The real impact on financial planners from the original Future of Financial Advice (FOFA) regulations that will remain in place are in two areas:
1) The Fee Disclosure Statements (FDS’s) will be required for all clients, new and existing, where an ongoing fee arrangement exists
2) The Opt-In required every two years now for all new clients that have an ongoing fee arrangement established since 1 July 2013
Commission paying clients, which are considered not to have an ongoing fee arrangement are not required to have a FDS or Opt-in. Once the Grandfathering provision has been reaffirmed by the government, the market value of commission-based clients could increase.
The ‘disallowed’ FOFA amendments were to clarify Grandfathering amid the confusion that existed between July and December 2013. In July 2013, all hell broke out and chicken little thought the sky was falling in, along with the rest of the pen. All along, both sides of government have consistently said, ‘They do not want to see financial planners penalised for selling their business and therefore not being able to move their clients to a new licensee.’ It seems likely that these provisions will now be retained.
Even fundamentally at a common law level, if a person sells a benefit (recurring revenue), then that benefit must be passed onto the recipient who has paid for the benefit. If that doesn’t happen, there’s a provision under the Corporations Act for payment of compensation.
Furthermore, I doubt if the government would want to face claims of anti-competitive legislation, possibly due to financial planning businesses being unable to move licensees because of ‘new legislation’. The government has already admitted on several occasions that the confusion of July 2013 with the new regulations ‘was unintended.’
The best interest duty of advisers, that will remain, is neither here or there. Really, if someone wants to do the wrong thing, they’ll do it.
FOFA was first announced on 26 April 2010. At the time, the government said via a media release that the proposed FOFA regulations were due to the Global Financial Crisis. Further on, the government has mentioned that the ‘Storm Financial’ debacle was encouragement for these changes to be necessary. Do you really think that the FOFA changes will stop another Storm from happening, or prevent another GFC?
At the time, the government stated that FOFA would improve the quality of advice, protect investors and encourage more people to seek financial advice. I would be interested in hearing your feedback on this matter and ask that you complete a quick four question survey. Over 800 planners completed a similar survey in April 2010 and we’d like to see if anything has changed over the past four years. We’ll publish the results in next month’s newsletter. Participate in our survey.
In summary, FOFA has no effect on mortgage trails, purchase of shares in a financial planning business, life insurance commissions, income protection renewal commissions, group insurances commissions or trauma insurance renewal income.
FOFA will affect fee-for-service payments by clients, dialled-up Adviser Service Fees (ASFs) collected via the investment or platform and any other ongoing fee arrangement. The red tape now added to the financial planning industry with FDS and Opt-In, along with the higher educational requirements, may just tip a few advisers over the edge.
