By Air Commodore Robert M.C. Brown AM
In late December 2012, an article appeared in the Australian Financial Review under the headline “Financial Literacy the root of many losing investments”. A number of financial services industry luminaries were quoted, most of them claiming that more regulation is not the answer to the avoidance of losses suffered by retail investors in recent collapses such as Storm Financial and Banksia.
The article went on to assert (without substantiation) “the fact that most people will fail to heed the basic principles of investment shows that there is an urgent need to improve investor education”. That is, there is a direct causal link between a lack of effective investor education and investors losing money. That’s quite a claim, especially when this quote also suggests that most people (that’s more than 50%) are either financially illiterate or worse still, are unable to control their tendency to committing the cardinal sins of greed and envy when faced with a deal that looks too good to be true.
I am certainly not suggesting that financial literacy education is a waste of time. On the contrary, I am enthusiastic about efforts to improve the knowledge and confidence of investors. However, the financial services industry must not be allowed to promote its support of education as a way of demonstrating good corporate leadership, thereby avoiding discussion of improved regulation and ethics by transferring the blame for losses onto ignorant or greedy investors who should know better than to fall for the representations of dodgy promoters.
Regrettably, like the poor, dodgy promoters will always be with us. Therefore, I agree with the view that the best regulations in the world will not stop the most blatant scams and rips-offs (such as Nigerian emails) which will continue to dupe unsuspecting members of the public. We must continue to do our best to warn and educate people about these criminal activities.
However, we must not put the likes of Storm Financial and Banksia (which rather uncomfortably involve some of the leading lights of the Australian financial services community) into the same category as extreme criminal scams, thereby reinforcing a convenient conclusion that because consumers are substantially at fault, more regulation of the industry as a whole is unnecessary and that the only feasible solution lies in redoubling our efforts in financial literacy education. If only the solution were that simple.
The reality is that we can take significant and workable steps as a community (by way of legislated regulation) and as an industry (by way of self-regulation) to improve the lot of consumers. My preference is always for self-regulation (at least as a first step). After all, self-regulation at a level above the minimum requirements of the law should always be the hallmark of an honest and ethical industry, especially when it is purporting to offer trustworthy professional advice to the public.
Unfortunately, the Australian financial services industry’s self-regulation record is not good. In order to demonstrate that point, we need go no further than the recently introduced Future of Financial Advice legislation. That legislation (which was introduced as a result of the excesses of margin lenders such as Storm Financial and Opes Prime) was avoidable if the financial services industry had been willing to introduce and enforce its own genuine professional and ethical standards.
Instead, the industry has suffered an own-goal caused by its unwillingness to address its eminently fixable shortcomings. Worse still, FOFA’s chances of improving the industry’s structurally-driven poor behaviour are quite limited. Of course, that is the precise outcome sought by many of the industry’s leaders who hide this truth by complaining about FOFA’s costly administrative complexities for which they are substantially responsible because of their insistence on workaround solutions and ethical compromises involving, for example, disclosure of conflicts rather than avoidance of them.
As a result, there are likely to be significant and intricate amendments to FOFA over the coming decades as the industry is dragged kicking and screaming to the position where it could have been in 2013 (and on its own terms) if it had voluntarily chosen the route of self-regulation in the public interest, not just the appearance and rhetoric of it.
Therefore, until the industry gets its act together (voluntarily or otherwise), financial literacy education should include an independent assessment of the industry’s conflicted and flawed structure and its potentially detrimental consequences for investors. That would be equally as useful as a discussion of the connection between risk, reward and Nigerian scams.