The absence of a comprehensive regulatory impact statement remains a stumbling block for the government’s Future of Financial Advice (FoFA) legislation, according to the Office of Best Practice Regulation (OBPR).
Shadow Minister for Financial Services and Superannuation, Senator Mathias Cormann, was quick to seize on the regulator’s view, asserting that Minister Bill Shorten had failed to demonstrate that the increased costs to businesses and consumers are justified.
In evidence before Senate Estimates, the head of the OBPR gave a less than rosy assessment of the FoFA legislation currently before Parliament.
OBPR head Jason McNamara said the government’s regulatory impact statements did not have enough information about the impact on businesses and consumers and the cost benefit of the contentious parts of FoFA for the government to make informed decisions.
This echoes the sentiment of many in the industry as expressed to Bernie Ripoll’s Parliamentary Joint Committee last month.
According to the OBPR, the government had failed to properly assess the impact on businesses and consumers of its proposed changes in relation to a number of the most contentious issues.
Specifically, the regulator raised concerns over:
- renewal requirements for ongoing financial advice fees to retail clients (opt-in);
- the treatment of paid commissions on insurance products within the superannuation and life insurance products outside of superannuation;
- the treatment of soft dollar benefits; access to advice;
- replacement of the accountant’s exemption; and the carve out of simple products.
“It is not good enough for Bill Shorten to just press ahead with changes like opt-in and his ill-considered and ever-changing proposal to ban commissions on risk insurance inside superannuation,” Senator Cormann said.
“He should not be allowed to press ahead with his vested-interest agenda to make Australia the world leaders in financial-advice red tape without going through proper process.
“OBPR has never even been asked to assess Bill Shorten’s latest proposal to retrospectively impose additional annual fee disclosures requirements on financial advisers.
“The least people should be able to expect is that the government will comply with its own process requirements before pressing ahead with changes the industry says will cost $700 million to implement upfront and $350 million a year there after.”
He called on Minister Shorten to commission a “proper Regulatory Impact Statement”, before pressing ahead with the FoFA legislation.
In nearly 30 years of practice I have never seen ,or heard such howling from the industry about pretty simple issues.
1. Volume rebates from platforms should be abolished. They were put there because dealers wanted to bribe their advisers to use a particular platfrom , with the end beneficiary being the institution who owned the platform and the dealer .
Dealers saw this as an opportunity to retain advisers
The institution then hoped if the adviser used the platform , some of the invested capital would be funelled into their own managed funds.
Likely outcome : A lot of small operations who have relied on the volume bonus are going to feel the heat from a cash flow perspective if all volume bonuses are outlawed ( including existing arrangements )
2. Acting in the best interests of clients – this is airy fairy stuff and and will never be tested in a court of law. This part of the the FoFA legislation could be considered Ultra Varies as the meaning of the law cannot be clealy defined
3. Opt in – what is the big deal . If you have a healthy relationship with your client you will have no trouble getting them to opt in
Likely outcome : Those clients you havent seen for years ( and which you have been getting a free income stream from through annual fees and volume bonuses ) will not opt in . Thats just plain tough
4. Scaled Advice – this is the biggest nonsense part of the legislation and designed to help Industry Funds and Banks provide limited levels of advice .
You are either on the bus or off the bus when providing advice and cherry picking on what you will advise on is dangerous to the consumer and the adviser .
In summary , bring it on as the government in waiting ( around 590 days to the next election ) will undoubtably repeal some of the airy fairy stuff contained in this legislation .
I second all of that. Well said Chris.
How we charge our fees is by an agreement between ourselves and our clients and recent comments that % fees of FUM are an issue with clients are totally untrue. We disclose our fees upfront in both percentage terms and dollar terms. Our current charge is 2% of FUM for at risk assets and 1.1% for fixed interest investments which require less monitoring.
We recently accepted a new client that was paying previous adviser $1500 pa for their advice and our fee was $6600 pa. The clients immediate comment was that “He got nothing for the $1500 whereas we had a proven record of providing a more personalised service”
We earn our keep and that is why our business is growing and most importantly we are profitable and this means a higher level of security for our clients.
We focus on the goal and most importantly we share the rewards of reaching that goal “Our goal is to grow our clients wealth whilst managing downside risks to contain losses to no more than 10% of their portfolio from negative markets”.
This we do successfully and that why we are growing.
William Mills
Price Financial Intelligence Pty Ltd
Thornleigh NSW
Not one single profession in Australia, or as far as I know, the world, directs their members in relation to the way in which they may charge for their services.
However, without exception, they require members to belong to a professional body enabling effective self-regulation and they have high minimum competency standards.
These are, in my opinion. the biggest issues for our industry in relation to becoming a profession.
FOFA does nothing to address either of these issues.
“I don’t know if those disgraceful courses still exist that allow planners to be RG146 compliant within a week”
On this I agree with you. However, I have a degree of sympathy for the position that our member organisations are in where advisers can simply decline to be members if the requirements are to onerous or if they don’t want to be regulated.
“However all the study in the world isn’t much good if the conflicts of interest in the profession still exists.”
Why not? Most lawyers, accountants, doctors and dentists face a conflict between their own financial interests and their client’s best interests every day and are able to manage them professionally and ethically.
If all of the old, established professions can manage a conflict between their own interests why shouldn’t we attempt to learn from them rather than think that, in attempting to become a profession, we should do things differently from all the established professions.
The major conflict of interest that can’t be managed (in my opinion) is charging clients on a % of FUM.
Lawyers, accountants, doctors and dentists don’t base their fees on how much money their clients have; they’ve learned to live with other methods of remuneration so why can’t we?
Hi Matthew
Lawyers, accountants, doctors and dentists may not charge on a percentage of assets managed but there is still a conflict of interest between their financial interests and their client.
In my opinion, part of being a professional is putting the client’s interests before your own. That necessarily means managing conflicts of interest.
Every day, individual surgeons pass up thousands of dollars in potential fees when they recommend that their patients undertake an alternative treatment to surgery.
Our industry should seek to have that standard of professional and ethical conduct.
Remuneration for advice must taken into consideration not only the adviser’s competence (which is a blend of qualifications and experience) and time but also risk taken on by the adviser in providing advice.
In my opinion, a fee-based service is an appropriate way for some (most?) advisers to charge. However, for those advisers that manage investment portfolios a % of assets charged is the most appropriate way to charge as it can adequately compensate for that risk. Now, whilst financial planners aren’t generally investment managers, some investment managers do manage private client portfolios.
And I guess that is the point. Adviser’s provide advice on a variety of different things to their clients and in a variety of different ways. The method of remuneration that you or I based on our speciality area and our client base use is simply not going to work for different advisers and/or their clients.
More to the point however, our industry is striving to become a profession. In order to do that we must improve our levels of competence (especially education and specialist accreditations) and the way we regulate ourselves and we must have an obligation to put our client’s interests ahead of our own. These are all elements of all professions and are being sidelined by the debate over method of remuneration – something which is not mandated by any profession.
Paul,
Government has proposed
1) a ban on volume bonuses;
2) opt in.
3) ban on % based fees on gearing.
These three changes will promote more transparency and increased trust and faith. These are initiatives that will change behavior which consumers will notice and value.
What is in the FPA’s code of professional practice that will provide more assurance to consumers that things are changing for the better?
You say that these changes are not good enough, what additional changes do you think need to be made? Are the FPA enforcing such changes on its members?
I don’t know if those disgraceful courses still exist that allow planners to be RG146 compliant within a week; I agree that these need to go (can you be an authorised rep and a member of the FPA with such a course?). However all the study in the world isn’t much good if the conflicts of interest in the profession still exists.
Matthew – I’m not sure where your assertion that the Government is doing more than the FPA to increase professionalism is coming from. The FPA code of professional practice far exceeds anything that is provided in the FOFA legislation regarding professionalism. That is unless you consider the intrafund advice component to increase professionalism. I certainly do not.
The appalling lack of detail as to future educational requirements that might go some way towards raising the barriers to entry is a case in point.
If FOFA is supposed to provide consumers with a better understanding of what constitutes good advice – it is an abject failure. Simply getting rid of commissions (no real argument from me BTW) is just not good enough.
I agree Gavin that under-insurance is a concern, but my view is this: once we are recognized as a profession (rather that an an industry) more people will engage with financial advisers which will overcome the under-insurance problem. If commissions are eliminated on insurance in superannuation premiums become a lot more affordable so people can afford more insurance but they still need advice. More resources need to be put into educating consumers which the industry superannuation funds should be berated for. They have so many members, so much FUM, yet do little to make the information about their funds and options available to members. They don’t even invest enough into educating their consultants and advisers. We spoke to one major industry super fund the other day and the head of their advice team didn’t even know what fund managers were used for their international shares allocation. She said “well you wouldn’t have just one, you’d diversify it between many”. We were put on hold whilst she went and found out who was responsible for the international shares allocation. Turns out it was just one fund manager…!
I believe that there is a basic level of financial planning that consumers can do for themselves, but once it gets to a certain level of complexity they need to seek advice.
Hopefully in the future, our fees will be tax deductible to consumers, making it more attractive to pay for advice. I believe this is the future. To get there we need to be seen to be trusted which is what all these rules changes will achieve. As I’ve said elsewhere on this website; it’s just that the newly formed IFAAA and Government is leading us to the future, not the FPA or AFA where all the members currently are.
Agree that $130billion is a good saving to make for consumers. But I have to wonder how much consumers families will lose due to underinsurance, over insurance, missed tax saving opportunities, etc. simply because they did not take advice or took limited advice from an organisation which still had a vested interest. We’re assuming that there will only be advisers who in future will always act in the best interests of the client. Intrafund advise and the lack of advice will no doubt eat away at these projected savings.
$130 billion goes back into customers’ pockets by 2026, how does that sound Jason? Far outweighs those costs you mention. Did Jason provide any detail of how he came up with those costs Andrew? Perhaps you could share it with us.
I think a lot of people will be happy knowing that all this money is staying in superannuation accounts and not into the bank accounts of lazy advisers. It’s simply embarrassing that the Government are doing more than the FPA or AFA to lead us into the professional era.