corporations Act 2001 In the presence of minority counter claims, survey respondents pointed out three top drivers leading to these illegitimacy tendencies Ranked from most significant to least, they included: (1) unintentional [and intentional] breaches of the statutory best interest duty, (2) practices misaligning adviser-client interests, and (3) licensees’ commercial interests compromising the best interest duty These potential contraventions of statutory compliance requirements can encourage class action Evidence also established even highly qualified and professional advisers lack professional autonomy and power to stop AFS licensees from controlling their professional ethics with key performance indicators, sales targets and threats of job and remuneration losses to promote a product sales culture Accordingly, these results strengthened arguments for individual licensing through a single independent professional body, like other professions Thus, the findings support the notion to turn financial advisers into recognised accredited professionals, who are subject to the same legal professional, educational, ethical and entry standards as other true professionals In the presence of minority critics, survey respondents make known a preference for licensing via such a single independent body However, they fear losing the subsidised support services offered by their licensees, such as software, training, professional indemnity, research, compliance, business, legal and back office support Furthermore, another major concern for advisers, should they move to individual licensing, would be the cost implications of individual licensing Additionally, qualitative evidence determined numerous unresolved issues around licensing consist of: practicality, professional indemnity, approved product lists, buyer of last resort agreements, ‘white’ and ‘private’ label products, and vertical integration In addition, advisers expressed, no matter what licensing regime was in operation, AFS licensees would always find ways to incentivise advisers to distribute their products These concerns and unresolved issues requires further investigation in future research VI When considering the findings, licensing advisers via product-conflicted commercially oriented third-party licensees threatens independence, a key characteristic of a profession Additionally, when attention to any conflict of interest is critical to a professional, this manner of licensing results in conflict of interest from association As part of policy recommendations, the legislated Financial Adviser Standards and Ethics Authority [FASEA] tasked with professional standards, education and ethics could evolve to also appoint, register, regulate, discipline and cease individual advisers to practise their craft as recognised accredited professionals Since the financial planning profession is growing rapidly, this single body should accredit financial advisers to practice their skill In support of Kingsford Smith’s (2014) views, this single monopoly body is the most effective way to regulate the future financial planning profession In comparison, multiple independent professional bodies covering multiple designations often accredited other professions, resulting in consequently multiple challenges Moreover, the empirical results show, independently licensed advisers promote improvement in public trust and confidence Most importantly, disconnecting individual advisers from AFS licensees will further the cause of professionalising the emerging financial planning industry into a recognised accredited profession Another likely benefit of individual licensing encompasses incentivising university graduate talent to enter the financial advisory sector, because recognised professions have status Based on the findings, all financial planning stakeholders should work together towards an individual licensing model, by drawing on the experience of other true professions Like other empirical studies, this research has several limitations A balanced view of the current licensing model was difficult to present given the lack of scholarly attention and harmful commentary to this matter It was not the intention to examine legitimacy at the micro- or tactical level Instead, empirical validity of legitimacy happened at the macro- or strategic level because not many academics addressed this issue before On that account, researchers should broaden the legitimacy criteria in time as more information becomes available Industry superannuation licensees were excluded from the study because, unlike corporate retail superannuation who pay profits to their shareholders, they plough back any profits to benefit their members Given the sensitive and controversial nature of the topic, the self-report design could have resulted in common method bias However, researchers reported results to both include and exclude the evidence of common method bias to better identify the common direction of the relationships between the legitimacy criteria items VII TABLE OF CONTENTS DECLARATION I TOEWYDING II ACKNOWLEDGEMENTS III EXECUTIVE SUMMARY IV LIST OF FREQUENTLY USED ABBREVIATIONS XV GLOSSARY OF DEFINITIONS FOR THIS RESEARCH XVIII LIST OF TABLES XX LIST OF FIGURES XXI LIST OF GRAPHS XXII LIST OF APPENDICES XXIII LIST OF PUBLICATIONS, SYMPOSIUM PAPERS XXV AND MEDIA INTEREST XXV CHAPTER 1: INTRODUCTION 1.1 INTRODUCTION 1.2 BACKGROUND TO THE STUDY 1.2.1 Legislative background to the AFSL-AR licensing model 1.2.2 The current Australian licensee-adviser licensing model 1.2.3 International trends of professional adviser licensing 1.3 CONCEPTUALISED FRAMEWORK OF LICENSING ADVISERS 1.3.1 Dual-agency role of financial advisers 1.3.2 Four objectives of the Commonwealth Corporations Act 2001 10 1.3.3 Integrating Suchman’s theoretic legitimacy framework to AFSL-AR licensing 11 1.3.4 Individual licensing as an alternative solution 15 1.4 RESEARCH OBJECTIVES AND CONTRIBUTION 19 1.5 STATEMENT OF IMPORTANCE 19 1.6 OUTLINE OF THE THESIS 25 VIII CHAPTER 2: INTERNATIONAL TRENDS IN FINANCIAL ADVISER REGULATION 26 2.1 INTRODUCTION 26 2.2 AUSTRALIA 26 2.2.1 Legislative background to Australian adviser regulation 26 2.2.2 Adviser licensing regime in Australia 33 2.2.3 Australian reform consequences and challenges 45 2.3 UNITED STATES 49 2.3.1 Legislative background to United States adviser regulation 49 2.3.2 Adviser licensing regime in the United States 51 2.3.3 United States reform consequences and challenges 56 2.4 UNITED KINGDOM 58 2.4.1 Legislative background to United Kingdom adviser regulation 58 2.4.2 Adviser licensing regime in the United Kingdom 60 2.4.3 United Kingdom reform consequences and challenges 62 2.5 COMPARISONS BETWEEN THE THREE NATIONS 66 2.6 CONCLUSION 71 CHAPTER 3: LITERATURE REVIEW ON THE LEGITIMACY OF THE CURRENT LICENSEE-ADVISER LICENSING MODEL FOR AUSTRALIAN FINANCIAL ADVISERS 73 3.1 INTRODUCTION 73 3.2 DUAL AGENCY ROLE OF ADVISERS 74 3.2.1 Agency theory integrated into financial planning theory 74 3.2.2 Licensee-adviser-client dual agency relationship 77 3.3 OBJECTIVES OF THE CORPORATIONS ACT 2001 [CWTH] 81 3.3.1 Conflicts of interest 81 3.3.2 Best interest duty 84 3.3.3 Licensee-adviser-client interest alignment 86 IX Professional Planner 2017b, 'To boldly go where every other profession has gone before', Professional Planner, vol no 97, pp 6-12 Professional Standards Councils 2014, 'White paper : Professionalisation of financial services', viewed 13 July 2016, Professional Standards Councils 2015, Submission to the Parliamentary Joint Committee on Corporations and Financial Services' inquiry in professional standards of financial advisers, viewed 22 August 2016, Raar, J 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study 1.2 BACKGROUND TO THE STUDY 1.2.1 Legislative background to the AFSL-AR licensing model The start of the licensing debate, in and outside of the Australian Parliament,