In 2008, Storm Financial and Opes Prime failed. In 2009, the Ripoll Inquiry examined these and other corporate collapses, and financial services and financial products more generally, and reported its findings.
In April 2010, the Federal Government responded, issuing its “Future of Financial Advice” information pack. An exposure draft bill had been expected a month ago. Instead, the Government issued another information pack.
Most FOFA measures are due to start on 1 July 2012. The latest information pack suggests the Government intends to undertake extensive further consultations. Despite this, the financial advice industry has now been told to expect an exposure draft bill in July. If the Government does all of the further work suggested by the information pack, it is hard to see that timeframe being met. The information pack clarified some aspects of the FOFA proposals but significant aspects remain hazy. Without an exposure draft bill, financial advisers and the broader financial services sector are struggling to plan ahead.
The FOFA reform process seems to have become bogged down and, more recently, politicised. The Government seems to be struggling to reconcile its competing objectives of improving the quality of financial advice while expanding access to advice. In addition, in formulating its measures, the Government is potentially creating conflicts of duty and interest for financial advisers, contrary to its own objective of mitigating and removing conflicts as a means of improving advice. It is concerning that the Government’s work so far has yielded so little that is clear and meaningful.
Our summary of the latest information pack is available here. In this article we offer some broader perspectives on FOFA and whether it is on a road to somewhere.
How financial advisers are paid
When the proposed ban on volume-based payments relating to the distribution of retail financial products was first announced in April 2010, many were surprised by its breadth. The ban targeted volume bonuses and rebates paid by product providers, payments for meeting sales targets and volume-based shelf space fees. The financial advice industry’s attempts to narrow the ban through the subsequent consultation process were, on the face of the latest information pack, mostly unsuccessful. Further, the Government is now considering anti-avoidance provisions targeting “equity arrangements”. While it has since emerged that shelf-space fees paid to platforms but not on-paid to dealer groups may have secured a reprieve, whether that reprieve is temporary or permanent remains to be seen.
Beyond the ban being “prospective” and applying from 1 July 2012, the Government has provided no information about how the transition arrangements will work. What will be the trigger point which brings a pre-commencement client into the new regime? If the trigger point is the adviser providing an existing client with materially new or different advice, will it create a conflict between, on the one hand, the adviser doing the “right thing” by giving the client advice they need and, on the other, the adviser’s personal financial interest in the client remaining a pre-commencement client?
The decision to ban commissions on risk insurance within superannuation but not to ban commissions on risk insurance outside superannuation has been contentious. Assume that, for a particular client, insurance cover within superannuation is demonstrably the better option. Will the Government’s policy setting create a conflict between, on the one hand, the adviser doing the “right thing” by advising the client to take the insurance within superannuation and, on the other, the adviser’s personal financial interest in the client taking the insurance outside superannuation?
These are just two ways in which the Government may be creating conflicts of duty and interest for financial advisers. That the Government may be doing so as part of a reform process intended to mitigate conflicts is both ironic and disappointing.
“Scaled advice” and financial adviser duties
The discussion of “scaled advice” and financial adviser duties in the latest information pack leaves some important questions unanswered.
We commented on the proposed new statutory “best interests” duty in our earlier summary. It is easier to identify what the duty will not require, than to identify what it will require. However, the information pack did say this:
“Compliance with this duty will be measured according to what is reasonable in the circumstances in which the advice is provided. What is reasonable in the circumstances is commensurate and scalable to the client’s needs. This means that if the client’s needs indicate that only limited advice is necessary, the adviser is not obligated to provide holistic advice.”
This statement links together three matters:
- whether it is legally possible to provide limited (or “scaled”) financial advice;
- whether it is possible to do so in light of the duty in section 945A of the Corporations Act to have a reasonable basis for advice (where it is personal advice provided to a retail client);
- whether it will be possible to do so in light of the proposed new statutory “best interests” duty.
The first two points have been the subject of much debate by lawyers, ASIC and others since FSR was first introduced.
What is remarkable about the statement quoted above is the implication that the existing “reasonable basis” duty, and the proposed new “best interests” duty, are seen by the Government as covering essentially the same territory – that is, whether financial advice is reasonable and, specifically, whether it is reasonable for advice to be limited advice.
Some important questions flow from this implication:
- will the “reasonable steps” defence to the proposed new “best interests” duty be not so much a defence to an alleged breach of duty but what defines the content of the duty?
- if so, what substantive differences, if any, will there be between the existing “reasonable basis” duty and the proposed new “best interests” duty?
- if the differences are marginal, and if the proposed new “best interests” duty will effectively supersede the existing “reasonable basis” duty, will the existing duty be repealed?
- should the proposed new duty really be termed a “best interests” duty at all, if it is mainly concerned with financial advisers performing their role reasonably?
Finally, it seems “scaled advice” is little more than shorthand for qualifying the existing “reasonable basis” duty. Oddly, the information pack questions whether the intra-fund advice class order should be revoked and, in the next sentence, whether it should be extended.
Is FOFA on a road to somewhere? The signs are not good. The prospects of quality legislative and policy outcomes seem low. Then there is the obvious overriding question, which has come to the fore over the past fortnight: the prospect of FOFA legislation successfully navigating the Parliament. Some in the financial advice industry will be thinking, the longer the FOFA process goes on for, the better.