In the aftermath of high profile corporate collapses resulting in significant losses for Australian investors acting on financial advice, the Parliamentary Joint Committee on Corporations and Financial Services launched an inquiry into the financial planning industry.
The Federal Government’s response to the inquiry and its subsequent report was to announce the Future of Financial Advice (FOFA) reforms, which are aimed at restoring consumer confidence in the financial planning industry by improving the quality, accessibility and affordability of financial advice and enhancing the professionalism of industry participants.
The FOFA reforms were first announced in April 2010, with the then-Minister for Financial Services, Superannuation and Corporate Law issuing an information pack on the intended reforms. At the time, the Government announced an intention to engage in significant public consultation, and also to set 1 July 2012 as a mooted start date for the majority of the reforms.
More than a year after that announcement - and less than a year out from the proposed date for commencement - draft legislation for public comment is yet to be issued. Instead, an additional information pack was issued in April 2011 to outline changes to the FOFA reforms arising out of the Government’s year of engaging extensively with stakeholders. In this information pack, the Government also announced its intention to issue draft legislation in the second half of the year, and to introduce the FOFA legislation into Parliament before the end of 2011 in order to meet the 1 July 2012 timeframe.
In our first e-Bulletin for this financial year, we had hoped to provide an extensive review of the reforms that are scheduled to commence at the beginning of the next financial year. Instead, in the absence of draft legislation, we have turned to the April 2011 information pack for information on the headline changes to the FOFA reforms.
Remuneration reforms – additions to the ban on conflicted remuneration structures
- A prospective ban on any form of payment relating to volume or sales targets from any financial services business to dealer groups, authorised representatives or advisers, including volume rebates from platform providers to dealer groups from 1 July 2012, hopefully resulting in products for retail investors being judged on their merits.
- Also from 1 July 2012, and to compliment the proposed ban on conflicted remuneration structures, a prospective ban on certain soft dollar benefits of $300 or more (per benefit).
- A prospective ban on up-front and trailing commissions and like payments for both individual and group risk within superannuation from 1 July 2013, although this ban is not intended to extend to risk products outside of superannuation.
- A limited carve out from the ban on conflicted remuneration structures, including volume payments, for employees of Australian Deposit- Taking Institutions (ADIs) advising on and selling their employer ADIs basic banking products, on the basis that the risk of a conflict of interest is outweighed by the cost of changing remuneration structures and ensuring compliance.
Changes to the advice reforms - opt-ins, statutory duties and scaled advice
- A prospective requirement from 1 July 2012 for advisers to get retail clients to opt-into (or renew) their advice agreement every two years, with a disclosure notice to be provided to the client every other year. While this may appear to reduce the administrative burden on financial advisors (the opt-in as originally announced proposed an annual opt-in), it still has the potential to require planners to change their fee structures and implement significant administrative measures and compliance checks.
- The statutory best interests duty for financial advisers announced in the April 2010 information pack is to be refined, with details of the statutory duty hopefully contained in draft legislation when it is issued. However, a limited carve out from this duty for employees of ADIs (in line with the carve out from conflicted remuneration structures) has already been foreshadowed.
- Promoting the availability of limited “scaled advice” on one area of a retail client’s needs, or about a limited range of issues, in addition to the traditional (and in theory more expensive) “holistic advice” provided by financial planners. It will be interesting to see how this proposed form of advice sits with a statutory best interests duty.
Other reforms and areas of review
Other issues being considered under the FOFA reforms include:
- considering the need for, and the costs and benefits of, a statutory compensation scheme for financial services (public submissions are currently being reviewed)
- reviewing the current dichotomy of wholesale and retail clients
- formulating an appropriate replacement to the existing exemption permitting accountants to provide certain advice regarding self managed super funds without holding an Australian financial services licence
- determining whether the use of the terms “financial adviser” or “financial planner” should be regulated
- enhancing ASIC’s powers regarding Australian Financial Service licensing and banning of individuals for breaches of licence obligations
- simplifying Financial Service Guides to ensure more effective disclosure in light of the other FOFA reforms.
Irrespective of whether these changes have a practical impact on the quality of advice being provided, the FOFA reforms could potentially lead to financial planners having to implement significant changes to their operations, fee structures and compliance programs before the start of the next financial year.
As such, financial planners should keep an eye out for the further opportunities to consult with the Government regarding the FOFA reforms, and monitor the progress of the FOFA legislation when it is eventually released to the public. Financial planners and those working with them should be aware of the risk that the FOFA reforms could cause disruptions and lead to additional costs to their businesses during this financial year and plan ahead appropriately.