{"id":26506,"date":"2014-06-17T12:52:38","date_gmt":"2014-06-17T02:52:38","guid":{"rendered":"https:\/\/riskinfo.com.au\/news\/?p=26506"},"modified":"2014-07-02T06:55:14","modified_gmt":"2014-07-01T20:55:14","slug":"committee-gives-fofa-reforms-green-light","status":"publish","type":"post","link":"https:\/\/riskinfo.com.au\/news\/2014\/06\/17\/committee-gives-fofa-reforms-green-light\/","title":{"rendered":"Green Light for FoFA Amendments"},"content":{"rendered":"

The Senate Economics Legislation Committee (SELC) has given the Government\u2019s Future of Financial Advice amendment legislation the go-ahead, recommending few changes to the proposals put forward by Senator Arthur Sinodinos<\/strong> earlier this year.<\/span><\/p>\n

On 20 March, 2014, the Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014<\/em> was tabled in the House of Representatives. The Bill contained the measures proposed by then Assistant Treasurer, Senator Sinodinos, to amend the FoFA legislation, with a particular focus on clarifying the best interests duty and removing the opt-in requirements. After tabling, the Bill was referred to the SELC, \u2018\u2026to provide a forensic and detailed examination of the legislation and the effects this and previous reforms would and have had on the financial services and investment decisions\u2019.<\/p>\n

The SELC has now released its report on the legislation, recommending that it should proceed through Parliament, with minimal changes. The key areas of the legislation and the findings of the SELC are outlined below\u2026<\/p>\n

Best interests duty<\/strong><\/p>\n

Debate regarding the best interests duty was primarily concerned with the removal of the \u2018catch-all step\u2019 in the best interests duty safe harbour provisions. During the SELC public hearings into the FoFA amendments, Richard Batten<\/strong>, from Minter Ellison Lawyers, informed the SELC that the catch-all step was not needed to protect consumers and that the other six steps provide a full, appropriate and complete list of the steps that an adviser would need to take to comply with their obligations.<\/p>\n

\u201cThe best interest duty is about the process of giving advice, and the safe harbour should reflect that. Removing the catch-all step simply removes uncertainty for advisers. It will not affect the duty of advisers to place client interests ahead of their own,\u201d Mr Batten said.<\/p>\n

Removing the catch-all step simply removes uncertainty for advisers<\/h6>\n

Conclusion of committee<\/span><\/p>\n

The SELC said it was persuaded by the evidence relying on the consumer protections provisions, including sections 961G, J and H and the best interests requirement in subsection 961B(1), that the removal of the catch-all provision would not dilute the best interest duty.<\/p>\n

The SELC concluded that these provisions work together to ensure that, if this amendment was to go ahead, that there would be no dilution of the best interests duty, but a greater deal of certainty for both client and adviser.<\/p>\n

Scaled advice<\/strong><\/p>\n

Many in the financial services industry welcomed the proposals surrounding scaled advice, contained within the draft legislation, because they would ensure that clients can obtain the advice they require without having to pay for advice they do not want.<\/p>\n

Conclusion of committee<\/span><\/p>\n

The SELC said there was no doubt that the availability of scaled or limited advice was in the interests of consumers. However, the report highlighted that a number of witnesses referred to the importance of clients being made fully aware that they were receiving scaled advice and the consequences flowing from this limited advice.<\/p>\n

\u2018The committee believes that advisers, when providing scaled advice, should be under an explicit obligation to explain clearly to their clients what scaled advice entails and its limitations,\u2019 the SELC said in its report.<\/p>\n

As such, the SELC recommended that the Bill\u2019s Explanatory Memorandum include a paragraph that clearly and unambiguously spelled out the best interests obligations\u2014961B(1) and (2), 961G, 961J and 961H\u2014and the level of consumer protection they provide.<\/p>\n

Further, the committee recommended that the Government consider closely how these separate obligations work together and whether any further strengthening is required to ensure that a provider cannot circumvent these best interests obligations.<\/p>\n

Conflicted remuneration exemption for general advice<\/strong><\/p>\n

Many of the submissions received by the SELC spoke about the potential for a return of commissions which could be brought about by the proposed general advice exemption from the conflicted remuneration regime. Some feared that the exemptions from the ban on conflicted remuneration would re-allow or reopen the door for conflicted forms of remuneration to be paid.<\/p>\n

During the public hearings, the Financial Planning Association explained that there were several risks associated with commissions for general advice, including:<\/p>\n

    \n
  • The conflicted remuneration, which drives business models that encourage a complementary sales model of financial product issuance and distribution, poses a real risk of product mis-selling to retail investors and was rightly banned by the future of financial advice reforms<\/li>\n
  • Commissions incentivise the provision of general advice as a form of consumer education or a replacement for personal advice\u2014general advice is inappropriate for that purpose as it makes it more difficult for consumers to distinguish personal financial advice from marketing material or product sales<\/li>\n
  • Commission payments have eroded public confidence in our financial system\u2014Australians will not have the confidence in our financial system as long as providers of products or advice are exposed to perverse incentives such as commissions<\/li>\n
  • Allowing superannuation investment commissions to be paid on general advice has the potential to shift licensees and representatives away from the provision of personal advice in order to earn commissions.<\/li>\n<\/ul>\n

    Conclusion of committee<\/span><\/p>\n

    The committee said it accepted that the current law needed to be changed to remove the unnecessary complications associated with the provision of general advice. In this regard, the committee said it was concerned about the confusion that surrounds the proposed changes and the fear that they have the potential to reopen the door to commissions. The committee also noted the concerns about the possible misuse or misunderstanding of the term ‘general advice’.<\/p>\n

    The SELC recommended that:<\/p>\n

      \n
    • The Explanatory Memorandum make clear that it is not the Government’s intention to reintroduce commissions<\/li>\n
    • The Government consider the provisions governing conflicted remuneration and redraft them to ensure that there is greater clarity around their implementation<\/li>\n
    • The Government give consideration to the terminology used in the Explanatory Memorandum and legislation, such as information, general advice and personal advice, with a view to making the distinction between them much sharper and more applicable in a practical sense when it comes to allowing exemptions from conflicted remuneration<\/li>\n<\/ul>\n

      Opt-in and Fee Disclosure Statements<\/strong><\/p>\n

      Reflecting the view of many in the financial services industry, the Association of Financial Advisers (AFA) suggested that the opt-in notice was a very expensive process that would not add value. Michael Nowak, AFA President, noted that it was intended for new clients after 1 July 2013 who already receive annual fee disclosure statements so the opt-in notice, in his view, was a duplication.<\/p>\n

      …the opt-in notice was a very expensive process that would not add value<\/h6>\n

      The AFA also noted that some observers thought that opt-in would address those clients who were paying ongoing trail commission to advisers but the client had not seen the adviser for some time. It maintained that this understanding was incorrect as ‘these clients were never going to receive an opt-in notice under the current legislation as they were existing clients before 1 July 2013’.<\/p>\n

      Minter Ellison Lawyers submitted that the amendment to remove the requirement to provide yearly fee disclosure statements to existing clients should apply from I July 2013, the date this obligation commenced. They were concerned that if this change were not made retrospective, advisers and licensees would ‘have the uncertainty of being subject to a requirement that was in force for a short period of time’.<\/p>\n

      Conclusion of committee<\/span><\/p>\n

      The SELC found that the current opt-in arrangement imposes a compliance burden on financial service providers for little gain. Similarly, the requirement to provide a fee disclosure statement to pre 1 July 2013 clients places a significant regulatory burden on industry. It made no recommendation for this reform to be changed, and for the legislation in this regard to proceed.<\/p>\n

      Dissenting report<\/strong><\/p>\n

      Both the Labor and Greens Senators issued dissenting reports, opposing the recommendations expressed in the SELC report.<\/p>\n

      The Labor Senators argued that the SELC report’s recommendations were little more than \u2018\u2026a piecemeal attempt to fix structural legislative gaps and failures using the explanatory memorandum\u2019.<\/p>\n

      Labor expressed the view, through its dissenting report, that the Bill in its current form is beyond repair and should be opposed, and that the Government should abandon any attempts to rush in, again, a new set of regulations ahead of introducing new legislative charges.<\/p>\n

      \u2018If the Government wishes to proceed with minor and\/or technical changes that facilitate industry compliance with the original FoFA reforms, then it should enter into good faith discussions with all stakeholders, including those who represent investor and consumer interests, and all parliamentary political parties,\u2019 the Labor Senator\u2019s dissenting report said.<\/p>\n

      The Labor Senators did, however, make two recommendations that may be welcomed by many in the financial services industry:<\/p>\n

        \n
      1. That the Government legislate to change the term ‘general advice’ to ‘general information’<\/li>\n
      2. That the Government reintroduce the measures in Schedule 2 of the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013, to restrict the use of the terms ‘financial planner’ and ‘financial adviser’<\/li>\n<\/ol>\n

        The Greens said it was disappointing that during the SELC\u2019s public hearings, the Government’s line of questioning particularly targeted the conduct of Industry Super Funds, something that was outside the inquiry\u2019s scope.<\/p>\n

        The Greens also recommended that the Bill not be passed, arguing that it is too early to consider such amendments, and requesting an independent review of the effectiveness of the legislation be established after 5 years.<\/p>\n","protected":false},"excerpt":{"rendered":"

        The Senate Economics Legislation Committee (SELC) has given the Government\u2019s Future of Financial Advice amendment legislation the go-ahead, recommending few changes to the proposals put forward by Senator Arthur Sinodinos earlier this year.<\/p>\n","protected":false},"author":7,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[8],"tags":[],"class_list":["post-26506","post","type-post","status-publish","format-standard","category-compliance-regulation"],"_links":{"self":[{"href":"https:\/\/riskinfo.com.au\/news\/wp-json\/wp\/v2\/posts\/26506","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/riskinfo.com.au\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/riskinfo.com.au\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/riskinfo.com.au\/news\/wp-json\/wp\/v2\/users\/7"}],"replies":[{"embeddable":true,"href":"https:\/\/riskinfo.com.au\/news\/wp-json\/wp\/v2\/comments?post=26506"}],"version-history":[{"count":0,"href":"https:\/\/riskinfo.com.au\/news\/wp-json\/wp\/v2\/posts\/26506\/revisions"}],"wp:attachment":[{"href":"https:\/\/riskinfo.com.au\/news\/wp-json\/wp\/v2\/media?parent=26506"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/riskinfo.com.au\/news\/wp-json\/wp\/v2\/categories?post=26506"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/riskinfo.com.au\/news\/wp-json\/wp\/v2\/tags?post=26506"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}