The new Abbott government has recently set the direction for its pre-election commitment to scale back the former Labor government’sFuture of Financial Advice (FOFA) reforms, a move much anticipated by financial advisers, insurance brokers and their insurers. On 20 December 2013 the Treasury released a consultation draft of the Corporations Amendment (Streamlining of Future Of Financial Advice) Bill 2014(draft bill), which has the stated aim of simplifying the regulatory obligations and reducing compliance costs for both advisers and consumers. The draft bill essentially adopts the dissenting recommendations put forward in February 2012 by the Coalition members of the parliamentary joint committee that reviewed the original FOFA bills.
The draft bill proposes four key amendments to the FOFA legislation:
- Removing the section 961B(2)(g) “catch-all” component of the best interests duty;
- Broadening and clarifying the exemptions from the ban on conflicted remuneration;
- Removing the renewal notice “opt-in” requirements; and
- Removing the requirement to provide yearly fee disclosure statements to pre-FOFA clients.
The Proposed Changes
Modification of Best Interests Duty
Section 961B of the Corporations Act 2001 (Cth) (Corporations Act) requires the financial advice provider to act in the best interests of the client. Subsection 961B(2) prescribes seven steps that the provider must take to discharge its duty. Subsection 961B(2)(g), known as the “catch-all” provision, requires the provider to take “any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client's relevant circumstances”. Subsection 961E supplements the catch-all provision by prescribing a broad test for determining when a step is in the client’s best interests.
The draft bill proposes to remove the catch-all duty by repealing sections 961B(2)(g) and 961E entirely. According to the explanatory memorandum to the draft bill, the government considers that the catch-all provision hampers provision of low-cost “scaled advice”, that is advice limited to a specific area of the client’s needs. It is proposed that clients will remain adequately protected by the remaining six steps prescribed under section 961B(2).
The draft bill also proposes to clarify and extend the exemptions from the best interests duty granted under subsections 961B(3) and (4) in respect of advice relating to basic banking and general insurance products.
Exemptions from Ban on Conflicted Remuneration
The most significant change proposed to the conflicted remuneration ban is the exemption of “general advice” from the ban. Under the current law, the ban applies to remuneration received in relation to the provision of both “personal advice” (financial product advice that takes into account the client’s objectives, financial situation and needs) and “general advice” (financial product advice that does not take the described personal factors into account). According to the explanatory memorandum, the government considers that the application of the conflicted remuneration ban to general advice unnecessarily burdens the industry by capturing staff not directly involved in providing advice to clients.
The draft bill proposes to amend the definition of “conflicted remuneration” contained in section 963A of theCorporations Act by omitting the reference to general advice. Under the draft bill, the ban will apply to provider remuneration that could reasonably be expected to influence “the personal advice provided or the financial products recommended to a retail client in the course of providing personal advice”.
The draft bill proposes to enact broader exemptions to the conflicted remuneration ban in the areas of: life risk insurance offered inside superannuation, execution-only services, education and training, basic banking products, volume-based shelf space fees, and certain client-to-adviser benefits.
Removal of Renewal Notice Requirements
Under the current statute, advisers must ask retail clients to renew their ongoing fee arrangements every two years by sending a renewal notice that complies with section 962K(2). An “ongoing fee arrangement” exists where a retail client is given personal advice and charged an ongoing fee during a period of more than 12 months. The renewal notice provisions apply only to new clients from 1 July 2013 onwards, meaning that the first renewal will not be required until 1 July 2015. If the client decides not to renew, or does not respond to the renewal notice, then the ongoing fee arrangement terminates. The government considers that the current law unnecessarily increases costs, red tape and uncertainty.
The draft bill proposes to remove the requirement for an adviser to provide a renewal notice to a client. This will create an “opt-out” system, whereby any ongoing fee arrangement will continue unless the adviser or client terminates the arrangement.
Yearly Fee Disclosure Statements for Pre-July 2013 Clients
The Corporations Act currently provides that advisers must give all retail clients who have an ongoing fee arrangement a fee disclosure statement (FDS) which shows the fees paid by the client, the services the client received, and the services the client was entitled to receive, during the previous 12 months. The FDS obligations currently apply to both new and existing clients.
The draft bill proposes to remove the requirement for provision of a FDS where the ongoing fee arrangement was entered into before the FOFA reforms commenced on 1 July 2013. The intention is to avoid the significant cost to the industry associated with retrospective application of the FDS obligations.
Implications and Next Steps
The government accepted submissions on the draft bill until 19 February 2014. A bill in form similar to a draft bill is expected to be presented to parliament shortly thereafter. ASIC has announced that it will take a “facilitative approach” until mid-2014; it will not take enforcement action in relation to the specific FOFA provisions that the Government is planning to repeal.
The new reforms are expected to save the financial industry an estimated $90 million in implementation costs and reduce annual compliance burdens by an average of approximately $190 million per year. If the draft bill is enacted in its current form, then financial planners and their insurers should review their arrangements to ensure they benefit from the compliance-cost reductions that are expected to flow from the proposed deregulatory changes.