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Following the tabling of the Senate Economics Legislation Committee Report (Report) on the Inquiry into the Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014 (the Bill) in the Senate on 16 June 2014, the Acting Assistant Treasurer and Minister for Finance, Senator Mathias Cormann, has released the Government’s response to the Report.
Senator Cormann has indicated that the Government intends implement its previously proposed amendments to the Future of Financial Advice (FoFA) reforms, with some minor adjustments to reflect recommendations in the Senate Committee’s Report. Those previously proposed amendments supported by the Government and the Senate Committee include:
- removal of the opt-in requirement;
- applying the Fee Disclosure Statements (FDS) prospectively for new clients only;
- removing section 961B(2)(g) (the ‘catch-all’ provision) from the best interests duty; and
- not proceeding with the amendments to allow commissions on group life insurance inside super where personal advice has been provided.
The Government has agreed to the recommendations in the Report to amend the Bill to ban commissions on investment and superannuation and will also amend the grandfathering regulations to remove the current restrictions applicable to financial planners who may change employers or licensees. Whether the Government can successfully rely on its regulation-making power to introduce some of its proposed reforms remains to be seen as the risk of a disallowance motion is high given the hostile Senate it faces.
First announced in April 2010 by the then Minister for Financial Services, Superannuation and Corporate Law, Mr Chris Bowen MP, FoFA was the the Labor Government’s response to the Parliamentary Joint Committee on Corporations and Financial Services' Inquiry into financial products and services in Australia.
FoFA and its implementation has since been shrouded in a cloud of uncertainty. Compulsory compliance with FoFA was deferred originally by 12 months to 1 July 2013. The change in Government created further uncertainty with the announcement of proposed amendments, said to be aimed at striking the “right balance” between consumer protection and cutting red tape to reduce regulatory burden. The Bill and associated Corporations Amendment (Streamlining of Future of Financial Advice) Regulation 2014 (the Amendment Regulation), together introduced in early 2014, became subject to significant debate within the industry and still remain in a state of limbo.
The Senate referred the Bill to the Senate Economics Legislation Committee which subsequently provided the Report, in which the Committee recommended the passing of the Bill subject to certain minor amendments and the addition of further information to the Explanatory Memorandum to clarify the Government’s intention (in particular, in relation to the best interests duty and the conflicted remuneration provisions).
SUMMARY OF THE GOVERNMENT’S LATEST RESPONSE
Broadly, the Government has stated it intends to proceed with implementing the FoFA amendments subject to some minor amendments. The key aspects to the Government’s response released by Senator Cormann are summarised below:
Clcik here to view table.
The Government will also proceed with the other amendments previously proposed, as summarised here, including the removal of the two year opt-in requirement and the requirement for FDS to be sent to pre-1 July 2013 clients.
Senator Cormann’s media release confirms that as previously proposed, the Government will continue to implement the more “time sensitive” changes by regulation with effect from 1 July 2014 to 31 December 2015, including:
- removing the catch-all provision of the best interest duty;
- removing of the "opt-in" requirement so that investors will not be required to renew their ongoing fee arrangement with their adviser every 2 years;
- modifying the best interests duty to better facilitate scaled advice;
- removing the requirement for FDS to be sent to pre-1 July 2013 clients; and
- changes to better support the provision of general advice, while putting beyond doubt that commission-style payments cannot be re-introduced.
The provisions regarding balance scorecard benefit payments and changes to grandfathering provisions will also be made through regulation.
Changes that will continue to be progressed through amendments to the Corporations Act through the Bill include a clarification on volume-based shelf-space fees, extending the time period advisers are required to send a FDS from 30 to 60 days after the client's anniversary date, and expanding the regulation-making powers.
The Bill and the amendments to FoFA do not completely remove all the uncertainty that has been felt across the industry. Given the composition of the Senate at present and from 1 July 2014, it is unclear whether the Government will have sufficient support for these changes to the FoFA reforms and any regulations which are introduced risk a disallowance motion.
Additionally, it is unclear as to whether ASIC’s no action position, announced on 20 December 2013 in response to the Government’s proposed amendments, will apply to all of the Government’s amendments, particularly where there is a drafting amendment following the Government’s consideration of the Senate Committee’s Report.
FoFA still remains a space on which to keep a very close watch, particularly for financial advice services providers who may find last minute tweaks to systems or processes are necessary.