Further changes to the Future of Financial Advice (FOFA) reforms have been announced today by the Assistant Treasurer, Senator the Hon Arthur Sinodinos.
The media release outlining the changes makes the statement:
“The Government supports the principles of FOFA, however the previous Government’s reforms went too far, creating unnecessary complexity, imposing significant burdens on industry and reducing the availability and increasing the cost of advice to consumers.”
So what’s changed?
It appears the Government has taken heed of the recommendations of industry lobbyists and has proposed a raft of changes which are expected to be well-received by the industry. Draft regulations have not yet been released but are anticipated for early in the New Year.
The key changes can be separated into three categories:
- Best Interests Duty;
- Conflicted Remuneration; and
- Removal of ‘opt-in’.
Best interests duty
The proposed changes soften the overly stringent requirements of the ‘best interests duty’ currently imposed upon advisors. Most notably, the “catch-all” provision (in subsection 961B(2)(g)) is proposed to be removed.
In its current form, the catch-all provision requires advisors 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.”
This proposed change will hear advisors breathing a sigh of relief as it should give them more certainty that they are satisfying the best interests duty.
It is also proposed to amend the best interests duty to explicitly allow for ‘scaled advice’. This proposal will allow clients and advisors to agree on the scope of the advice whilst ensuring that the advice remains appropriate.
A number of changes have been proposed for the conflicted remuneration provisions under FOFA, including exempting general advice so that the ban on conflicted remuneration applies to personal financial advice only.
The existing grandfathering provisions will also be amended to ensure that advisors are able to move between licensees and still enjoy the benefits of grandfathering. The Government acknowledges that the current grandfathering provisions have had the unintended effect of reducing competition in the industry by locking advisors into their current licensee.
Amendments will also be made to clarify how grandfathering applies to the sale of a financial planning business and when employed advisers become self-employed advisors.
Further changes to the conflicted remuneration provisions include changes relating to life insurance inside superannuation, the ‘execution-only’, training and the basic banking exemptions and clarification of how the ban applies to volume-based shelf-space fees, performance bonuses and balanced remuneration structures.
Removal of ‘opt-in’
It is proposed to remove the ‘opt-in’ requirement in full, thereby relieving advisors of unnecessary paperwork and the need to seek the client’s agreement every two years to charge ongoing fees. The proposed changes also attempt to streamline the requirements relating to annual fee disclosures (in particular, the possible “retrospective” application of the fee disclosure obligation), clarification of the “client-pays” exemption and amendments to the application of the wholesale and retail client distinction.
So what's next?
FOFA is still very much a moving beast; however it is reassuring to see that the Government has responded positively to the recommendations made by industry groups.
ASIC has been quick to comment on the proposed changes from a regulatory perspective, confirming that “ASIC will not take enforcement action in relation to the specific FOFA provisions that the Government is planning to repeal.” ASIC will also continue to take a “facilitative” approach to FOFA until mid-2014.
For a more detailed look at the proposed changes, see Attachment A to the Assistant Treasurer’s media release. A follow-up article will provide a detailed explanation of the practical implications of the changes once draft regulations become available.
Our financial services team is involved in industry consultation on FOFA and is well-placed to assist you in navigating its complexities.