The Minister for Financial Services and Superannuation, Bill Shorten, has released the first round of measures contained in the draft legislation of the Future of Financial Advice (FoFA) reforms.
The draft legislation confirms compulsory client opt in every two years, best interest obligations and requirements, new penalties and the enhancements to the Australian Securities and Investments Commission (ASIC) powers. Further FoFA elements such as insurance commissions, soft dollar benefits, the application of the reforms to stockbrokers and the grandfathering of existing arrangements were also clarified.
The two-year opt in notice, a compulsory renewal requirement for all advisers charging ongoing fees to retail clients from 1 July 2012, will have “significant flexibility in terms of how advisers are able to discharge the opt in obligation”.
Service renewals can be raised through electronic channels, such as phone or internet and “could potentially use a record of advice to record the renewal” via a short online form.
Ongoing advice fees cannot be charged if the client has not opted in for the renewal of adviser services and “clients are also entitled to recoup any ongoing fees that are charged in the event that the adviser fails to send either a fee disclosure or renewal notice”.
Advisers who continue to charge an ongoing fee after a client has terminated those services, either by actively opting out or not responding to the renewal notice, will be subject to a civil penalty – $50,000 for an individual and $250,000 for a body corporate. The Australian Securities and Investments Commission (ASIC) is able to assess the gravity of each breach.
The construction of the disclosure and renewal notices and the method for how clients can opt in will also be flexible. The fee disclosure statement, for example, can be as short as one page.
The draft also highlights the best interest obligation, proposing that the person providing personal advice must act in the best interests of the client, particularly in situations where conflicts of interests arise between the client, the adviser, the licensee and the authorised representative.
The measure states that: “The principle guiding the application of the best interests obligations is that the objectives, financial situation and needs of the client must be the paramount consideration when providing advice”.
The penalty for breaching best interest obligations “will rest with the authorised representative or licensee with a maximum penalty of $250,000 for individuals and $1 million for corporate entities”.
The draft legislation includes a licensee obligation to ensure their representatives comply with best interest.
The ban on upfront and trailing commissions within superannuation from 1 July 2013, announced in April this year, did not extend to risk insurance outside superannuation. The Government’s final position is to apply the ban to commissions “on group life insurance in all superannuation products, including Default/MySuper products and Choice products, and to commissions on any life insurance policies in a Default/MySuper product from 1 July 2013”.
The Government has extended the ban on soft dollar benefits to now include non-investment linked life insurance outside of superannuation, but not general insurance therefore advisers cannot accept a soft dollar benefit “unless it explicitly relates to a general insurance product or is otherwise permissible according to legislation and/or regulations”.
Minister Shorten says the core activities of the stockbroking industry “will not be unduly impacted by the FoFA reforms”.
There will be a “carve out to allow stamping fees or similar payments relating to capital raising”.
Trail commissions will continue to be paid in circumstances where an existing contract gives an adviser the right the receive a trail commission after 1 July 2012, or after 1 July 2013 in the case of certain risk insurance policies in superannuation.
Another announcement will release the details of the second tranche for the draft legislation of FoFA, including the ban on conflicted remuneration, the ban on soft dollar benefits and asset-based fees, intra-fund advice and the replacement of the accountants’ exemption.
Check back with Professional Planner Online during the day for more details and updates as they come to hand.
