Reaction to the Government’s revised Future of Financial Advice (FoFA) reforms has ranged from highly critical and disapproving, to welcoming and supportive, following its release yesterday by Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten.
Richard Klipin, chief executive of the Association of Financial Advisers (AFA), said that the FoFA package has failed to address the actual problems of the industry.
“When you think about the original intent of FoFA, [it] was around cleaning up the industry so that more people could get advice and clearly, what needed to be struck was…putting the right regulatory framework in place without wrapping the market up in endless red tape and endless cost,” Klipin said.
“Our view is that the Government has overstepped the mark, that they have gone too far and they’ve got the balance wrong.”
CLICK HERE to read Minister Bill Shorten’s explanation of the revised FoFA package.
TWO-YEAR OPT IN
According to Klipin, it is “inappropriate” for a government to interfere in a marketplace to the extent of requiring consumers to opt in.
“Our view is that the Government has overstepped the mark, that they have gone too far and they’ve got the balance wrong”
“Whether it’s one year, three years or five years, there’s no other profession where a government sits down and says, ‘This is how consumers and advisers will operate together’.
“It’s essentially treating consumers with a sense of arrogance – that the Government knows best – and we’ll obviously continue to debate that long and hard.”
BT Financial Group has embraced the reforms. Mark Spiers, BT’s general manager of advice, said the reforms are about raising the industry standards to a higher level of professionalism.
“The way I see it, each separate piece of change is transformational – whether it’s the new opt-in arrangements or the new best interest duty – but combined they represent unprecedented industry change,” Spiers said in a statement.
“With regard to the new requirement for investors to opt in to their advice agreement every two years, we strongly support the principle that customers should only pay for the service they agree to receive.
“As we move towards the introduction of a two-year opt in regime, we will make sure this is as simple and easy for our customers to utilise, not an administrative burden.”
Claire Mackay, co-director of Quantum Financial Services, said in a statement that “the new two year opt in requirement will ensure consumers are more actively engaged in their finances on an ongoing basis which can only be a good thing”.
“Some advisers – who rely on passive income streams of client fees they have either bought or built up over many years, which are still paid by inactive clients – will find this reform difficult to implement,” Mackay said.
“Such advisers rightly fear they will not be able to convince fee-paying, inactive clients to sign such an opt in notice.”
Mackay said opt in will ultimately transform the financial planning industry from a transactional practice to one that is based on relationships.
“Advisers who are actively engaged with their clients and who already show they are providing value-adding advice will not find this reform [will] change their business processes in any material way”, she said.
Scott Walters, head of financial planning at Yellow Brick Road, said the opt in provisions are “entirely consistent with the hallmarks of a profession and a fee for service environment.”
“The move to legislate that advisers act in a client’s best interest is applauded, although this should be ‘ticket to the game’ stuff,” Walters said, in a statement.
Steve Tucker, group executive at MLC & NAB Wealth, said that with the introduction of a fiduciary duty for advisers, the removal of commissions and ban on volume related payments, an opt-in arrangement “is redundant”.
Andrew Gale, chief executive of Count Financial, said that while the two-year opt in has the potential to make advice more expensive for consumers, it is still better than the original one-year proposal.
BANNING COMMISSIONS ON INSURANCE IN SUPERANNUATION
This piece of the FoFA reforms has caused the most debate, where upfront and trailing commissions for individual and group insurance within superannuation will be banned from July 1, 2013.
“Opt in will ultimately transform the industry from a transactional practice to one that is based on relationships”
“It’s just bad policy,” said Klipin.
“It looks like it’s been poorly thought out and it only goes to salve the superannuation lobby and interest groups in the superannuation world, which will do nothing for the underinsurance issues in Australia or the access to advice.
“Clearly there’s a bit of wriggle room in the ministerial statement and the information pack. Until we see the draft regulation, we’ll see how much wriggle room there is.”
BTFG has also expressed its concern that the decision to remove commissions on life insurance in superannuation will “widen the insurance gap for the average working Australian” in an already underinsured nation.
“Insurance through super is the most tax effective way of ensuring people have the right amount of life cover, without the need to dig into the monthly family budget,” it said in a statement.
BTFG said it does support the removal of commissions on default levels of life insurance in MySuper, as it aligns with MySuper’s public policy intentions.
Tim Mackay, co-director of Quantum, said in a statement that they support the ban as it has acknowledged that commissions create a conflict of interest.
“This ban recognises that commissions can impact on the quality of advice provided to consumers and can drive premium prices up, exacerbating the underinsurance problem,” he said in a statement.
“However, we are disappointed the Government did not also uniformly apply the ban across life insurance products outside of super. We believe consumers who choose to hold their life insurance policies outside of super deserve the same level of protection against the broken and conflicted commission model.”
On the other side of the debate, MLC & NAB Wealth’s Tucker expressed disappointment with the insurance inside super ban as “commissions have a valid and important role to play as a remuneration option on insurance”.
He said there will be many consequences as a result, including an increase in “Australia’s underinsurance challenge”.
Also fighting to keep the insurance commissions is Yellow Brick Road. While it agrees with the majority of FoFA decisions, it is hoping that the Government reconsider this ban “in circumstances where complex advice is being provided to the client, for example, within a self managed superannuation fund”.
Walters said: “In an advised environment, if it is in the client’s best interests to pay their life or TPD premiums from within a self managed superannuation fund, then we see no issue with a commission payment in recompense for the complexity of the advice provided.
BANNING VOLUME REBATES
Yet contrary to the volume-based payments amendments – which will see the end of volume rebates from financial services companies to dealer groups, authorised representatives and advisers – platforms can still accept volume rebates from fund managers at this stage.
Quantum’s co-director Tim Mackay said “the devil will be in the detail when it comes to this reform”.
“Commissions have a valid and important role to play as a remuneration option on insurance”
“Until we see the details of what has been excluded from the volume bonus ban, we do not know if this is a win for industry over consumer protection or whether any such ban will actually have any teeth,” he said.
“Our concern is that the exclusions will be big enough for the big dealer groups and platforms to drive a truck through and so they will be able to carry on paying and receiving the conflicted volume kick backs in much the same way as they do now.
“We are surprised that the reforms have excluded life insurance products from the volume bonus ban. No reason is provided for this exclusion and we would be interested to see the rationale.”
While MLC & NAB Wealth has welcomed the reforms, it has asked for the Government to consider setting a suitable transition period for the removal of volume bonuses.
Tucker says in order to cope with the considerable changes the volume rebate ban will create, financial planners and product providers will need time to adjust.
“The bulk of these changes will create a less complex, more transparent advice system where the value of advice can come to the fore and advisers can be recognised for the great work that they do, helping thousands of Australians achieve a more comfortable retirement,” he said.
“Removing volume related payments from the system will require some adjustments to business models and will impact advisers, licensees and product manufacturers who currently participate in volume rebate arrangements.”
SCALED ADVICE
The FoFA package has now included “scaled advice”, which allows planners to give advice on one or a limited number of areas or issues, rather than requiring the provision of comprehensive advice every time.
According to Klipin, there is no substitute for quality advice with a qualified professional adviser and there will be dangers in encouraging scaled advice.
“[It] treats advice as a dumbed-down commodity and so consumers don’t want their entire lives addressed they only want a small component,” he said.
“There’s a fairly seriously danger that it will actually not meet the particular requirements and it will be a way in which the large superannuation funds deliver scalable sales offers to their clients, much in the way that we get an increase in credit card allowances by the mail.
“So I expect that we will see offers emanating from our superannuation funds that might be ‘tick a box’ or ‘return the email’.”
Mark Bouris, chairman of Yellow Brick Road, has accepted the Government’s effort to provide scaled advice for the purpose of “[giving] all Australians access to basic guidance on a limited range of matters without the requirement for holistic advice when the clients do not require it”.
In a statement, Bouris said that Yellow Brick Road has been an advocate for accessible advice, particularly intra-fund advice, so this expansion will make advice affordable for more Australians and therefore improve “the unfortunate fact that only one in five Australians currently receive advice from a financial planner”.
The draft legislation is scheduled to be announced in the second half of 2011.
Hopefully these rules will apply to industry super funds too.
Does this mean that they will no longer be able to receive insurance commission or is it gong to continue to be a “secret” payment as it is paid to the fund rather than any adviser?
How many advisers are going to be prosecuted because they have not received opt in agreement from clients in time and perhaps have then not notified fund managers to cease service fee deductions from clients accounts?
Will the government now force industry funds to disclose executive and trustee fess, as well as advertising and sports sponsorships as after all it is the members funds being used to cover these costs, not fund profits like commercial funds, because as their adverts say they work “only to profit members”?
Just like the failed insulation scheme the government will be forced to eat their words and in due course revert to sensible regulations.
It is high time that the Government recognised that Insurance inside am SMSF is the accepted way of doing business and small business will now suffer greatly as it will not be able to most probably afford this type of insurance. The Government appears once againa to be bowing to its union mates and to the not for profit and industry super funds.
A very bad move and this will alos hurt a gret many good financial planners.