FoFA Changes: Reducing Compliance Costs and Regulatory Burden or Allowing Flawed System to Re-emerge

Wednesday 19 February 2014 @ 11.21 a.m. | Corporate & Regulatory | Taxation | Trade & Commerce

The spectacular collapse of finance organisations like Storm Financial and the resulting loss and hardship flowing to many small investors looking for superannuation benefits and self-funded retirement would not have escaped the attention of many.

In the Storm Financial collapse, some investors lost their life savings because of conflicted, poor and self-interested financial advice. In an effort to prevent this type of outcome from happening again, the previous government introduced what has become known as the "Future of Financial Advice" legislation (FoFA) (see the Corporations Amendment (Future of Financial Advice) Act 2012 (No. 67 of 2012) and the Corporations Amendment (Further Future of Financial Advice Measures) Act 2012 (No. 68 of 2012) discussed below).

Now, through a Treasury Website page headed "Future of Financial Advice" it has been announced that the new Government intends to bring in a "package of changes to FoFA to implement its election commitment to reduce compliance costs and regulatory burden on the financial services sector". This action many fear, including organisations like Industry Super Australia (ISA), will see a return to the bad old practices that led to financial disasters like Storm Financial or so it is reported in the press today.

Background

As indicated above, the two principal pieces of legislation making up FoFA are the Corporations Amendment (Future of Financial Advice) Act 2012 (No. 67 of 2012) which essentially commenced on 1 July 2012 and implemented the first components of FOFA focusing on the framework for the provision of financial advice, setting up a framework with the following features:

  • a requirement for providers of financial advice to obtain client agreement to ongoing advice fees and enhanced disclosure of fees and services associated with ongoing fees (charging ongoing fees to clients); and
  • enhancement of the ability of the Australian Securities and Investments Commission (ASIC) to supervise the financial services industry through changes to its licensing and banning powers.

The reforms also included the introduction of a requirement for "advisers to act in the best interests of clients" and a ban on "conflicted remuneration", including commissions, volume payments and soft-dollar benefits.

Measures implemented through the supplementary Act, the Corporations Amendment (Further Future of Financial Advice Measures) Act 2012 (No. 68 of 2012) which also commenced on 1 July 2012 included two key measures; firstly, the imposition of a "statutory best interests duty" on financial advisers (a duty requiring advisers to act in the best interests of their clients, and to put their client's interests ahead of their own) and secondly, a ban the receipt of "conflicted remuneration" by financial advisers, for example, commissions from product issuers.

What the New Government Proposes to Change

It is reported that many of the changes offered by the new Government would overturn or water down reforms like:

  • the key provision to oblige financial advisers to always act in the best interests of their clients.
  • remove "opt-in" requirements, which force financial advisers to contact fee-paying clients every two years to renew their contacts.
  • scrap rules requiring financial advisers to disclose how much they charge clients in annual fees.

The Government justifies the proposed reforms on the basis of saved implementation costs ($90 million) and reduced compliance burdens ($190 million p/a).

Reaction

It is reported that ISA has sought legal advice on the Government's plans to implement the changes through regulation initially rather than putting them through parliament in Bill form and has been advised that the regulations would be legally invalid. The advice suggesting that any financial advisers relying on the changes could be left exposed to potential class action challenges in the future.

"The regulations would therefore create significant uncertainty and could well become the subject of protracted litigation between financial advisers and their clients, for example, in an investor class action."

A spokesperson for the Assistant Treasurer has responded for the Government saying such regulations would be backed up by legislation to be introduced into Parliament in the coming weeks.

"The Government will make regulations to give effect to the amendments to the extent legally possible, to provide certainty to industry as to the intent of the Coalition's reform package, . . The Treasury has sought and received legal advice on these matters. . .All Commonwealth legislation can be legally challenged, and that is ultimately a matter for the courts."

A reaction from the Banking and Finance Consumers Support Association (BFCSA) president indicates the changes could mean the laws will not go far enough to protect consumers and will lower standards.

"The laws are delivered in consultation with industry and therefore accommodating the needs of industry,  .  .  . 
Initially, commissions which have been discussed as a root evil for the past two decades are still present  .  .  .
Advising clients of the costs on any manufactured product is mandatory at the time of purchase, yet Financial Advice being paramount to one's own personal financial well-being, is not being given a comparative status .  .  .
I feel the above point means a 'cutting red tape' approach will mean a lowering of standards."

Another very interesting point reported in the BFCSA reaction is that the financial advice industry has already spent $700 million complying with FoFA and expects to spend another $350 million a year, apparently somewhat dwarfing the Government's expected savings.

Most telling is the reported reaction of Storm Financial victim Luke Vogel who is quoted as saying:

"In this respect [referring to the Governments proposals], the purpose of the laws and their implementation will totally miss its targets,  .  .  .
The legislation was designed to protect consumers and investors so that they could build a future in retirement .  .  .
Legislation prior to the changes had similar altruistic goals, however there are those who seek to dismiss the intent of the laws for the sake of profit or advantage".

What Next

The treasury website referred to above states:

"The Government intends to implement time sensitive measures through amendments to the Corporations Regulations 2001. To provide certainty, these amendments will be subsequently reflected in the Corporations Act 2001. It is anticipated that a Bill will be introduced into Parliament in the 2014 autumn sitting period and passed during the winter sitting period."

Submission on the proposed changes closed today (Wednesday 19 February 2014). Draft regulations and legislation are available in the Consultation Papers section of the Treasury website.

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