When the previous government announced the detail of its Future of Financial Advice (FOFA) law changes back in April 2011 the Coalition’s position was very clear.
We expressed our concern that investors receiving financial advice would face more red tape, increased costs and reduced choice if those laws were passed in full. Our fundamental concern was and remains that over time fewer Australians would be able to access or afford high quality financial advice under Labor’s FOFA.
We made it clear that we supported sensible financial advice reforms which increase access to affordable, high quality advice as well as transparency, consumer choice and competition.
We explicitly supported the introduction of a statutory best interest duty for financial advisers and the ban on conflicted remuneration or commissions which distort investment advice.
However, we also pointed out that any reform in this area needed to strike the right balance between appropriate levels of consumer protection and ensuring the availability, accessibility and affordability of high quality financial advice. We remain concerned that FOFA, as previously legislated, will reduce affordability and accessibility of financial advice in Australia.
Labor’s FOFA changes did not strike the right balance. As the then Minister, Bill Shorten must have known they did not, given he refused to put those FOFA changes through the former government’s own required regulatory impact and cost-benefit assessment.
After those FOFA changes were passed by the House of Representatives in March 2012, we formally announced the policy which the Coalition took to the last election, including:
- the complete removal of the requirement for an investor to keep re-signing contracts with their advisers on a regular basis (Opt-In);
- the simplification and streamlining of the additional annual fee disclosure requirements;
- improving the Best Interest Duty; and
- providing certainty around the provision and availability of scaled advice.
We remain committed to implementing the improvements to the Future of Financial Advice laws we took to the last election.
The two areas which have generated most of the public debate on our proposed changes to financial advice laws centred around two key propositions; both are wrong:
- An inaccurate assertion that we were somehow abolishing or significantly watering down the Best Interest Duty for Financial advisers.
- An equally inaccurate assertion that we are re-introducing commissions for financial advisers.
Best interest duty
The requirement for a financial adviser to act in the best interest of his or her client is enshrined in subsection 961B(1) of the Corporations Act.
That requirement remains in place unchanged. There is no amendment to that requirement at all.
Current subsection 961B(2) outlines the steps an adviser may go through to show that he or she has satisfied the duty to act in the best interest of his or her client.
The first six steps remain effectively unchanged. They prescribe that to act in the best interest of a client, an adviser must:
- the subject matter of the advice sought (whether explicitly or implicitly)
- the objectives, financial situation and needs of the client that would reasonably be considered as relevant to the advice sought on that subject matter;
- Identify the objectives, financial situation and needs of the client that are disclosed to the adviser by the client;
- Where it was reasonably apparent that information relating to the client’s relevant circumstances was incomplete or inaccurate, make reasonable inquiries to obtain complete and accurate information;
- Assess whether he or she has the expertise required to provide the client advice on the subject matter sought and, if not, decline to provide the advice;
- If in considering the subject matter of the advice sought, it would be reasonable to consider recommending a financial product:
- Conduct a reasonable investigation into the financial products that might achieve those of the objectives and meet those of the needs of the client that would reasonably be considered as relevant to advice on that subject matter;
- Assess the information gathered in the investigation
- Base all judgements in advising the client on the client’s relevant circumstances.
This is a comprehensive set of steps, which provide certainty about the application of the best interest duty to both financial advisers and investors seeking financial advice.
The previous government added a further open-ended catch-all requirement, which in our judgement created too much complexity and uncertainty for advisers and consumers.
Labor added a requirement that as well as all of the above, an adviser must take any other reasonable step that would be regarded as being in the best interest of the client given the client’s relevant circumstances.
The practical application of this open-ended catch-all provision is necessarily uncertain by virtue of its design, and means that advisers will not be able to confidently provide quality financial advice to their clients.
Increased uncertainty means increased costs, ultimately for investors seeking access to financial advice, without in our view a proportionate increase in the level of consumer protection.
The Government has been open to suggestions on what other specific requirement may improve the operation of the Best Interest Duty test. However, when asked, even the most vocal critics of the Government’s proposed change to the best interest duty test have not been able to point to one.
Finally, it should also be noted that the best interest duty in section 961B works in conjunction with related obligations in the law:
- Section 961G, which requires the advice to be appropriate;
- Section 961H, which requires an adviser to provide a warning if there is any incomplete or inaccurate information;
- Section 961J, which requires an adviser to prioritise their client’s interests ahead of their own; and
- Section 961L, which requires licensees to ensure that their representatives are complying with these sections.
All these obligations will continue to remain in place.
Given all of the above, the Government will proceed with the Best Interest Duty test in the form as previously outlined in the lead-up to the election and since.
Ban on commissions/conflicted remuneration
The Government has supported the ban on commissions and conflicted remuneration for financial advisers since it was first legislated. At no point has the Government sought to re-introduce commissions or conflicted remuneration for financial advisers.
ABC Fact Check accurately described suggestions that the Government was bringing back commissions or conflicted remuneration for financial advisers as ‘scaremongering’.
Specifically in relation to the government’s proposed changes to the conflicted remuneration provisions, the ABC Fact Check accurately stated that they “do not bring back the type of commissions that financial advisers could receive before FOFA was introduced”.
The previous Labor Government themselves envisaged circumstances where incentive payments to advisers were not conflicted remuneration and would be allowed.
For example, Bill Shorten said in his second reading speech introducing the FOFA Bills that if “a particular stream of income does not conflict advice, then these reforms do not prevent them from receiving that income”.
And in his Explanatory Memorandum to the Bill that if “the remuneration could not reasonably be expected to influence the choice of financial product recommended, or the financial product advice given, … , the remuneration is not conflicted and is not banned”.
Balanced Scorecard arrangements simply clarify that these payments can be made where they do not conflict advice as was always envisaged in FOFA by the previous government.
The Government’s changes also provide that certain incentive payments related to the provision of general advice are not conflicted remuneration.
This is not and never has been designed to bring back commissions for financial advisers.
The Government is moving to put this absolutely beyond doubt by prescribing that any payment related to the provision of general advice cannot be an upfront or a trailing commission.
That is, the legislation and the regulations will provide an explicit prohibition on:
- Any payment made solely because a financial product of a class in relation to which the general advice was given has been issued or sold to the client; and
- Any recurring payment made because the person has given the general advice.
This prohibition comes on top of requirements that:
- The person providing the general advice has to be an employee of the financial product provider and be transparently operating under the name, trademark or business name of the product provider; and
- The person did not provide personal advice (other than in relation to basic banking, general insurance or consumer credit) to any retail client over the previous 12 months; and
- The general advice can only be provided in relation to products issued or sold by the provider, or under the name, trade mark or business name of the provider.
To put absolutely beyond doubt how serious the Government is about not permitting commissions in these circumstances, we also intend to put in place regulation-making powers that may prescribe circumstances in which all or part of a benefit is to be treated as conflicted remuneration.
Therefore, if—contrary to our clear expectation and our intention not to bring back conflicted remuneration—developments in the market warrant our intervention, we could and would address this issue very quickly through regulations. We do not believe this will be necessary.
The above changes are consistent with our long stated policy intent not to bring back commissions for financial advisers and go further than the relevant recommendations of the Senate Economics Legislation Committee inquiry recommendation.
The Government will also make improvements to the FOFA grandfathering provisions to address unintended consequences and to facilitate competition in the financial advice industry, by enabling advisers to move licensees with their clients whilst continuing to receive grandfathered remuneration.
We welcome the positive and constructive approach taken by the Opposition in relation to finalising these revised Grandfathering arrangements to address unintended consequences.
Process from here
In order to provide clarity and certainty for the financial advice industry and for investors seeking financial advice, the Government’s changes to FOFA will be implemented through regulations to take effect on 1 July 2014 where that is legally possible.
This will provide certainty to financial advisers and consumers while the changes are considered in detail by the Parliament.
Under the Corporations Act the Government variously has the power to make regulations; some in ‘prescribed circumstances’ or in ‘particular situations’.
Pending consideration of the various changes of our financial advice laws by Parliament the following changes will be implemented by regulation with effect in the particular period from 1 July 2014 until 31 December 2015:
- Removal of the costly and ineffective ‘opt-in’ requirement which forces investors to complete unnecessary paperwork in order to continue their arrangement with their financial adviser;
- Removal of the catch-all provision of the best interest duty to provide clarity and certainty on how a financial adviser has to comply with the best interest duty;
- Better facilitation of access to scaled advice, thereby enabling investors to access more affordable financial advice; and
- Removing the requirement for fee-disclosure statements to be sent to pre-1 July 2013 clients.
The necessary change to better support the provision of general advice to consumers while putting beyond doubt that commission-style payments cannot be re-introduced will also be implemented through regulation and eventually through legislation.
The following changes will be progressed through amendments to the Corporations Act and not through regulation:
- Clarification of the operation of the volume-based shelf-space fees;
- Extension of the time period advisers are required to send a fee disclosure statement to a client in an ongoing fee arrangement from 30 to 60 days after the client’s anniversary date; and
- Expansion of regulation-making powers in relation to the conflicted remuneration provisions to allow the Government to react quickly to address unintended consequences or if industry were found to be misusing the provisions.
The following changes will be made solely through regulation:
- Balance scorecard incentive payments which do not conflict advice are permitted; and
- Improvements to the FOFA grandfathering provisions to address unintended consequences and to facilitate competition in the financial advice industry.
The final FOFA package has been informed by a further round of consultations by Government and also the inquiry undertaken by the Senate Economics Committee.
This package fulfils the Government’s election commitment to reduce unnecessary regulatory burdens on business and on consumers and promotes greater access to high quality financial advice.
Finally, the Government appreciates and supports the significant efforts that have been made across the Australian financial advice industry in recent years to lift professional, ethical and educational standards.
We will continue to work with all stakeholders on initiatives to further lift professional, ethical and educational standards into the future.
Ultimately what we all want to achieve is that Australians saving for their retirement, or managing their retirement, have access to high quality advice they can trust and which is affordable.