Last Wednesday, on a dramatic day in Canberra, Motoring Enthusiast senator Ricky Muir and newly independent senator Jaquie Lambie (who back flipped on their previous positions), and two other crossbench senators, voted against the Government’s proposed changes to financial advice laws.
The Future of Financial Advice (FoFA) laws have been a moveable feast since their introduction on 1 July 2013. The Government’s proposed changes to FoFA have already been in effect in practice as they were passed by regulation, not legislation, in July this year. Last Wednesday’s developments mean that the financial services industry will have to revert back to the original FoFA practices (pre-July 2014), demonstrate the uncertainty surrounding these laws and will only add to the confusion for the financial advice industry and consumers alike (at least in the short term).
The group of senators that rejected the Government’s changes have dubbed themselves the ‘coalition of common sense’. They say they are protecting the interests of consumers. Consumers and advocates for consumers are lauding the decision. Victims who have been left reeling from negligent or dishonest financial advice have also come out in support of the Senate’s decision.
The Government says that its proposed changes would have reduced red tape and kept costs down. There is a perception, particularly held by consumer groups, that the Government’s changes would have put the balance of power in favour of the financial advice industry. Many viewed the changes as watering down the protections and safeguards for consumers. Independent senator Xenophon described the Government’s proposed changes as “unambiguously bad for consumers” and senators Lambie and Muir were apparently heavily persuaded by the testimony of victims of TimberCorp at last week’s Senate hearing into the scandal.
The financial services industry will understandably not welcome the move. The inconvenience and confusion of immediately having to realign itself with the previous FoFA laws (that existed prior to July 2014) will create palpable stresses. The industry claims that it will be thrown into disarray and will face millions of dollars in extra cost to facilitate compliance. Financial Services Council director of policy Andrew Bragg told the Financial Review that “the changes will make advice more expensive and less affordable” and also criticised the suddenness of the reversal.
WHAT ARE THE CHANGES?
The aspects of the original FoFA laws that will now come back into effect and that are likely to have the greatest impact on the financial services industry and consumers are:
THE ‘OPT IN’ RULE
The ‘opt in’ rule imposes an obligation upon financial advisors to be formally re-engaged by their clients (by written consent) every two years. This rule was devised to protect consumers from lazy advisers that were picking up trailing commissions from their clients. The financial advice industry believes there will be significant disruption in complying with the ‘opt in’ rule as hundreds of thousands of clients will have to be contacted. There is also doubt as to whether all financial advice practices will have systems in place to ensure compliance with this rule.
THE ‘BEST INTEREST’ DUTY
Advisers will have to revert to satisfying the catch all duty to act in the ‘best interest’of their client. The Government is concerned that this duty is too broad and leaves advisors vulnerable to legal action. Its proposed changes scrapped the catch all provision in respect of ‘best interest’.
Financial planners will now have the added burden of satisfying this higher threshold and will have to ensure that they maintain adequate records and provide advice that enables them to demonstrate that they are acting in the best interests of their clients.
There will also be tighter restrictions on the types of payment that banks and wealth management companies can make to financial advisers.
This is a very divisive issue and one that involves a lot of emotion for many people – particularly those who have been victim to negligent or fraudulent financial advice.
Given the recent scandals in the financial planning and advice industry (e.g. TimberCorp, Storm Financial) it surely is agreed by consumers and the financial planning industry alike that it is imperative that steps are taken to restore consumer faith in the industry. The question is ‘at what cost?’ Protocols and safeguards, like the ‘opt in’ rule and the ‘best interest’ duty, are likely to increase industry costs. Accordingly, although the decision of the ‘coalition of common sense’ may provide consumers with more protection it is also likely to mean that consumers will have to pay more for financial advice.
Given the tumultuous history of the FoFA laws we suggest that you ‘watch this space’.
The Minister for Finance, the Honorable Senator Mathias Cormann, has only today issued a media release advising that the Government has reached an agreement with the Opposition in respect of reinstating elements of the disallowed FoFA reforms to address some unintended consequences of the current legislation. The media release can be found here.