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Financial advisory and taxation services in Australia

CPA Australia

The Institute of Chartered Accountants in Australia The National Institute of Accountants

Introduction: Access to financial and tax advice

Consumers should be able to access consistent, affordable financial and tax advice from their choice of appropriately qualified, experienced professional advisers across the financial services industry. With that in mind, this paper explains the current financial advisory services landscape and the limitations that exist for consumers in receiving an appropriate level of advice in Australia.

1. The financial advisory services landscape – at a glance

1.1 The problem

• Financial literacy is a national problem. Many Australians lack an understanding of basic financial concepts and would benefit from receiving strategic advice on their financial position.

• Access to and use of financial planning services is low. Only 25% of Australians at some point in their lives will seek advice from a financial planner (but more than 70% seek the services of a tax agent on an annual basis).

• The financial services industry is experiencing a lack of trust (both real and perceived) as a result of negative publicity around high profile cases of corporate collapses, investor loss of funds, conflicted remuneration structures and a lack of understanding of the value of advice. Broadly speaking, the financial services industry is still to gain the confidence and trust of the Australian public.

• The current “accountants’ exemption” under Corporations Regulation 7.1.29A is problematic in terms of its practical application for recognised accountants and their clients.

• Other than their accountant, many Australians have limited, or no access to basic, affordable financial advice that would help them develop a better understanding of their financial situation and engage with their superannuation. This problem is amplified for Australians living in regional and rural areas.

• The current licensing framework focuses on the delivery of financial product advice when there is a need for the delivery of “non-product” and strategic advice. The current licensing regime requires those providing personal financial advice to operate under an Australian Financial Services License (AFSL) or have their own AFSL – in many cases neither of these options is practical for a recognised accountant.

• There is a general lack of understanding of the role and services recognised accountants provide to their clients and the potential services and advice the profession can offer.

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• The current licensing framework and regulation for recognised accountants under the accountants’ exemption does not provide an appropriate solution for Australians to develop greater engagement with their superannuation and financial position.

The issues

1.2.1 Provision of financial advice by accountants

• In 2004, professional accountants were given an exemption under the AFSL regime that permitted them to provide advice on the establishment of Self-Managed Superannuation Funds (SMSFs), taking into consideration the breadth and depth of expertise of professional accountants in this area.

• The accountants’ exemption was thought to be required to overcome the interpretation by some market participants that SMSFs are a financial product (for which an AFSL would otherwise be required to provide advice in relation to their setup). SMSFs are widely viewed within the accounting profession as a structure within which financial products are held, not a financial product in their right.

• The aim of the accountants’ exemption was to expand the scope of financial advice available to the Australian public; however, due to restrictions for both consumers (in terms of the questions they can ask) and for accountants (in terms of the advice they can give), in practice the exemption has failed to deliver on this objective. Accountants were not able to discuss alternatives or related issues.

• For many Australians seeking basic (non-product) financial advice, if they are unable to ask simple questions of their accountant, it is likely these questions will either not be asked or answered at all.

• In the absence of workable guidelines that meet their clients’ needs, professional accountants have been providing basic advice to their clients in relation to their financial affairs, at times in breach of the limits of the accountants’ exemption.

• Australians value basic (non-product), affordable advice from their professional accountant, in part because they have a trusted and long term relationship with their accountant.

• Professional accountants provide a wide range of advisory services to their clients, including taxation, compliance, estate planning, financial and business matters. Much of this advice is interrelated and as such, grey areas occur when accountants endeavour to operate within the limits of current legislation. (See Appendix: The role of professional accountants)

• It is the role of all professional advisers to act in the best interests of their clients. Therefore it is the responsibility of a professional accountant to provide advice to their clients not simply in terms of what the client should do, but also in terms of what they should not do (this includes acting on third party opinions or advice). In many cases, providing complete advice in this manner is not supported by the current legislation.

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• The key to the provision of any advisory services to the Australian public must be based on an appropriate consumer protection framework.

• A recognised accountant has the following characteristics:

o Membership of a professional body as outlined in Corporations Regulation 7.1.29A

o Tertiary education and qualifications

o Guided by professional and ethical standards through the Accounting Professional and Ethical Standards Board

o Quality Assurance/ Compliance program

o Professional Indemnity insurance requirements

o Ongoing professional development

The above characteristics are central to building an appropriate framework within which professional accountants can operate.

Recommendations Professional accountants play an important role in the community as trusted advisers on finance, accounting and business matters. However, the current accountants’ exemption in relation to SMSFs does not provide an appropriate legislative framework within which professional accountants can operate. It needs to be replaced with a solution that boosts accessibility and affordability of basic (non-product) advice for the majority of Australians, so that they may increase their financial literacy and engage with their super. 1. Introduce a tiered financial advisory system. Non-product financial advice, intra-fund advice and

financial planning product advice should be distinct, to enable accessibility and affordability of basic financial advice for the consumer.

2. Non-product financial advice should be defined as advice that does not involve a specific product

recommendation. Rather, it would be limited to classes of product and would sit outside the AFSL regime. Any advice that recommends a specific product would still be subject to the current licensing and disclosure requirements.

3. Only suitably qualified professionals such as recognised accountants, lawyers, registered tax agents and licensed financial planners should be eligible to provide non-product financial advice. All such professionals would need to meet set requirements, including the completion of set training and would be required where appropriate to provide the consumer with a record of the advice.

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Appendix: The role of professional accountants Professional accountants are defined under Corporations Regulation 7.1.29A. A ‘recognised accountant’ is defined in Corporations Regulation 7.1.29A as a person who:

1) Belongs to one of the following professional bodies: the Institute of Chartered Accountants in Australia, CPA Australia, National Institute of Accountants in Australia

2) Complies with that body's continuing professional education requirements.

Professional bodies Declared membership classifications

CPA Australia CPA and FCPA

The Institute of Chartered Accountants in Australia

CA, ACA and FCA

National Institute of Accountants in Australia

PNA, FPNA, MNIA and FNIA

What services do professional accountants provide? Professional accountants are trusted advisers who provide their clients with a range of services including, but not limited to:

• Business management

• Financial planning

• Tax advice and planning

• Estate planning

• Auditing and assurance services

• Forensic accounting

• Preparation of financial statements

• Structural advice and audit services on partnerships, companies, discretionary and fixed trusts including Self Managed Super Funds (SMSFs) and joint ventures

• Legislative and regulatory compliance

How are professional accountants regulated? Generally, professional accountants (as defined in the Corporations Act 2001) are self-regulated. Each of Australia’s three professional accounting bodies sets the benchmark for professionalism and ethical conduct of its members. In addition, self-regulation for the three professional accounting bodies incorporates adoption of the guidelines, standards, directives and other provisions of the following organisations:

• Australian Accounting Standards Board (AASB)

• Accounting Professional and Ethical Standards Board (APESB)

• Auditing and Assurance Standards Board (AuASB)

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Depending on their area of expertise and service offering, recognised accountants may be subject to regulation from a number of government bodies for various functions, including:

• Australian Securities and Investments Commission (ASIC)

• Australian Taxation Office (ATO)

• Australian Prudential Regulation Authority (APRA)

• Australian Competition and Consumer Commission (ACCC)

• Tax Practitioners’ Board (TPB) Rules and governance from multiple regulators is typical for recognised accountants.

Limitations in the current financial advisory services landscape Recognised accountants are well placed to provide basic, (non-product) advice on financial and business matters to their clients. However, the ‘accountants’ exemption’ under the Corporations Regulations Act 2001 presents significant ‘grey areas’ for recognised accountants in terms of the advice they can provide to their clients.

Examples The following examples illustrate the types of interactions recognised accountants have with their clients on a daily basis. In all cases, it is unclear whether the accountant can legally provide the advice. Professional accountants still seek the counsel of their professional body to clarify how they can operate.

1. A client asks about consolidating their superannuation. (Should the accountant be able to ask where the client currently holds their super or the relative merits of particular fund sectors, e.g. industry, retail or corporate funds?)

2. An accountant has a client with a significant amount of money sitting in a cheque account and wants to discuss the option of moving cash to another form of holding that will give the client a better return (eg a term deposit).

3. An accountant has a client who they believe to be more risk averse than indicated in a financial plan.

(What should the accountant do?)

4. A client would like advice as to whether they should salary sacrifice into superannuation and how much to salary sacrifice.

5. An accountant is asked to review a client’s financial plan. (What advice and opinion can the

accountant provide?)

6. An accountant provides advice on after-tax superannuation contributions and eligibility to the government’s superannuation co-contribution.

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7. A client tells their accountant they cannot afford to see a financial planner and wants the accountant to explain basic financial concepts and ways to improve their financial affairs.

8. A financial planner makes a recommendation for a client to set up a SMSF. (Should the accountant

be able to discuss these issues with their client?)

9. A client is considering purchasing their own business premises. The prospect of ownership within an SMSF brings with it certain tax advantages as well as considerable asset protection measures. (Should the accountant be able to consider and recommend, if appropriate, the establishment of an SMSF as opposed to another structure?)

10. A client asks their accountant to set up a SMSF. (Should the accountant ask the client to justify their decision compared to other superannuation structures?)