Future of Financial Advice (FOFA)

The Government announced the Future of Financial Advice (FOFA) reforms in April 2010, with the primary aim to improve the quality of and access to financial advice for Australian consumers.

The first tranche of the FOFA legislation was passed by Parliament on 25 June 2012. These reforms commenced on 1 July 2012 and will be mandatory from 1 July 2013.

Whilst the mandatory implementation date has been pushed back (to 1 July 2013), the extent of work required for most players to comply with the new laws means that FOFA readiness programs have been accelerating to comply with the reforms.

Beyond compliance, the strategic implications for all players (including asset managers, wealth managers, banks, platforms and a range of other service providers) are significant and require immediate focus if market opportunities are to be capitalised and risks mitigated.

Despite the demands of compliance, opportunities are available for businesses who are prepared for the changes and who are taking steps to align their business models, product, channel and people strategies to the realities of a post-FOFA landscape. Broader market, consumer and regulatory factors also present considerable opportunities and challenges for all players across the wealth management value chain and must be embedded in FOFA readiness initiatives.

We are working with our clients to assist them to answer key strategic questions and to develop and execute their FOFA programs to meet the approaching mandatory compliance date (1 July 2013).

Opt-in requirement for ongoing advice fees to be changed

  • From 1 July 2013, 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 2013; the annual disclosure statement requirement applies to existing and new clients
  • Exemptions are provided for advisers who are subject to approved codes of practice such as those issued by the peak professional bodies. We expect this will encourage more advisers to attain membership of a professional body
  • Also, these measures do not apply to ongoing payment of insurance premiums or product fees

Statutory best interest duty for financial advisers

  • From 1 July 2013, 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
  • ASIC's interpretation of the best interest duty remains outstanding

Conflicted and banned remuneration

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

  • Subject to the grandfathering provisions (see below), these payments will be prohibited from 1 July 2013
  • 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 (e.g. 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

  • Subject to grandfathering provisions (see below), up-front and trailing commissions for group risk insurance within all superannuation products will be prohibited from 1 July 2013
  • Commission on both individual and group risk insurance in a default/MySuper product will also be banned

Ban on soft dollar benefits

  • From 1 July 2013, licensees and their representatives must not accept soft-dollar benefits over $300 where it could be expected to have “influence” over the choice of financial product recommendation or the advice given to retail clients (limited exceptions apply for general insurance, execution-only services and other prescribed benefits)
  • Whilst regulatory guidance remain outstanding, it is expected that irregular soft dollar benefits under $300 will be acceptable

Grandfathering of existing conflicted remuneration

Notwithstanding that regulatory guidance regarding the application of grandfathering is largely outstanding, we note:
  • Where an adviser has an existing contractual rights to receive trail product commissions, this right will continue after 1 July 2013 related to in-force products only
  • Existing volume based shelf-space fee arrangements between fund managers and platform providers can continue after 1 July 2013
  • Asset-based fees can continue to be charged on borrowed amounts after 1 July 2013 provided that they have been used to acquire financial products prior to that date
  • It is expected that the regulatory guidance will provide for the treatment of existing volume payments from platform providers to licensees or dealer groups

Anti avoidance

  • Any actions taken to address the requirements of the legislation should be considered from an anti-avoidance risk perspective
  • ASIC's approach to applying the anti-avoidance provisions remains unclear

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

Other FOFA proposals (no draft legislation as yet)

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 has now released draft regulatory guidance for consultation (CP 164 and CP183)

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)

Removal of accountants' exemption relating to establishment of self managed superannuation funds

  • As part of the Government's announcement regarding the FOFA reforms in April 2010, it announced a proposal to remove the accountants exemption (i.e. Corporations Regulations (2001) reg 7.1.29(3) to (5) outline exceptions for accountants, and for providing advice regarding self-managed superannuation funds) and develop with the profession an appropriate alternative that would allow accountants to continue to provide appropriate advice
  • After two years of consultation with the accounting industry, the Government recently announced a new conditional licensing regime for professional accountants. This regime will enable Australians to continue to access non-product strategic financial advice from their professional accountants

Other FOFA proposals

  • Restriction of the use of the term financial planner/adviser
  • Classification of retail versus wholesale investors
  • Simplification of financial services guides
  • Statutory compensation scheme for retail investors
  • Insurance commission claw-back provisions and separate disclosure