The financial services industry has been quick to respond to the revised FoFA reform package announced on 28 April 2011.
Generally, most financial associations and life companies have welcomed the introduction of measures to improve the quality and accessability of advice, however the industry remains divided as to which of the reforms will actually achieve this outcome.
The biggest area of concern is the removal of commission for insurance within superannuation, followed by the introduction of a bi-annual opt-in arrangement.
(For a full analysis of the reforms, including comments from the AFA and FPA, see: FoFA Verdict.)
Financial Services Council
The Financial Services Council (FSC) said the reforms would improve the professionalism of financial advisers and build trust between advisers and consumers, but will also increase the cost of financial advice and reduce its accessibility to consumers.
“This package is much fairer than the one announced by the Government last year. The Government’s concessions in a number of areas ensure consumers will continue to receive the benefits of scale and competition,” John Brogden FSC CEO, said.
“The definition of best interest adopted by the Government applies the best interest test to the process of an adviser giving financial advice to their client. This will ensure the consumer and the adviser are clear on how best interest applies and that the regulator has a clear and objective measure to test whether an adviser has acted in the best interests of their client.”
But Mr Brogden highlighted that there were several areas about which the FSC remained concerned.
“We support the ban on commissions on life insurance in default superannuation. But the proposal to allow commissions on directly advised life insurance outside super while banning them on the same product inside super makes no sense. It will distort the market and will likely see less insurance purchased – worsening Australia’s underinsurance problem,” he said.
Industry Super Network
The Industry Super Network (ISN) has congratulated the Government, saying the revised reforms have retained the central integrity and intent of the FOFA package originally announced in April 2010.
ISN CEO David Whiteley said that the announcement demonstrated a commitment by the Government to improve consumer protection and lift the professionalism and community standing of the financial planning industry.
“The hallmark of a professional is acting in the best interests of the client. This precludes the charging of ongoing fees where no advice is given or sales incentives of any description. The opt-in provision and comprehensive ban on sales based volume payments are therefore central to the reform package,” he said.
According to Mr Whitely the level of access to and demand for financial advice will increase under the reforms as super funds increasingly provide financial advice to their members.
“The reforms, if implemented in full, will largely disaggregate sales and personal financial advice and deliver benefits to both consumers and financial planners,” Mr Whitely said.
Association of Superannuation Funds of Australia
The Association of Superannuation Funds of Australia (ASFA) says today’s announcement by the Government is a key step in the reform process for consumers seeking greater access to financial advice.
ASFA CEO, Pauline Vamos, says the reforms will ensure Australians continue to obtain cost-effective access to advice (scaled advice) on single enquires such as what fund to join, whether or not to top up their insurance and what investment portfolio suits their circumstances.
“ASFA is particularly pleased to see the recognition that scaled advice is already a key part of the advisory services provided to members of superannuation funds.
“The codification of scaled advice is welcome as it creates greater certainty for independent financial advisers,” she said.
Ms Vamos added that the decision not to expand the subject areas that can be dealt with under intra-fund advice was a positive one. “Expansion at this time would be a big call and the potential consumer risks have not been fully explored,” she said.
She also acknowledged there was still work to be done to clarify how the statutory best interest duty would operate, and whether the ban on insurance commissions within superannuation would impact on the provision of advisory services on this area.
Joint Accounting Bodies
(CPA Australia, Institute of Chartered Accountants in Australia, National Institute of Accountants)
The Joint Accounting Bodies (JAB) has welcomed the revised reform package saying it has long supported the removal of conflicted remuneration structures and ensuring that advice provided to consumers is in the clients’ best interests.
The accounting bodies believe the removal of conflicted remuneration structures including commissions and volume-based payments will strengthen consumers’ confidence in the financial advice they receive.
They also support the introduction of a two-year ‘opt-in’ requirement and an annual disclosure notice, saying the requirement will ensure that the relationship between a financial planner and client remains transparent and importantly, encourages consumers to take an active role in their financial future.
In its statement the JAB acknowledged the replacement for the current ‘accountants exemption’ as a positive step which “takes into consideration the experience and expertise of accountants”. According to the JAB, this should give professional accountants scope to provide ‘non-product’ financial advice to clients.
MLC & NAB Wealth
MLC & NAB Group Executive, Steve Tucker, said he was disappointed with the decision around the banning of commissions for insurance inside super.
“Commissions have a valid and important role to play as a remuneration option on insurance.
“Insurance is a very different product to investments and applying a ban on insurance commissions inside super will have many consequences, not least of which could be a reduction in the number of Australians who have adequate insurance cover.
“We will continue to speak with the Government on this issue.”
He also urged the government to set an appropriate transition period for the removal of volume rebates.
“Whilst we fully support the need for the industry to move away from volume related payments, this is a substantial change and needs to be managed over a reasonable time frame.
“Removing volume related payments from the system will require some adjustments to business models and will impact advisers, licensees and product manufacturers who currently participate in volume rebate arrangements,” he said.
AMP/AXA
AMP has announced its support of the Government’s intention to introduce a fiduciary-like obligation on all financial planners and advisers across the industry, requiring them to put their clients’ interests first.
AMP Financial Services Managing Director Craig Meller said: “At AMP and AXA, financial advice is at the heart of what we do, and we have long believed there is no question that the pre-eminent responsibility of financial planners and advisers should be to act in their clients’ best interests.
However, Mr Meller said the Government’s proposal to ban commissions on life insurance paid for within superannuation, including income protection and disability cover, goes too far and it is not clear what problem is being addressed.
“The proposal to ban commissions on life insurance within superannuation is ineffective public policy because it will inevitably exacerbate Australians’ chronic level of underinsurance,” he said.
“Without the encouragement and support of a financial planner many people do not appreciate the necessity to arrange adequate insurance.”
BT Financial Group
BT Financial Group (BTFG) has responded positively to the announcement, saying it supports what the Government is trying to achieve around improved transparency and increased investor confidence.
BTFG General Manager of Advice, Mark Spiers, said the reforms are all about raising the professional standards of the industry, which is a good thing.
“The way I see it, each separate piece of change is transformational – whether it’s the new opt-in arrangements or the new best interest duty – but combined they represent unprecedented industry change,” Mr Spiers said.
“With regard to the new requirement for investors to opt-in to their advice agreement every two years, we strongly support the principle that customers should only pay for the service they agree to receive.
“As we move towards the introduction of a two-year opt-in regime, we will make sure this is as simple and easy for our customers to utilise, not an administrative burden,” he added.
The Group has expressed concern over the removal of commissions on life insurance in super as it has the potential to widen the insurance gap for the average working Australian.
Asteron
In an email to advisers, Asteron Executive General Manager, Jordan Hawke, said the current proposals had some “serious flaws”.
Mr Hawke said that banning commissions on insurance inside super would exacerbate the problem of underinsurance in Australia, and hoped that common sense would prevail and the legislation would not be passed.
He reassured advisers that while the scope of change is significant, provisions had been made to support advisers with opt-in and the removal of volume-based incentives, if required.
“We are 100% committed to achieving sensible regulatory outcomes, and to supporting you through the next stages of this process, and the transition you adopt,” Mr Hawke said.
OnePath
OnePath has prepared an analysis of the reform package for its advisers, which it issued via email from Paul Barrett, General Manager, Advice and Distribution, ANZ Wealth.
The group said it welcomed Minister Shorten’s announcement on the FOFA recommendations and the next steps to implementation, but that it was too early for detailed comment.
TOWER
TOWER Australia Managing Director, Jim Minto, praised the proposed ‘scaled advice’ model, saying it demonstrates that the Government acknowledges the value of advice and is keen to offer improved access to it for consumers.
“We have, as an industry, developed processes to significantly enhance access over the past few years with extensive technology and process investment. Now, the way is clear with this new form of advice and these new industry tools to ensure the protection needs of many more Australians can be met,” Mr Minto said.
He also called on the industry to take a proactive approach to commissions.
“The reality is the life insurance commission model has generally served the nation well and has some very good aspects that have endured for a long period. At its heart, there is nothing fundamentally wrong with the commission model.
“However there are perceived conflict of interest and lapse issues now and some change is being forced by these FoFA proposals. We can either continue to just push back as an industry or we can develop changes to make the model viable for the longer term and attempt to win Government confidence in these.
Mr Minto said TOWER the life industry should develop a set of proposals to ensure a sustainable life commission model that resolves these issues and serves all stakeholders – customers, advisers and life insurers alike.
Zurich
Colin Morgan, Chief Executive of Zurich Life and Investments, called on the company’s network of advisers to remain calm in the face of the changes. He reminded advisers that the reforms were still only a proposal, and had yet to pass through parliament.
“The first thing we know is that the proposed reforms are just that – proposals. This is important in two respects:
- The coalition has already flagged its intention to oppose some of the proposals, including the 2 year opt – in and the risk in super commission ban; and
- Passing any legislation through the current parliament without coalition support requires support from a majority of the independents.
“In other words, having the legislation passed in its current form is far from a fait accompli.”
He also pointed out that there were still ambiguities within the Government’s announcement which need to be clarified further, in particular where the adviser – provider relationship is a mixture of risk and investment (or insurance inside and outside of super).
To view the Federal Opposition’s response to the announcement, click here.
