The majority of the Government’s proposed Future of Financial Advice reforms deliver “significant enhancements”, but one area of the advice market has been left out in the cold, according to the Association of Financial Advisers (AFA).
In its submission to the Government’s draft FoFA legislative amendments, the AFA said the changes would make financial advice more accessible and more affordable. However, the Association remains concerned that the needs of advice specialists who deal in the corporate super and group insurance markets have not been addressed.
Highlighting the wide range of services offered by corporate super specialists, such as group insurance recommendations for employers and claims services for members, the AFA argued that these professionals should still be able to be remunerated via a commission model.
…corporate superannuation advisers should be able to be remunerated for providing these services
‘Even with the proposed changes (to conflicted remuneration) it will not be possible for corporate superannuation advisers to be remunerated with respect to the provision of advice and related services for the establishment and ongoing servicing of insurance arrangements for employer superannuation plans. Employers and the members of their employer superannuation plans should have the ability to access advice and ongoing services on insurance, and corporate superannuation advisers should be able to be remunerated for providing these services,’ the Association said in its submission.
‘At the core of the corporate superannuation problem is that advice is provided to the employer, but the fees are typically deducted from the members account. This means that the existing ‘client pays’ exemption does not apply. Where fees are paid for ongoing services after the recommendation of the fund, it is arguable that this is conflicted remuneration. When considered in the context of the MySuper rules, this presents a fundamental obstacle to corporate superannuation advisers being able to provide services to new clients. We believe that the best option is to provide a further extension to the ‘client pays’ exemption that would provide for this to cover fees agreed with the employer on behalf of members.’
The AFA also called for a number of other tweaks to the proposed reforms, in order to deliver transparency and a level playing field:
FDS
The AFA has requested an extension of the timeframe within which an adviser must issue a Fee Disclosure Statement (FDS) to a client. Instead of the 30 days currently set out in legislation, the AFA said a 60-day window was more appropriate, and would provide a range of benefits, including:
- Greater accuracy in the statements because their production will not be rushed
- More time to enable advisers to deliver the FDS to the client via a face-to-face meeting, where they can further explain the contents of the document
- Allowing for any delays which occur as a result of communications between product providers and licensees
Grandfathering
The AFA has proposed that the new regulations relating to grandfathering – which will enable advisers to move licensees while still retaining existing conflicted remuneration benefits – be re-worded to ensure they deliver on the Government’s intention. At present, the draft wording supplied by the Coalition Government limits the grandfathering of benefits to those licensees that existed prior to 1 July 2013. The AFA said it was just as important for the competition and growth of the industry for new entrants to the licensee market to be able to offer existing representatives who elect to join them the same benefits as existing licensees.
In addition, the AFA recommended that the regulation relating to grandfathering in the case of the sale of a business be clarified so that grandfathering will also apply to the sale of a book or register of clients.
Training support
In order to support the training and education of financial advisers, the AFA is calling for provisions to be made that enable product partners to support licensees in the operation of training and education programs for financial advisers.
This will have a negative impact upon the overall level of training and education available to financial advisers
‘Under the FoFA regime, these partnership payments are now potentially conflicted remuneration,’ the AFA explained in its submission. ‘Whilst licensees have the opportunity of leveraging Regulation 7.7A.14, which provides an exemption for soft dollar benefits that are for the purpose of training and education, the complication is that this only applies to non-monetary remuneration. This means that the partner would need to pay directly to a third party (event venue, caterer or speaker), and they can’t pay the licensee directly. This makes it very difficult to structure a professional development program as these programs are typically agreed a year in advance, well before any specific program costs can be established.
‘The outcome of this is that many of these partner programs are in the process of being severely cut back, and there will be a resultant decline in the availability of these important training and development events. This will have a negative impact upon the overall level of training and education available to financial advisers. It is also likely that there will be a resultant decline in the use of venues and related training industry services.’
Intra-fund advice
Whilst the AFA supports the Government’s proposal to define ‘intra-fund advice’ in the Corporations Act, the Association called for greater disclosure in relation to the payment of fees for intra-fund advice.
The AFA recommended that intra-fund advice be subject to separate and specific disclosure ‘…so that members who have not received financial advice from the fund during the year truly understand how much they are subsidising the provision of financial advice to other members of the fund’.
‘We consider the non-disclosure of intra-fund advice fees to be a fundamental weakness in the MySuper legislation. If transparency was a central objective of the FoFA legislation then it should also be applicable to MySuper,’ the Association said.
General advice
While satisfied that the exemption of general advice from the ban on conflicted remuneration would not apply to financial advisers, the AFA called on the Government to provide a practical example of how this would apply.
Submissions on the draft legislation closed on Wednesday 19 February. The Government will now look to implement its reforms via regulations, with legislation expected to be tabled in Parliament during the Autumn session.
The AFA’s submission was also particularly critical of the way the FoFA amendments have been attacked in the media by certain sectors of the financial services industry. Click here for more.
