reflecting the economic substance

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					Opinion > President’s column




                                      reflecting
                                      the economic
                                      substance
                                      The US sub-prime mortgage crisis provides an
        Andrew Arkell                 insight into global financial system complexities.

T      he Institute has released a paper
       to assist members understand
exactly what happened in the US sub-
                                                substantially, they started to have financial
                                                difficulties. Their new mortgage payment
                                                was three times the initial amount and due to
                                                                                                    accounting and auditing profession.
                                                                                                       The accounting issues to come out of the
                                                                                                    credit crisis are complex and also dependent
prime mortgage market collapse, who’s           a weak property market their house was now          on the extent to which an entity or individual
responsible, what are the accounting issues,    worth considerably less than their original         is either directly or indirectly impacted.
what is the role of accounting standard         loan. Re-financing was no longer an option.            The main accounting impacts can be
setters and what may happen next.                  Like many others, the Joneses realised           summarised into three areas;
   Written by Dr Patricia Doran Walters PhD     that even selling their home would leave            > securitisation and consolidation
CFA, the report provides an insight into the    them with a substantial debt and their earlier      > fair value measures
many factors involved including the global      interest-only payments meant they had no            > impairment assessment.
effects on financial statements of banks and    equity. The Jones family believed they had
other financial institutions and investors in   no alternative (and no incentive), so they          NEXT STEPS
mortgage-backed securities.                     defaulted on their mortgage payments.               Next steps will include a review of the way
   One of the main issues expressed in          The owner of the loan foreclosed and took           standards are set. It is important to note
the paper is that some capital market           possession of the house. The Joneses now            that the United States Financial Accounting
participants in the US seem more concerned      rent a small apartment and are unlikely to be       Standards Board has announced its intention
with structuring transactions to achieve a      able to buy a home again.                           to make changes to its accounting standards
specific accounting outcome, rather than           The paper goes on to explain in more             that will allow it to address the current
reflecting the economic substance of the        detail the rocky road to home ownership,            securitisation problems and start working
arrangement. This is not an issue isolated to   mortgage lending and investment banking.            with the International Accounting Standards
the US but concerns our profession globally.    We also get an insight into what happens            Board to achieve a consistent treatment.
   It is hoped the paper will help members      when the housing boom bursts and low                   Disclosures of financial instrument risks
understand the intricate issues and             interest rate loans start to rise.                  are likely to improve, particularly in IFRS.
contribute to an appropriate understanding                                                             Regulators may also be asked to address
of how the US collapse occurred. Through        RESPONSIBILITY                                      the problems created by the collapse of the
the fictional story of Mr and Mrs Jones, the    Before the report identifies responsibilities, it   credit market and market illiquidity. Perhaps
report examines the role of those responsible   assumes that all the people and companies           this crisis could be the motivation investors
(borrowers, investors and brokers) and          involved have acted with integrity. Each party      need to take on the challenge of what would
those who protect them (preparers,              has tried their best to live within the rules set   improve investor decision making.
auditors, standard-setters and regulators).     down by the standard setters, regulators
Walters goes on to make recommendations         and legislative bodies about information
regarding their future roles.                   disclosure. This is a major assumption and
   The story starts with the Joneses            based on recent FBI activity most likely false!      waNT TO kNOw mORE?
dreaming of owning their own home, but             Importantly, the paper recognises none of
not having the right credit score with their    the parties identified can guarantee investors       This important paper is one of the
local bank they go to a mortgage broker. In     will receive reliable and relevant information       Institute’s leadership initiatives that make
accepting a 5-year adjustable rate mortgage     to assist in their decision-making process           sure we are well positioned to look
(ARM) with low introductory repayments          – without the support of others. Regulators          ahead, question and positively influence
and the thought of their new home only ever     and standard setters, when considering               the growth of our profession.
increasing in value, they were well pleased     any future changes, need to ensure they                For a copy of the full paper visit
with their financial arrangement.               do not overreact and that they consider all          charteredaccountants.com.au/
   But, five years later, with interest rates   parties and underlying causes, rather than           leadership/reporting
and their mortgage payments increasing          just the traditional scapegoats of those in the


 14 Charter | August 2008
Opinion > CEO’s view




                                        promoting
                                        the brand
                                        The Institute is promoting its brand
                                        to help lift the profile of Chartered
       Graham Meyer                     Accountants and our profession.

H     ow do we ensure a sustainable future
      for the Institute and for Chartered
Accountants? This is a burning question,
                                                  our brand positively and affirm our vision to
                                                  lead the profession.
                                                     The Institute has developed a number
                                                                                                    our target audiences.
                                                                                                       In the last five years, candidate numbers
                                                                                                    in the Chartered Accountants Program have
particularly in times of economic uncertainty     of materials to help members leverage the         doubled, testifying to the increasing appeal
and with the skills shortage.                     brand as a resource for their business. For       of the profession to young people.
   Accordingly, one of the Institute’s key        example, we recently developed a brochure            The strategic alignment of our facilities
strategic objectives for 2008-2009 is             entitled What is a Chartered Accountant? to       and brand began a year ago with our
to enhance the value of the Chartered             help our members in public practice market        national office relocation to 33 Erskine
Accountants designation, the reputation           themselves.                                       Street in Sydney’s CBD. We used our office
of our members and the image of the                  The brochure, freely available from our        space as a vehicle to bring the Chartered
profession itself.                                service centre, underscores the Chartered         Accountants brand to life and to offer
   The strength of the Chartered                  Accountants qualification as the benchmark        improved amenities for members.
Accountants brand rests on 80 years of            in accounting excellence. Moreover, it               At the end of May, our ACT office
history and leveraging this brand equity is       reinforces to the market that the Chartered       relocated to new premises in Canberra,
an opportunity for members to secure new          Accountants qualification and ongoing             bringing into line the last of Institute offices
employees, new business and new growth.           technical training of our members mean their      with the new look and feel. We now have
                                                  advice across a range of services can be          high-tech, modern conference and meeting
WHAT IS A BRAND?                                  deeply trusted.                                   room facilities available in Melbourne,
Put simply, a brand is a collection of               We have also created a marketing               Brisbane, Sydney and Canberra for member
ideas, images and experiences related to          support section on the Institute website.         use at competitive rates. As the literal writing
a company, product or service. Think of           Here, members can find information on             on the wall in our offices, our brand and core
Microsoft or BMW – these names create             planning their visual identity, creating direct   values remind employees, members and
common associations and expectations of           mail, advertising, publicity and conducting       guests of who we are and what we stand for.
the company’s products among consumers.           seminars.                                            Our brand is a key element of our
It is no wonder that increasingly, marketing                                                        strategic plan to ensure a sustainable
researchers are concluding that brand is one      STUDENT FOCUS                                     future for the Institute and for Chartered
of the most valuable assets a company has.        One way we are addressing the skills              Accountants. I encourage you, our
    At the Institute, we work hard to ensure      shortage for members is by introducing            members, to use the brand as a resource
the Chartered Accountants brand is                students to the Chartered Accountants             in the marketplace and to make the most of
associated with expertise and insight, the        brand at a critical time in their career          the products, services and benefits at your
highest standard in accounting, ethics and        decision-making process.                          disposal to do so.
trust and that our brand creates positive            We’ve engaged student brand champions
expectations of the services we provide.          to represent the Institute on campus and
    The brand conveys prestige to the             promote the brand and the Chartered
marketplace, helping members attract high         Accountants Program to fellow students.            BRAND AIDS
value clients and improve their bottom line.         The brand champs provide unique insight
    To that end, the Institute has engaged in a   into the local student environment and latest      To obtain copies of Institute brochures
number of activities aimed at strengthening       student trends, with the aim of raising brand      or marketing collateral, contact our
the brand, helping members market                 awareness and increasing registrations             service centre on 1300 137 322. Need
themselves as Chartered Accountants and           into the Chartered Accountants Program.            help to promote your business? Visit
inspiring confidence in who we are and            The initiative ties in with our wider brand        charteredaccountants.com.au/
what we do. After all, every stakeholder          advertising campaign to bolster preference         marketing_support
experience is an opportunity to represent         of the Chartered Accountants brand within


 16 Charter | August 2008
Business > On the economy




                                         swamped by
                                         sub-prime evil
                                         The full horror of global credit crisis is yet to play
                                         out. But Australia’s Reserve Bank is also being
         Adrian Thirsk                   stretched by the dark forces of inflation.

E     xistence opened into a void. As black
      heavens widened above and around
him, he was aware something was moving
                                                   fought between the forces of good and
                                                   evil, according to the Bible, will occur at
                                                   Armageddon. The chairman of the Magellan
                                                                                                       “Over that weekend – and the sources,
                                                                                                   I believe, are highly accurate – there was
                                                                                                   an assessment made that if Bear Stearns
up underneath him. It was massive – like           Financial Group, Hamish Douglass, says          filed for bankruptcy on the Sunday evening,
a dormant volcanic crater – and rising to          the financial world came very close to          by the following Tuesday, at the rate of
swallow him in its vastness. And there was         Armageddon over the five days starting on       withdrawals that were happening at other
a presence at the centre. It was evil; evil as     12 March this year, as the investment bank,     financial institutions, there would have been
he’d never known it.                               Bear Stearns, stared into oblivion. “On         two or three other investment banks that
   That’s an excerpt from the prologue to          that Wednesday morning they had about           would have also had to file for bankruptcy,”
a horror novel I’ve never ended up writing.        $30 billion worth of cash,” Douglass tells      says Douglass. The Federal Reserve stepped
It was penned about 22 years ago, as my            me. “There had been a rumour circulated         in with $US30 billion to fund less liquid
youthful incarnation aspired to blend trashy       round the market that a number of people        assets and guarantee the “undead” Bear
genre with prize-winning literary merit. About     were stopping dealing with Bear Stearns as      Stearns a continuing lease on life under the
a year ago, a horror story of a financial nature   counterparty. That had been circulated to       new ownership of JP Morgan Chase. If it
suddenly demanded eligibility for the Miles        the major hedge funds around the world.”        hadn’t, says Douglass, “the consequences
Frankenstein Award. And this time                  The hedge funds did as hedge funds do and       for the financial markets were very dire and
I was among the many writers bursting              acted with lightning speed to withdraw their    the estimates that people were preparing
into published print. For, emerging from           client funds, scared of what they saw as a      themselves for was maybe a drop in world
the shadows of the global wholesale credit         bankruptcy risk. “Bear Stearns effectively      financial markets – in debt and equity
markets, America’s sub-prime mortgage              by the afternoon only had $3 billion worth of   markets – of around 40 per cent the
crisis had truly started becoming a monster        cash left. And that evening they rang up the    following week.”
of many parts in August last year. That’s          US Treasury and the US Federal Reserve
when global sharemarkets plunged in fearful        to say they’d have to file for bankruptcy the   Turning poinT
response to the freezing by top French bank,       following morning,” says Douglass.              Many now see that episode as the turning
BNP Paribas, of three investment funds                Emergency funding allowed a severely         point. But the nightmare might be far from
exposed to the US property market.                 mauled Bear Stearns to limp into the            over. In the global banking system, there
   There’ve been regular episodes of terror        weekend.                                        are some big known losses yet to be
                                                                                                   realised. And because the lifeblood has
One of the most insidious aspects of                                                               been drained from certain markets, those
                                                                                                   now illiquid securities could give rise to even
the current crisis is that, all around the                                                         more losses accruing down the track. As
                                                                                                   a result, credit spreads – the interest rate
developed economies, skeletons have been                                                           premium above official rates sought in capital
                                                                                                   markets to compensate for risk – remain
ghosting into a closet near you                                                                    very elevated. Put simply, the fear factor is
                                                                                                   still high. Speaking at the end of June, ANZ
since on both debt and equity markets. And            Douglass says that what’s not widely known   chief executive, Mike Smith, told the Australia
now, around the developed nations of the           is that it wasn’t just Bear Stearns where       Lebanon Chamber of Commerce that he, too,
world, economic slowdown can be added to           institutional clients and hedge funds became    was more circumspect. “My own feeling is it
the catalogue of carnage.                          nervous about the security of their deposits.   will take longer for this to work through. To
   On this anniversary of sorts, it’s timely       The likes of Merrill Lynch, Lehman Brothers,    reinforce this, one measure of risk in the US
to revisit the black lagoon of the sub-prime       Morgan Stanley and Goldman Sachs (whose         – the price of insuring against default – has
crisis, especially as there’ve been frequent       client note had sparked the Bear Stearns        risen by more than a third in the last month,”
suggestions the worst is over.                     rumours!) all started experiencing massive      he told his audience.
   The final cataclysmic battle to be              withdrawals at the same time.                      Less than a week later, I was present at


 18 Charter | August 2008
                                                a consumer credit card summit in Sydney              and its US partners have aborted plans for
                                                when the Commonwealth Bank’s chief                   what would have been the tallest tower in
                                                executive officer, Ralph Norris, shared his          Las Vegas as part of a 5000-room hotel
                                                concern at estimates there were another              and gaming complex. A den of sin
                                                $US700 billion in sub-prime write-offs still         biting the dust, perhaps, but it’s
                                                to come. “It’s a situation which is obviously        also a stark illustration of the
                                                very fragile. And from my perspective,               “real economy” impact of
                                                I would suspect that we’re looking at at             the credit crisis. Says ANZ’s
                                                least another 12 months to two years before          Smith, “if last year’s theme
                                                this particular crisis actually works its way        was turmoil in US and
                                                through,” he said.                                   European financial services,
                                                                                                     then 2008 is the year when
                                                MorE EXpEnSiVE MonEY                                 these financial stresses go on
                                                For businesses in developed economies,               to harm the global economy.”
                                                money is now more expensive, harder                     To my way of thinking,
                                                to come by and carries more stringent                one of the most insidious
                                                conditions. That’s the case whether a                aspects of the current
                                                company is issuing its own debt directly into        crisis is that, all around
                                                capital markets or being forced to go back to        the developed economies,
                                                the banks for funding (as part of the current        skeletons have been ghosting
                                                phenomenon known as reintermediation).               into a closet near you. And they
                                                Despite the strength of Australia’s banking          might not take much fleshing out
                                                system, local companies are not going to get         to become the next zombie wave.
                                                their money cheaper for a good while yet.            There was a growing suspicion
                                                “There is unfortunately no sign at present           that Europe’s lending institutions
                                                that we will be able to reverse the increases        were harbouring legions of
                                                we have had to pass on to borrowers over             undisclosed write-downs. In
                                                and above official rate increases any time           Australia, the profit-reporting
                                                soon,” says Smith. Australian banks now              season is now upon us. As the
                                                draw about 30 per cent of their wholesale            financial year came to a close, the
                                                funds from offshore.                                 Australian Securities and Investments           Douglass: “In the developing markets
                                                    It’s not just the cost of funding which is       Commission had effectively implored             around the world, two thirds of the world’s
                                                having, and will continue to have, far-reaching      accountants, auditors and executives to         population may be facing 10 per cent plus
                                                consequences, as pointed out by financial            throw the cupboard doors wide open.             inflation rates into next year.” In Australia, the
                                                academic, commentator and former Liberal             ASIC’s chief accountant, Lee White FCA,         outlook is not quite as dire. But there is the
                                                Party leader, Dr John Hewson, at a mortgage          says: “All participants involved with the       added element of the best terms of trade in
                                                industry convention I attended in mid May.           reporting period will need to approach          more than half a century which are pumping
                                                “I think the tragedy from the point of view of       their roles with a strong understanding         tens of billions of inflationary dollars into the
                                                where we are in our economic cycle is the            of the potential impact of the market           local economy. They should also quicken
                                                concept that our financial institutions will start   turbulence and the liquidity squeeze.” The      activity in some sectors and/or geographies
                                                to ration credit, as the banks already seem to       new accounting standard AASB7 requires          of the economy even as other sectors flag,
                                                be doing. To me it’s nonsensical. You’ve got         detailed information on risks associated with   thereby warding off stagflation, which is
                                                to keep the place going. You’ve got to keep          financial instruments.                          creeping around economic debate, like
                                                the economy running.”                                   The asset write-downs, debt maturity         J. K. Rowling’s Voldemort. I nevertheless
                                                    But corporate corpses are starting to            profiles and loan covenants that come to        put it to Douglass that, while the Reserve
                                                litter the ground. Have you ever noticed             light are sure to give impetus to the process   Bank seeks to drive a stake through inflation,
                                                in horror movies that there’s never just             of de-leveraging now under way among            the credit crisis is placing it in a bind. “Yes
                                                one zombie lurching up to menace the                 Australian companies. So while there are        it is,” he says. “I think it’s causing them a
                                                hero before falling down chopped, shot               plenty of businesses which just can’t raise     lot more serious policy issues. Because
Illustration: Dynamic Graphics/Jupiter Images




                                                or otherwise “schlocked”? In the US, the             debt, there are probably a hell of a lot more   normally you’d expect during a credit crisis
                                                noted economist, David Hale, thinks 400 to           that simply don’t want it. And the scramble     economies would start slowing down
                                                500 smaller banks could go to the wall. In           to reduce debt will have the self-reinforcing   naturally and interest rates could be lowered
                                                Australia, the mortgage lender, RAMS, was            effect of further slowing economic growth.      to stimulate the world.”
                                                an early casualty. Allco Finance has lost a             The devil has two horns and so does              So the central bank has been forced to
                                                lot of blood. Extending more widely into the         many a dilemma. Even though Australia’s         choose between two evils. And they’ve
                                                economy, shopping centre owner, Centro               economic growth is slowing, the scaly beast     decided the prime focus is still inflation. The
                                                Properties Group, and even Coles’ new                of inflation is rearing up. As global food      sub-prime crisis is, well, sub-prime – so far
                                                owner, Wesfarmers, have staggered under              and oil prices ignite and apply a blowtorch     at least.
                                                the burden of short-term debt. And some              to economic management the world over,
                                                big projects are going on hold. The James            Australia finds itself in a geographical        Adrian Thirsk is a financial reporter
                                                Packer-controlled casino operator, Crown,            hot spot, as noted by Magellan’s Hamish         with ABC radio and television.


                                                                                                                                                                                  19 Charter | August 2008
Opinion > Enterprise




                                          family ties can
                                          destroy logic
                                          When it comes to family businesses,
     Sue Prestney FCA                     emotions often win out over rationality.

O      ne of the problems with being an
       accountant is that we tend to think that
the world, or at least the business world, acts
                                                    receives the same dividend and is building
                                                    up the same value in their investment in the
                                                    business. It does not even seem to matter
                                                                                                         environment where not all family members are
                                                                                                         equal in terms of energy, ability and aspiration.
                                                                                                         It can result in family members being
according to logic and rationality. In our world    if the working sibling receives a market or          employed just to give them a job; it can hold
the debits equal the credits. You act either        above-market salary for their work. In their         back the talented and promote the untalented
within the law or outside of it – it is quite a     view they are suffering the stress and the risks     very rapidly to the level of their incompetence.
black and white place. Therefore if a strategy      involved in running the business while their         And, I’m afraid I have to say it, mothers are
would result in increased profitability we          non-working siblings are reaping the benefits        often the instigators of the family business
would expect a business to follow it.               on easy street. This is one reason why buy-          dealing equally with the unequal.
   Of course what this view of the world fails      outs of non-working siblings and cousins are            The reason we have family business
to take into account is that businesses are full    almost inevitable, even if it puts a strain on the   constitutions is to try to set rules and
of people and people are rarely rational. They      business or, at least, constrains the growth of      procedures that operate on the principles of
can be fearful, jealous, lazy, angry, stupid,       the business                                         rationality. That assumes, of course, that the
vengeful and even psychopathic. They can            > boards are often chaired by semi-retired           family owners of the business decide that
also be affected by a wide variety of mind-         business owners in order to maintain their           the business is to operate on the basis of the
altering substances – some more legal than          pride and visible standing in the business           business comes first. But you can’t assume
others. I’ve met more than one business             community – not because they are the best            that this is the overriding principle – many
owner who started the workday with a liquid         person for the job or even know how to               family businesses aim to accommodate
breakfast which wasn’t coffee.                      properly chair a meeting. This leads to the          a combination of the best interests of the
   Nowhere is the human element more                whole issue of the composition of family             family and the business. I’m sure there are
obvious than in family businesses, where            business boards – being a family member is           many that are managed predominantly in the
emotions connected with deep-seated family          not a rational criterion for being a director        best interests of the family, even where this
issues become entangled in the business.
Here are some examples:
> a younger sibling is rarely supported for a       Nowhere is the human element more obvious
position of authority over their older siblings,
especially by the older siblings. The wider the
                                                    than in family businesses, where emotions
age gap, the more resentful they are likely to      connected with deep-seated family issues
be of the younger one’s promotion. While the
younger sibling may be the best person to run       become entangled in the business
the business, it is often impossible for an older
sibling to deal with the fact that the person       > I have seen family businesses expand               conflicts with the interests of the business.
who used to look up to them in childhood will       too quickly just to ensure there is a place          Drawing all the profits from the business is a
now be making the rules. I have met siblings        in the business for all of the children of the       fair indication that this is the case.
in business who could never agree because           current owner. The resulting level of debt              As accountants we can give sound,
the older one could not admit that the younger      vastly increased the annual interest bill while      rational advice to SME owners but we
one might be right. The same situation often        the expansion (too hastily conceived and             should not be surprised that it is not always
applies to parents and children in the same         implemented) did not produce the expected            taken – rationality is often no contest against
business – it can be a very difficult thing for a   income. The ironic result of trying to find room     powerful emotions such as pride, jealousy
father to admit that the child may be right and     for all the children was that there was less         and love.
he may be wrong. Poor decisions are often           profit for everyone
made because of stubbornness and pride              > the concept of equity between family               Sue Prestney FCA is from MGI BOYD
> a sibling working in the business will often      members, which families hold sacrosanct,             Chartered Accountants & Taxation Advisors
resent the fact that a non-working sibling          does not translate well to a business                and is the Institute’s spokesperson on SMEs.


 44 Charter | August 2008
Opinion > Financial services




                                        ownership –
                                        does it matter?
                                        Rather than focusing on ownership financial
                                        planners will never achieve professional status
    Robert MC Brown FCA                 unless the remuneration models are changed.

I  t is often suggested that consumers
   can avoid the lack of independence of
much of the financial planning industry
                                                 profession to realise that. The reality is
                                                 that commercial life is full of conflicts of
                                                 interest. How we deal with those conflicts
                                                                                                   about the community’s attitude to financial
                                                                                                   planners than it does about accountants.

by only dealing with planners who are            determines whether the community as a             SERIOUS CONSEQUENCES
not operating under the direct control of        whole trusts us to act in the public interest.    Such are the serious consequences of
a financial institution. Those advisers (it is   If we are trusted to act in that manner,          widespread structural conflicts of interest in
said) are likely to be more independent and      history shows that we will be treated as          the financial planning industry that they
on that basis their form of remuneration is      professionals and allowed to self-regulate        cannot be dealt with by disclosure,
not important, provided it is fully disclosed    (to a greater or lesser extent).                  transparency and education of planners.
and agreed.                                         In the case of accountants and other           These are fine aspirations and the industry
   This sounds plausible enough because          traditional professions, while they are by        is to be applauded for its excellent work
there is no doubt that ownership plays a         no means perfect, conflicts of interest           in introducing ethical standards to tackle
part (to a greater or lesser extent) in the      are minimised in their remuneration               them. Nevertheless, they are not the
behaviour of advisers. However, this             models and (as a consequence) they                ultimate solution to the problem.
analysis fails to acknowledge a deeper           are substantially self-regulated                     That solution lies in public acceptance
problem. This problem is that the main           occupations. Should those professions             and promotion by the industry’s leadership
driver of behaviour in the industry is not       fail the community trust test, then it            of the fact that remuneration models drive
ownership but rather the remuneration            follows that the community (through               behaviour and that the only professionally
models that encourage the sale of products       parliament) will impose a multitude of rules      acceptable remuneration models are those
and the accumulation of funds under              and regulations on them in order to force         that do not rely on the sale of products or
management (FUM).                                compliance with certain standards with            the accumulation of FUM. Only then will we
   Whenever remuneration is paid in the          which the professions have failed to comply       be able to create an environment of genuine
form of commissions, percentage fees             voluntarily.                                      trust between financial planners and their
for service, trails, production bonuses             This problem of trust (or lack of it) stands   clients. This will lead to a much lower level
or any other product-related incentive,          in the way of the financial planning              of intrusive, prescriptive legislation, thereby
poor behaviour and biased advice is likely       industry’s acceptance as a profession. Its        reducing compliance costs, which will
to follow.                                       fundamental cause is the remuneration             ultimately lead to many more Australians
   Of course, it does not necessarily follow     models that have been designed to                 being provided with affordable, trustworthy
that every adviser who is paid in this way       control and direct advisers as part               and independent advice.
will do the wrong thing; but it is a fact that   of product distribution networks, rather             If this solution cannot be achieved
for nearly all of the industry (irrespective     than to create advisers that are trusted as       because the industry concludes that it is
of ownership), remuneration models are           independent professionals. These models           impractical (or because the industry can’t
deliberately designed to drive a bias            have established deeply entrenched                bring itself to face the consequences of a
towards certain products and FUM-related         structural conflicts of interest in the           substantial realignment of powerful vested
outcomes. It should hardly be a surprise         industry, which may be distinguished              interests), then it must be honest enough
when those outcomes are achieved!                from the traditional professions in               to concede that most financial planners will
                                                 which behavioural problems are the                never achieve professional status. Then the
PUBLIC INTEREST                                  exception, rather than the rule.                  only question remaining will be whether the
This does not suggest that bad behaviour            These models even explain why our              community is prepared to accept that close
automatically ceases when advisers               legislators found it necessary to endow           enough is good enough.
are paid hourly rates or annual retainers.       unlicensed accountants with a carve-
We only need to observe some of the              out from licensing laws in the area of DIY        Robert M.C. Brown FCA is a financial
recent excesses of the accounting                superannuation, an initiative that says more      planning specialist.


 46 Charter | August 2008

				
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