In brief

The Abbott Government’s Future of Financial Advice (FOFA) reforms were disallowed by the Senate on the evening of Wednesday, 19 November 2014, with crossbench senators Jacqui Lambie (Palmer United Party) and Ricky Muir (Motoring Enthusiast Party) removing their previous support for the Abbott Government's wind-back of Labor's financial advice reforms.

The Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014, that seeks to consolidate the Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014 (FOFA Regulations) into primary legislation, is currently before the Senate. However, its passage is now uncertain given the disallowance of the FOFA Regulations and the volatility of the Senate crossbench.

Status of the FOFA laws

FOFA Regulations

Due to the disallowance, the FOFA Regulations that came into effect on 1 July 2014 have ceased to have effect. Accordingly, the FOFA laws implemented by the former Labor Government on 1 July 2013 have been reinstated.

This includes:

  • reinstating the ‘opt-in’ rule: advisers are required to obtain consent from their clients every 2 years for ongoing fee arrangements entered into after 1 July 2013. Advisers will need to start re-obtaining client consent from 1 July 2015,
  • reinstating the catch-all provision in the best interests duty: advisers are required to satisfy the ‘catch-all’ provision to discharge their duty to act in the best interests of clients. This requires advisers to ‘take any other step’ that would reasonably be regarded as being in the best interests of the client,
  • reinstating the requirement to give all clients fee disclosure statements: advisers are required to give fee disclosure statements to all clients, including pre-1 July 2013 clients;
  • removing the ability to provide ‘scaled advice’: advisers are required to undertake a thorough assessment of a client’s financial needs upon initially advising the client, rather than being able to provide ‘scaled advice’ on a specific issue, and
  • removing a number of exemptions to the ban on conflicted remuneration, including:
  • the balanced scorecard exemption: this exemption applied where remuneration earned from a client was a small proportion of a financial adviser’s total remuneration,
  • the calculated by referenceexemption: this exemption provided that a benefit was not conflicted remuneration where the amount of the benefit was calculated by reference to another benefit that is not considered conflicted remuneration,
  • the general advice exemption: this exemption provided that the ban on conflicted remuneration did not apply to the provision of general advice in certain limited circumstances, and ?
  • the stamping fee exemption: this exemption applies to certain benefits relating to IPOs of listed investment companies and real estate trusts.

New Statement of Advice laws

It is important to note that the new Statement of Advice provisions were implemented through the Corporations Amendment (Statements of Advice) Regulation 2014 dated 4 September 2014, which is a separate instrument to the disallowed FOFA Regulations.

Accordingly, regulation 7.7.09D (‘Obligation to give a client a Statement of Advice’) of the Corporations Regulations 2001 (Cth) is still in force. The regulation imposes a range of additional obligations on financial service licensees in relation to the provision of Statements of Advice, including that the client must acknowledge receipt of the Statement of Advice.

Compliance challenges – what this means for you

ASIC has issued a media release stating that it will take a ‘facilitative approach’ to regulation until 1 July 2015. ASIC acknowledges that financial service providers will need to make systems changes to comply with the FOFA provisions.

The FOFA provisions are civil penalty provisions. If a licensee contravenes a civil penalty provision, ASIC has access to a range of enforcement tools, including pecuniary penalty orders. A court may grant whole or partial relief from liability for breach of a civil penalty provision where a licensee has acted honestly and ought fairly to be excused for the contravention in the circumstances.

The fact of the matter is that changing systems and processes in the wake of the disallowance may take considerable time and adjustments could require considerable manpower. A facilitative approach can take into account these factors, because at the end of the day, the law should recognise the impossibility of overnight fixes.

We would welcome a facilitative approach to regulation that operates as follows:

  • ASIC will pursue breaches where there has been no attempt to comply with the rules post-disallowance,
  • ASIC will not pursue breaches where immediate compliance with the rules is not possible due to systems and other reasons,
  • ASIC will not pursue breaches where compliance will take a reasonable time, due to legitimate operational reasons.

The increased cost of compliance is unlikely, of itself, to be seen as a justification for non-compliance.