A reprieve on risk commissions outside super, client opt-in every two years and the introduction of a new form of advice headline the new elements of the Government’s Future of Financial Advice (FoFA) reforms, announced overnight.
Following a year-long debate and consultation period for reforms intended to ‘… ensure more Australians have access to high quality and affordable advice’, the new FoFA reforms include:
- A prospective ban on up-front and trailing commissions for both individual and group risk products within superannuation from 1 July 2013 (but risk commissions outside super will continue)
- A prospective requirement for advisers to get clients to opt-in (renew) their advice agreement every two years from 1 July 2012
- A prospective ban on any form of payment relating to volume or sales targets from any financial services business to dealer groups, authorised representatives or advisers
- A prospective ban on soft dollar benefits from 1 July 2012
- Expanding a new form of limited advice called scaled advice, which can be provided by a range of advice providers
- Further investigation as to whether the term ‘financial planner/adviser’ should be restricted under the Corporations Act
Risk Commissions
Up-front and trailing commissions for both individual and group risk advice within superannuation will be banned from 1 July 2013.
Part of the Government’s rationale is that “Fees and charges within superannuation come at the cost of foregone retirement savings and expenditure on insurance is tax deductible to the fund.”
The Government also notes the results of ASIC shadow shopping surveys that illustrate “… in case[s] of poor advice, over half involved poor life insurance advice.”
The ban on conflicted remuneration does not extend to risk insurance outside super, i.e. retail risk commissions may continue.
The benefits for this outcome, cited in the Government’s FoFA information pack, include:
- The quality of advice will improve as conflicted remuneration structures will be removed
- Consumers will have the freedom to pay for insurance advice, but won’t be charged for services they don’t receive
- Accessing insurance through superannuation will remain attractive as preferential tax arrangements will remain
- Those consumers who want alternative payment arrangements have the choice and flexibility of doing so outside the superannuation environment
The Government notes it will continue to pursue client best interest issues in relation to policy churning.
Opt-in
Retail clients will have to agree, by opting in, to ongoing advice fees every two years from 1 July 2012.
This will be supplemented by an intervening annual disclosure notice to be provided to the client detailing fee and service information for the previous and forthcoming year.
The Government notes “A two-year opt-in means advisers are in regular contact with clients, but provides some flexibility regarding implementation.”
Implementation details include:
- The adviser being required to send a prescribed renewal notice no less than 30 days prior to the relevant (two year) anniversary date
- This notice would outline the fee the client paid in the previous year and a description of the services they received as well as fee and service information for the forthcoming year (also alerting the client to the fact that they can opt out at any time)
If the client does not respond to the notice or opts out, the adviser cannot continue to charge an ongoing advice fee.
Answering the question asked by many advisers over the last twelve months about when their liability for advice ceases when a client opts out, the Government states that:
If a client does not respond to a renewal notice, they are taken to have chosen to opt-out 30 days after the anniversary date, meaning the adviser’s liability for ongoing advice ceases at the point that they can no longer charge an ongoing fee.
Banning Volume Payments
The Government advises:
“…if structural reform in the industry is to truly transpire, all conflicted remuneration, including volume rebates from platform providers to dealer groups, must cease.”
One of the intended benefits of this ban on volume payments stated by the Government is that it will enhance competition with platforms competing with one another purely on price and quality for the client.
The scope of this ban includes any volume-based shelf-space fees which are paid from the fund manager to the platform provider and from the platform provider to the licensee.
However, the Government notes this ban does not apply to ‘pure risk insurance’, nor do intended bans on soft dollar benefits apply to risk insurance outside superannuation.
Best Interests Duty
The Government says it recognises that the focus of the best interest duty should be on how a person has acted in providing advice rather than the outcome of that action. It also notes the duty should not be interpreted as imposing trustee-style obligations on financial advisers given the differences in roles between a trustee and a financial adviser.
Further, the Government says compliance with this duty will be measured according to what is reasonable in the circumstances in which the advice is provided. If the client’s needs indicate that only limited advice is necessary, the adviser is not obliged to provide holistic advice.
The Government also stipulates that any financial liability applied as a result of a breach in Statutory Best Interest Duty will be borne by the ‘relevant providing entity’, which mostly means the dealer group licensee.
Introduction of Scaled Advice
‘Scaled advice’ is a term initiated to describe ‘… advice about one area of an investor’s needs, such as insurance, or about a limited range of issues.’
The Government’s motivation to introduce scaled advice is based on ASIC research that indicated many Australians, particularly those who have never previously accessed financial advice, want piece-by-piece simple advice rather than a complete financial plan.
Intended to create a level playing field for all advice providers, scaled advice will be able to be offered by:
- Superannuation trustees (intra-fund advice is a form of scaled advice)
- Financial planners
- Accountants (to be confirmed)
The Government says the creation of a scaled advice structure “… will also open up new growth opportunities for advice professionals by removing the regulatory barriers to the provision of advice for those with simpler needs, including younger investors.”
A consultation paper, dealing with issues surrounding how scaled advice may be provided, will be released mid year.
Restriction of the Term Financial Planner/Adviser
In considering this issue, the Government is weighing up the argument that on the one hand restricting the use of the term financial planner/adviser will lead to certain consumer protection benefits against concerns it may, on the other hand, create a regulatory barrier to entry and unnecessarily increase the cost of advice.
The Treasury will shortly be providing its recommendation to the Government on this issue.
Work on other aspects of the FoFA reforms is continuing, with draft legislation expected to be released for public comment shortly after the middle of this year, prior to final legislation being introduced into Parliament later this year.
In positioning these reforms, Financial Services Minister Bill Shorten said:
“With around 1 in 5 Australians currently receiving advice, the public policy and industry challenge is to ensure more Australians have access to high quality and affordable advice, particularly as we enjoy the gift of longer life. There is little doubt that those who access quality financial advice are better off than those who do not.
In recognition of this, the FOFA reforms focus on improving the quality of financial advice and expanding the availability of more affordable forms of advice. The removal of regulatory barriers to the provision of different forms of advice will open up new markets for financial planners, helping them reach younger customers and those with less complex advice needs.”
Click here to access your copy of the Government’s 2011 FoFA information pack.
To view the response from the Federal Opposition, see: FoFA II Full of Red Tape.
Industry Response
AFA
The initial response from the Association of Financial Advisers (AFA) is that while it supports the intent of the FoFA reforms it disagrees with how a number of them are intended to be implemented. In this regard it says ‘… consumers have been hung out to dry.’
According to AFA CEO, Richard Klipin, the AFA believes the new FoFA measures announced will mean that key financial advice for consumers in future will be:
- Harder to access
- More expensive
- Filled with red tape
In reference to the intention to ban all conflicted remuneration structures inside super but allow risk commissions outside super, Mr Klipin believes the notion of a taxation structure (where insurance premiums inside super are generally tax deductible) driving a remuneration model delivers benefits to no-one and will instead only further exacerbate the existing underinsurance crisis.
On areas such as opt-in and scaled advice Mr Klipin says the devil will be in the detail of the implementation.
On a broader note, Mr Klipin contends the life insurance sector has been caught up in a series of regulatory changes inspired by events in which it had no role. He questions whether the unintended consequences associated with the implementation of the FoFA reforms are consistent with the Government’s stated position of making evidence-based policy decisions based on quality research and consultation.
FPA
The Financial Planning Association (FPA) says a detailed examination of the reforms is required to understand how the package will deliver improved outcomes for consumers and FPA members.
The FPA is specifically concerned about banning risk insurance commissions inside superannuation and legislating opt-in by clients every two years, and will continue its consultation with Government on these key aspects of the FoFA package.
However, FPA CEO, Mark Rantall, said the decision to look at amending the original proposal with regards to the expansion of intra-fund advice and the best interests duty, will apply welcome consumer protection measures in a consistent manner across the industry.
“The FPA has long been calling for further initiatives to improve access and affordability of financial advice to more Australians and supports the announcement to adopt a uniform and consistent approach so that all financial planners have the ability to provide scalable advice to more Australians,” Mr Rantall said.
To view a summary of other industry body responses to the reforms, click here.
I feel that banning commission on Insurance inside Superannuation could endanger the quality of advice. If you put the policy outside super you get full commission, you put it inside super and the client has to pay you for the advice. I am not saying that advisers will do the wrong thing but the client may elect to have the insurance outside so they do not have to find the money for the advice. This will also then mean our advice is being compromised. The commission is paid by Insurance Company and not the client so provided good advice is given and the client salary sacrifices the premium costs the client’s superannuation account balance is not affected by the insurance premiums, only the government is the person that misses out (as paid with before tax dollars and 15% tax rebate to the super fund for insurance premiums).
If the Government is worried about the growth of peoples superannuation then they should reduce the 15% contributions tax.
Richard Klipin is unfortunately correct on all fronts.
Julia and Bill you guys really have your finger on the pulse, what will you bugger up next.
So how do insurers price the cover now? The same life insurance inside Super will cost around 25% less than that outside of Super?
I look forward to joining the first insruer that reintroduces the Tied agency and “structures” remuneration accordingly.
Please describe exactly what insurance inside super means? Does it mean that insurance paid for by the finds within the super account or does it include those (numerous) stand alone term super plans paid for by the individual ? Also for low income earners , will it now be a better idea to hold personal super outside the fund, but still as term super , so that the premiums paid will qualify them for the government co contribution?
Does this now also mean that life cover inside super now constitute a “cost” to the fund and that the member will be better advised to maximize their retirement savings balance by not holding life cover inside super? After all a reduced retirement account balance is what we are supposedly trying to guard against ……..isn’t it?
What a pigs ear! where did the government get its research done?
This will not make risk insurnace cheaper or easier to obtain.
We have been working on a fee for advice structure for about 2 years and the “cheapest” we can get the fee down to is $300 per hour.
Having asked clients if they prefer a fee for service/advice or us receiving commissions all said they did not want to have to put their hands into thier pockets, they couldn’t afford it!
Years ago I suggested Mr Sherry should come and work as a risk adviser to see for himself how we did what we did (and earned our income)
naturally he declined.
All this will mean is more unisured Australians or at best covered by “direct” bought of the telly rubish.
If industry funds can’t get a commission for group risk, that will mean the member charges will have to rise to cover the cost of implementing the cover and servicing its members? Shorten and his mates were always going to screw us!
So if recommend for a client say AXA (or Tower Life or Macquarie etc) life inside super with a linked TPD/Trauma outside super does this mean that the life policy commission will be 0% and the linked TPD/trauma will be upwards of 150%+ to make up the difference??? Banning commissions inside super will do nothing except skew advice as the low an middle income earners who the FoFA is targeted refuse to pay for advice and product providers find ways to make those commissions up for secondary products held outside of super in similar fashion to products splitting one TPD product between super and personal ownership. Banning one and not the other will do nothing.
We always knew the Government was going to bugger up these reforms some how.
The outcomes as outlines will not help “harrrd woorking orst-rail-ian fam-lees”…Julia!!
Thanks for opening the “new markets for financial advisers” in young savers Bill. Thats the market where there is no money to invest and no complex financial planning required. And thanks Bill for killing insurance in super which is the only place many people could afford to have it without paying for advice the insurer paid for the advice. Is super risk ina self managed fund included ? More welfare families to come to you now I guess.
FPA, welcome to the 20th century…. Now I cannot wait until the 21st century when customers will be able to shop online with comoditised risk products and no commissioned hungry sales thugs to deal with. Sales people look at history, car insurance 25 years ago use to be sold through brokers, now brokers are no where to be seen!
What this will mean is the smart Risk Advisers will only deal with the top 15% of clients who see value in a Fee for Service, the rest of Australia’s population can look after themselves. Good on ya Julia and Bill!
So, will advisorsjust charge a fee for service out of the super fund in addition to any investment fee? That will still see a reduction in super funds.
What a dumb idea this is.
How do the insurance/super rules affect retail insurance only super products? They have no account balance which can fund premiums.
These changes appear to have been announced by the Minister without the benefit of any modelling as to the impact on the Federal Budget. The best indication is that the costs to the revenue side of the budget will be in the order of $1,5bn as Financial Services organisations start to dump staff, lower levels of risk insurance are written, and more people move to SMSF’s. The Treasury modelling should be released and if it is not then this will confirm that it has not been done. There appears also to be no testing of the impact of these changes on small businesses in Australia who will be looking to the Minister for compensation. In summary terms not very well thought through
How predictable, step 1 is ban commissions within super, step 2 will be ban all risk commissions. I told you so.
This current shambles of a government is being driven by the greens on many things and the looney lobby of industry super funds etc. on the financial services front. Now we will start to see how the you beaut fee for service lobby outcome will disadvantage most Australians.
The banks and big end of town will become more dominant and the salaried advisers are the winners.
Is it worth still fighting, probably not unless we get a new competent government.
Oh well another couple of years and I’m out of it.
Shortened sighted – If, as the Minister points out, only “around 1 in 5 Australians currently receiving advice”, and given that the relative cost of advice today has been promulgated in a post FSR environment, then I fail to see how the mulititude of Australians that need advice will voluntarily seek it post FOFA. Let’s see the Treasury modelling that confirms that “more Australians will have access to high quality and affordable advice”.
Making it harder for people to attain quality advice will only put a greater strain on welfare when inadequate benefits are available at claim.
Part of the stated rationale for the change in commissions is that the quality of advice will improve and consumers will have the freedom to pay for insurance advice. This presumes that clients are aware of the complex considerations associated with risk insurance. The most usual outcome of client meetings is that there is little awareness of the benefits of carefully weighing different risk options such as level vs stepped premiums, drawbacks and benefits of unitised cover, any or own occupation considerations, tax outcomes and options within different policies, to name a few. Without knowledge of the ramifications of different choices a client is unable to make an informed decision.
For the most part clients that I see have taken a stab at insurance decisions without clear objectives and with little idea of how to determine the best options for their circumstances. After a client discussion on risk the most common reaction is one of amazement that so many complex considerations were involved.
In summary this means that the FOFA verdict has failed in its intentions. Fewer clients will seek advice if they have to pay directly as there is little understanding on an individual basis of different risk outcomes. Government advisers have failed to understand the industry, failed to understand the benefits accruing to individuals receiving correct advice and the industry has failed to educate them.
Its bad enough that the sovereign risk of investing in Australia has increased dramatically over recent years but now the Government seems intent on ruining local industry, as well as making services unaffordable to the consumer. Real Estate agents look out – next they will be banning commissions on the purchase of property within SMSF’s.
What now for the future of a once great industry?Some very hard working people have been shafted by public servant/politicians.It is wrong that people’s businesses can be decimated by people we, as tax payers, employ.BUT every dog has his day Mr Shorten and I for one will be advocating a change of gov’t to my many hundreds of clients each time I see them as a result of your opt-in rule.
Tax Tax Tax …. is the biggest expense within every hard wroking Ost-railian worker’s super fund Julia & Shorty, NOT Commission !!! I know its hard for you get your heads around that fact !!! Drop the 15% and then you might be contributing towards the wealth of Ostrailian’s, rather than the reduction of wealth. Your making more and more people suffer financial hardship and becoming more reliant on the wellfare system – Centrelink !!!! Great iniative Bill….. Please show me another industry that is so targetted… When will we be able to “opt-out” of utilities for power & water when someone goes overseas for 6 months, “opt-out” of property management fees(10% commissions !!) and rental/lease agreements, land line rental, general insurance renewals etc etc etc. I pray the Libs can block this pathetic proposal by pathetic un-accountable pollies.
A typical Labor reform. The self employed, who want to protect themselves and their families with Life Insurance written as a stand alone risk product, will now be disadvantaged. If you are working in your own business, when you sell your business and retire that capital IS your superannuation benefit. And the Govt misses out on the 15% contribution tax. Brilliant!
So, a customer will now pay nearly double the premiums in the first year. An advice fee and the first year premium. How silly.
I haven’t seen the word ‘grandfather’ anywhere. Who’s happy about having made the choice to go down the hybred or level commission path now?
Be very aware under Shorten’s revised FoFA that advisers will always remain liable for advisory services already rendered to the client. “Only” the liability for providing on-going advice ceases when the client does not renew the opt-in provision. It shows an utter lack of understanding by Shorten that the “management of risk” is not a static issue. It is on-going and dynamic in nature and needs to be altered on a regular basis to suit the ever changing circumstances.
Gosh, once again the consumer gets screwed one way or another! Who on earth can afford to pay $300 an hour for financial advice, most aussies can’t afford a doctor at $80 per hour and with the rising of EVERYTHING these days. Maybe those who earn $200,000 a year and what happens to those who cannot afford such a luxury. The Government should think twice about ‘reforms’ and ask ALL Aussies not just those who can retire comfortably, like our politicans !!!!
However i can go to an ‘Investment Property Seminar’ see an agent who can sell me an’Investment’ Property without any concern to my affordability past the initial sale. The agent can quote a return based on differing factors and does not have to explain it. I can then borrow hundreds of thousands of dollars and even use my current home as security to the purchase. At no time am I given any advice nor is anyone responsible should the ‘Investment’ fail. On top of this the agent will have pocketed a sales commission of about 3% and sometimes for about 8 hours work. But of course that doesn’t mean I have been sold the highest priced property he can sell me even if it is in an area that may not do well!! This legislation is about this government trying to make itself look like it is doing something at the expense of real Financial Advisers. This is the only industry who has to advise the client of their income from an action. Build a house and go see the builder and ask him how much the materials cost him before he sells you the house and see how you get on. Whilst this legislation will drive some advisers[Good as well as bad] out of this industry it will do nothing to stop things like ‘Storm’ happening again.
The less than average and average Australia will not be able to afford fees for advice, research, implemenation etc.
The current model works well and is not broken.
The insurers are happy to pay us a fee for introducing business to them.
Why does this need to be changed?
When all my clients sask why are you charging me fees, EVERY YEAR, which impact on the family disposable income, I will explain why Bill and Julia.
Its not the insurance premiums that are depleting the super balances, it’s the 15% contribution tax on every deposit, every year.
Great comments above, another quick thought, if I recommend a client invest in any particular super/investment fund & they choose to opt-out of my advice, in order to avoid liability shouldn’t I sell down the investments (costing the client) & then make the client decide where they want to invest their savings. At this point my advice has ceased?
Removing insurance commissions is ridiculous!
I agree with all comments made by collegues. This is just absolute madness if Shorten believes that this will be better for all Australians. What rubbish ! I have paid claims to a number of average Australians over the past few years and not one of them complained about commissions rather the great assistance my office gave them and their families. They want transparency, well you dont get that inside industry funds, but then again we are not playing on level fields are we, there are rules for them and rules for us. Congratulations on stuffing up yet again Julie and Bill.
The kindest description I’ve heard said of this Government is “well intentioned buffoons”. Advisers have done far more to protect Australians than this Government will ever achieve through its so called consumer protection measures. If they think for a moment that destroying the advice industry will somehow help then its time Julia, Bill and co found a new job
Sadly, the Australian Government has lost the plot no matter which major party is in office as they no longer serve the people of Australia but serve the major Corporations of any origin including themselves.
Here are my thoughts – which are shared by DKN Financial Group. The removal of commissions from insurance cover established in superannuation funds is not a good outcome for the average member. Lower income (typically younger) members will find it difficult to pay for advice that under the present arrangements, makes it possible for them to have a Financial Planning relationship. For many Planners the risk commission received from superannuation makes it possible to maintain, service and (where a claim arises) advocate for these members economically. Any resulting reduction in premiums will fall short of the cost to service these fund members with the outcome only amplifying the state of underinsurance in Australia and increasing the cost of welfare in the longer term.
The Government is waiting to see the reaction to their proposals.
They always had their agenda and were always going to push ahead with their grand plan.
There has been some excellent and concise feedback with solutions that make sense.
Alas,as a Industry,we have spent millions of dollars over the last year, in the mistaken belief that this Government was listening, or at best, even trying to understand the implications of their misguided plans.
The mining industry is a example of the power of co-operation, when they were threatened.
They stopped their bickering and took on the Government as a cohesive unit and the Government backed down.
There are aspects of the FOFA regulations that are worthwhile and have merit.
However there are other area’s that are ridiculous and must be rejected, with no negotiation.
Waiting for bad legislation to be passed and then just watching the ensueing destruction of lives,is not acceptable.
The solution is simple. There is a line in the sand that must not be crossed.If it is,then as one voice,fight and do not back down.
Deliberate, or just misguided bad legislation, is not to be accepted.
The banning of risk commission in super will only lead to insurance not being sold at all.
Unlike the investment side where clients can rate the value of your advice and are prepared to pay a fee for performance and good advice, whereas the risk premiums actually reduce your remuneration on the investment side plus clients may not be prepared to pay a fee outside super for a risk product inside super.
Unfortunately clients do not value insurance until a claim occurs.
As holistic advice is no longer required many financial planners will opt for limited advice covering investment planning only and ignore risk completely as it will be just too hard to justify a fee for service model.
All the government has achieved is to create more “Conflicts of Interest” by this proposal.
They would have been better served in introducing a flat level commission for all risk products both inside and outside super.
Flat commission would correct the conflict of interest and resolve twisting at the same time.
When the Federal Government said they were going to limit gambling on the pokies the Clubs Association commenced a massive lobbying exercise and got independent MPs Oakeshott & Windsor to say they won’t be supporting legislation that harmed clubs in their electorates. So Guess what the FPA & AFA need to do on our behalf? They need to see the Federal Independent MPs and get them to stop the bans on risk commissions in super and the Opt in scheme when legislation is presented to the House of Representatives later this year. In the meantime all Advisers in the electorates of the Independent MPs need to see these guys and tell them about the massive impact it will have on consumers, small businesses and those employed by small business! The Opt in is a real red herring. After 1 July next year clients can Opt out of getting advice (and therefore paying an Adviser Service Fee) at any time; why do they need to keep Opting in every 2 years when they have the choice of leaving at any time?!
The ban on commissions in super is being implemented because apparently it is meant to stop the erosion of members’ super balances; and yet we can charge an Adviser Service Fee for super advice which has the same effect! This argument doesn’t stack up. Another argument being put by the Government (for banning commissions in super) is because there have been instances of misselling; if so why weren’t commissions banned in the UK when they looked at the issue there? Abuses aren’t restricted to Australia! Surely if commission payments lead to misselling then all commissions in every business (real estate, retail shops, sales jobs, etc.)should be banned!
The simple truth is you have a Minister who is an ex Trustee of Australian Super (Industry Fund) putting in place the ideological agenda of the Industry Fund movement! The Industry Funds want to tie the hands of Financial Advisers so they can hang onto their members’ monies for longer! Please see your local Member of Parliament and put your case to them! Don’t accept these proposals lying down!
Dear Minister Shorten,
Your bureacrats from Treasury, at our several meetings said ” the Minister is listening, the Minister understands and the Minister will make up his mind in due course”
The FoFA proposals prove that you were never listening and your mind was made up before the consultation began. Pity you were so intent on wasting the time of so many of my compatriots rather than coming up with the solution for the mates of your past history.
The good news for all of us is that you and your blundering, purpose driven Government will soon be part of a legacy known as the WORST Federal Government ever, and that will be your historic entry.
Please dont waste my time again.
Will the government now make financial advice TAX DEDUCTABLE so those that need it most can afford it. They say that they want to make financial advice accessible but then remove a payment mechanism that helps the cash strapped. What a joke! Well if you want more uninsured people roaming around putting stress on the public system when they get sick or injured, then keep up the ridiculous work!
They say that this will get rid of conflicts of interest. The only conflict of interest that I can see is that the unions set up the industry funds and the unions fund the Labor Party. This will make industry funds stronger, advice unaffordable and put many hard working advisers out of business. Worst government in Australia’s history!
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