Future of Financial Advice (FOFA)

Opt-in requirement for ongoing advice fee to be charged

• From 1 July 2012, when advisers provide personal financial advice to retail clients, they will be required to obtain written agreements from their clients every 2 years in order to charge for ongoing services
• Advisers will also be required to provide an annual disclosure statement detailing fee and service information
• The "2 year opt-in requirement" applies to new arrangements with new clients entered into after 1 July 2012; the annual disclosure statement requirement applies to existing and new clients
• These measures do not apply to ongoing payment of insurance premiums or product fees

Enhancing ASIC's licensing and banning powers

• Changing the licensing threshold to a higher standard to allow ASIC to refuse or cancel/suspend a licence where a person is likely to contravene its obligation (the current threshold is "will not contravene")
• Changing the banning threshold to a higher standard so that ASIC can ban a person if they are likely to contravene a financial services law (the current threshold is "will not contravene")
• Extending the statutory tests such that ASIC can ban a person who is not of good fame and character or not adequately trained or competent to provide financial services

Statutory best interest duty for financial advisers

• From 1 July 2012, an adviser providing personal financial advice to a retail client must act in the best interests of the client. In the case of conflict between the interests of the client and those of the adviser, the licensee, the authorised representative and their associates, the adviser must give priority to the interests of the client
• The duty includes minimum steps that advisers must follow in satisfying the duty
• Financial liability for any breach of the duty will rest with the licensee or authorised representative. Individual advisers will not be held financially liable for any breach of the duty (but may be subject to administrative sanctions being considered)
• Limited carve out for "basic banking products" and general insurance products

Ban on product commissions, volume based benefits, asset-based fees on borrowed funds & volume related shelf-space fees

• Subject to the grandfathering provisions, these payments will be prohibited from 1 July 2012
• Limited exceptions apply to "basic banking products", general insurance, life risk insurance outside superannuation, wholesale clients, execution-only services and other prescribed benefits
• Volume based benefits (eg volume payments from platform providers to dealer groups; employers paying performance bonus to employees) are presumed to be conflicted remuneration unless proven otherwise
• Volume related shelf-space fees are banned unless they represent reasonable fees for services provided to fund managers from platform providers or they represent reasonable scale based discount / rebate
• Asset-based fees can still be charged on the non-borrowed portion of an investment portfolio

Ban on commissions on group risk insurance products within superannuation and all risk insurance products within MySuper

• There will be a prospective ban on up-front and trailing commissions for group risk insurance within all superannuation products
• Commission on both individual and group risk insurance in a default/MySuper product will be banned
• It is expected that the regulations will provide for these measures to commence from 1 July 2013

Ban on soft dollar benefits

• Licensees and their representatives must not accept soft-dollar benefits over $300 (limited exceptions apply for general insurance, execution-only services and other prescribed benefits)
• It is expected that the regulations will provide for irregular soft dollar benefits under $300 to be acceptable

Grandfathering of existing conflicted remuneration

• Where an adviser has an existing contractual rights to receive trail product commissions, this right will continue after 1 July 2012
• Existing volume based shelf-space fee arrangements between fund managers and platform providers can continue after 1 July 2012
• Asset-based fees can continue to be charged on borrowed amounts after 1 July 2012 provided that they have been used to acquire financial products prior to that date
• It is expected that the regulations will provide for the treatment of existing volume payments from platform providers to licensees or dealer groups

Expansion of intra-fund advice

• Intra-fund advice will be subject to key FOFA measures such as the best interests duty (but not subject to the opt-in requirement)
• There will be new restrictions on the types of advice that can be provided under intra-fund advice rules
• Examples of the types of advice which are not covered by the intra-fund advice rules include advice relating to whether a member should consolidate their existing superannuation accounts or in relation to investment choice outside of the trustee-prescribed investment options

Scaled advice

• ASIC will develop regulatory guidance on how scaled advice can be provided in accordance with the regulatory requirements
• This guidance is expected to be finalised in the new year

Application of FOFA reforms to stockbrokers

• A carve-out is proposed to allow stamping fees or similar payments relating to capital raising to continue to be received by stockbrokers
• Employee brokers can continue to be remunerated on the brokerage they generate, including where they are remunerated based on a percentage share of the firm's income from broking fees
• Where brokers provide personal financial advice to retail clients, FOFA reforms will have full application (including the ban on product commissions and the best interest duty)