The Gillard Government is committed to creating jobs; what’s the response to suggestions that 25 to 30 per cent of financial planners may leave the industry either as a direct result of or as a result of issues associated with the FoFA proposals? Is some clean-out of the industry in fact a healthy thing for consumers?
“The customer penetration of financial advice has stagnated at around 20 per cent for some time. No industry can survive and thrive if it is not gaining new markets.
“Improving trust and confidence, the expansion of simple advice and the increase in the superannuation guarantee from 9 per cent to 12 per cent will underpin industry growth.”
Might the opt in proposal in fact lead to potentially greater employment opportunities in financial planning – if a planner has to provide actual ongoing service, then it may place a natural ceiling on the number of clients they can properly service. The “overflow” may need to source services from alternative suppliers?
“What will increase growth is new and active clients, who will require more financial planners to service their needs, which these reforms will help achieve. We would also point to the factors above (such as the 9 to 12 per cent) that will underpin growth.”
A backgrounder to the draft legislation says: “The [best interest] duty includes steps that advisers must follow in acting in the best interests of the client.” What are these steps?
“The steps that advisers must follow in acting in the best interests of the client are broadly based around the existing ‘know your client’ and ‘know your product’ steps that form the existing obligation to have a reasonable basis for advice under the Corporations Act.
“In general terms, they require advisers to identify the objectives, financial situation and needs of the client, make reasonable inquiries when information is incomplete or inaccurate and conduct a reasonable investigation when making product recommendations. In addition, the steps require an adviser to base all judgements on the objectives, financial situation and needs of the client.”
The backgrounder also states: “There will also be flexibility in how advisers construct the disclosure and renewal notices, and the method by which clients can opt in. For example, the fee disclosure statement is not intended to be complex…could be as simple as one page.” Is it completely up to advisers and practices to choose their method? Will the chosen method need to be approved?
“The legislation (and regulations) will prescribe the information that needs to be contained in the fee disclosure statement and renewal notice. Precisely how this information is presented is up the licensee.
“For example, the licensee might want to go into greater detail all of the services and benefits they have provided to the client in the previous 12 months.
“Alternatively, they might want to keep the notice short and sharp. Licensees can adopt whatever method best suits the licensee’s ability to demonstrate their value proposition and which ultimately persuades the client to continue using their services (so long as the minimum requirements in the legislation/regulations are satisfied).”
Will there be an example method that could be released as a guide or example for the majority to follow?
It is not envisaged that a Government-endorsed industry template will be released for industry, given the minimum information to be contained in the notices will be very clear. However, this should not be viewed as a process of discharging some legal requirement – these notices will ultimately assist a client in determining whether they are receiving value for money for the fees they are paying, and whether they wish to continue paying for that service. It is therefore in licensees’ interests for these documents to be clear, concise, easy to understand and engaging.
The draft legislation explanatory memorandum states that “…if, under an ongoing fee arrangement, the continued provision of a service to the client by the fee recipient is dependent on the continued payment of an ongoing fee, on termination of the ongoing fee arrangement, the obligation to continue to provide the service also terminates”. Does the adviser’s obligation for advice provided before the termination also cease? For example, if a client opts out, and at a later date decides some previous advice was faulty or defective or inappropriate, does the adviser have any liability?
“In the same way that the law operates now when a client terminates an arrangement with their financial adviser, the adviser will continue to be accountable for the financial advice or services they have already provided to the client. This merely clarifies that the adviser will not be liable for failing to provide advice after the arrangement terminates.”
How will the best interest test intersect with scaled advice/intra fund advice?
“Any adviser providing personal advice to retail clients, including scaled and intra-fund advice, must comply with the obligation to act in the best interests of the client. The best interests duty has been drafted to accommodate the provision of scaled advice that only looks at a specific issue.
“In these situations, an adviser is only required to make further inquiries of the client as necessary for providing the subject matter of the advice. In addition, ASIC has indicated that it will review its guidance around the provision of scaled advice once the FOFA reforms are completed.”
Will financial planners employed by superannuation funds be subject to the full provisions of the FoFA package?
“Yes.”
