The Government has released for consultation draft legislation and regulations to amend the Future of Financial Advice (FoFA) reforms (see: FoFA Changes – Draft Legislation Released). There appear to be no major surprises in the legislation, with the Government delivering on its previously-declared intention to remove opt-in, improve the best interests duty, and make changes to the conflicted remuneration ban for insurance inside superannuation.
The industry has welcomed the release of the draft amendments, with many praising the Government for its timeline. Financial Planning Association CEO, Mark Rantall, said the Association would carefully consider the draft amendments to ensure they do not introduce any unintended consequences. Brad Fox, CEO of the Association of Financial Advisers, said at first glance it appeared the changes were in line with the intent expressed by the Senator.
The following summarises a number of the key changes contained within the draft legislation and regulations:
Conflicted remuneration
A number of changes have been proposed to the existing conflicted remuneration requirements, including a change to the exemption for life insurance commissions inside superannuation.
Under the proposed new law, the exemption provided for monetary benefits paid in relation to life risk insurance policies offered inside superannuation will be broadened so that the ban on conflicted remuneration will only apply in relation to monetary benefits paid with respect to:
- Life risk insurance products for MySuper members, and
- Life risk insurance products offered inside other (non-MySuper) superannuation products in circumstances where no personal financial advice has been provided to the member regarding life risk insurance
The Explanatory Memorandum that accompanied the draft legislation goes on to clarify that the new law also provides that a life risk insurance product is considered to be provided for a ‘MySuper member’ if the product is issued to the licensee (or custodian) of a superannuation fund for the benefit of the ‘MySuper members’ of that fund.
Opt-in
The Government has proposed the removal of the entire section of the existing legislation that relates to the opt-in requirement.
Therefore, under the new law, an ‘opt-out’ system would apply, where any ongoing fee arrangement continues to exist unless the arrangement is terminated by either the client or the adviser.
Fee Disclosure Statements
The Government has also proposed that the section of the existing legislation that requires advisers to provide an annual Fee Disclosure Statement (FDS) to all ongoing fee-paying clients be removed. This would mean only clients who entered an ongoing fee arrangement with an adviser after 1 July 2013 would need to receive an FDS.
However, the Government has left the remainder of the FDS legislation intact, meaning no further changes have been proposed to the contents of the FDS or how it should be issued.
Best interests duty
The draft legislation makes a change to the existing ‘safe harbour’ steps used to help advisers determine if they are compliant with the best interests duty. The ‘catch all’ clause has been removed, leaving six steps.
In addition, the Government has proposed the addition of wording which clarifies how those who provide scaled advice can comply with the best interests duty.
The Explanatory Memorandum that accompanied the draft legislation proposes that: ‘A provider and their client will discuss the scope of any scaled advice to be sought by the client as part of their initial discussion. This discussion may occur at the same time the client discloses some preliminary information to the provider on their objectives, financial situation and needs, but before the provider commences their investigation into the client’s relevant circumstances in order to formulate the advice.’
Grandfathering
The regulations which apply to the grandfathering arrangements for existing clients are to be altered so that advisers who move licensees can still continue to receive grandfathered benefits.
Specifically, the draft regulations set out that payment of grandfathered benefits can continue when:
- An authorised representative of one licensee becomes an authorised representative of another licensee after the application day of the ban on conflicted remuneration
- A representative (for example, an employee) of a financial services licensee becomes an authorised representative of the same licensee
Advisers can click here for access to the Government’s draft amendments and additional explanatory documents.
Consultation on the legislation and regulations is open until 19 February 2014.
