FoFA draft heralds end to uncertainty

The first tranche of draft legislation giving effect to the Future of Financial Advice (FoFA) proposals signals the beginning of the end of uncertainty for the financial planning industry.

While the draft, released yesterday by the Minister for Financial Services and Superannuation, Bill Shorten, confirms some unpopular aspects of the FoFA proposals, the industry is confident it has given its best shot to making implementation as painless and as practical as possible.

However, there is rising concern that despite the legislative timetable slipping back – a second tranche of draft legislation is due to be released at an unknown date – the timetable for implementation has not been adjusted accordingly.

CLICK HERE for a Q&A with the Minister for Financial Services and Superannuation, Bill Shorten

“This has been dragging on for two years now; the sooner we get some clarity around the landing position on this, the better,” says Mark Rantall, chief executive of the Financial Planning Association of Australia (FPA).

Rantall says there is much in the FoFA proposals that the FPA can support, including the best interest test, the removal of conflicted remuneration structures, and the clarification of the issue of commission on insurance in superannuation. But an obvious exception is the opt in proposal.

Rantall says that in negotiations with the Government it became clear that opt in was not going to be removed from the package. It then became something of a damage limitation exercise for the association.

“We’re still opposed to opt in but at least we were able to negotiate a more practical stance,” Rantall says.

“Our approach was that we have always opposed opt in and we will continue to oppose it, but it was made very clear that opt in was not going to be removed from the draft legislation, so we were asked how it may be best implemented.

“Discussions took place around what the trigger point would be [for requiring opt in]”.

Rantall says possible triggers included when a planner prepares a new statement of advice (SoA) or when a client makes a new investment; ultimately the FPA pushed for opt in to be required only for new clients taken on by financial planners after July 1 next year.

“You start to get some complexities with anything else,” Rantall says.

Rantall says the FPA was also instrumental in negotiating down some of the proposed penalties for breaches of the legislation – some of which were as high as $250,000 per adviser or $1 million per licensee, “for what could amount to an administrative error”. And the FPA also sought “some flexibility around how you might comply” with the opt in requirements.

Rantall says the FPA is also heartened by the preparation of a consultation paper examining whether the term “financial planner” or “financial adviser” should be enshrined in legislation. This would require anyone calling themselves a financial planner or a financial adviser to be a member of a recognised professional association, and Rantall believes the FPA is in the box seat to claim that status.

The draft legislation met with a cool reception from the Association of Financial Advisers. The chief executive of the AFA, Richard Klipin, says “the good news is that the waiting is over and what we have now is the first tranche of draft legislation” But he adds that “the AFA is always going to assess it on the issues around ensuring access to advice on the one hand and transparency of advice on the other hand [and] our considered view is that Minister Shorten has failed on both counts”. “He’s failed the rigor and transparency test,” Klipin says. “The fact that there is a complete lack of evidence, a complete lack of modelling by Treasury, independent research that would actually evidence the consequences, benefits of FoFA…is a concern, and the fact that he uses only the Rice Warner research and doesn’t attribute that it’s actually Industry Super Network research, in our view is flabbergasting.” Klipin says opt in is “bad policy”, no matter how it is structured. But he says the best interest duty is a policy with much clearer consumer benefits. “Obviously for the vast majority of advisers, they have always been interested in acting in the best interest of their clients,” he says. “What best interest duty now does is in a quantifiable or clearer way, actually sets that benchmark. In broad terms, we’re supportive of it – yes, it will provide clarity for consumers and that’s a good thing.” Klipin says “there’s now a level playing field for insurance advice inside and outside super”, but the distinction between when commission is acceptable and when it’s not has been made on the wrong basis. “He’s now made a distinction between an individual and a group,” Klipin says. “In other words, if an individual is getting advice commission is okay but if a corporate super fund is getting advice [commission] is not okay. “Our view is that the differentiator ought to be advised versus non-advised – if an adviser was involved in the process, then commission should be allowable because that means access is better whereas if there was no advice, there isn’t any need for remuneration.” Klipin says that we have only seen the first tranche of legislation “so [our] concern is that the delivery date of the draft legislation has been delayed and delayed, and yet the commencement date has not - July 1, 2012”. “This needs to be resolved quickly and effectively or else the commencement date needs to be deferred in line with the late arrival of the draft legislation,” Klipin says.