The recent disallowance of a package of Future of Financial Advice (FoFA) refinements put through by the Government creates yet more confusion in the advice world, writes Michael Vrisakis.
Due to the disallowance, the FoFA Regulations that came into effect on 1 July 2014 have ceased to have effect. Accordingly, the FoFA laws implemented by the former Labor Government on 1 July 2013 have been reinstated.
This includes:
• reinstating the ‘opt-in’ rule;
• reinstating the catch-all provision in the best interests duty;
• reinstating the requirement to give all clients fee disclosure statements;
• removing the express references to providing ‘scaled advice’; and
• removing a number of exemptions to the ban on conflicted remuneration, including:
– the balanced scorecard exemption;
– the calculated by reference exemption;
– the general advice exemption; and
– the stamping fee exemption:.
As a result of the disallowance, the Government has sought to reintroduce some less controversial of these changes to facilitate certain business transactions. At the same time, the Australian Securities and Investment Commission (ASIC) has issued a media release stating that it will take a ‘facilitative approach’ to regulation until 1 July 2015. ASIC acknowledges that financial service providers will need to make systems changes to comply with the FoFA provisions.
The disallowance flowed from a widespread sentiment that the FoFA regulation changes diluted key consumer protections. This is both true in part and false in part.
Certainly the removal of the catch-all limb of the best interests duty did not diminish consumer protection at all. It was not well understood and did not add to the other best interests obligations. In fact, conveniently, proponents of the view that the best interests change watered down consumer protection ignored the three separate best interests provisions that the FoFA Act sets down – not just a best interests duty, but a duty to give appropriate advice, to prioritise clients’ interests and to warn the client where the advice is not based on full information.
Scaled advice
As to the scaled advice, the FOFA regulations which were disallowed did clarify that scoped or scaled advice was possible. However, even without this clarification it is abundantly clear that scaled advice can be given. Some commentators have suggested that scaled advice can never be given because to do so would not be in the client’s best interests. Again this is not correct. Apart from the fact that scaled advice might be in the client’s best interests, it is clear that the client and the adviser will by mutual agreement always settle on a scope of advice as part of their engagement. This engagement process which becomes documented in the statement of advice allows scaled advice to be provided. Within the boundaries of the scaled advice, the adviser must act in the best interests of the client, give appropriate advice and prioritise the interests of the client.
What then are the other key issues that flow from the disallowance?
Welcome to the Hotel California
One significant issue relates to mobility of advisers between dealer groups.
As the so-called expanded mobility provisions (sometimes called Hotel California provisions) have been disallowed, as a result of the disallowance it was generally not possible to pay advisers grandfathered remuneration when they move from one licensee to another. The previous (ie remaining) Hotel California rules meant that you can generally not pay advisers sales remuneration when they transfer between dealer groups as they will not have a pre-1 July 2013 (ie grandfathered) arrangement with the new dealer group. It has only recently been announced that it had been determined that these provisions would be reinstated.
Reverting to the pronouncement by ASIC concerning facilitative compliance, the FoFA provisions are civil penalty provisions. If a licensee contravenes a civil penalty provision, ASIC has access to a range of enforcement tools, including pecuniary penalty orders. A court may grant whole or partial relief from liability for breach of a civil penalty provision where a licensee has acted honestly and ought fairly to be excused for the contravention in the circumstances.
The fact of the matter is that changing systems and processes in the wake of the disallowance may take considerable time and adjustments could require considerable manpower. A facilitative approach can take into account these factors, because at the end of the day, the law should recognise the impossibility of overnight fixes.
A facilitative approach
A sensible facilitative approach to regulation could operate as follows:
• ASIC will pursue breaches where there has been no attempt to comply with the rules post-disallowance;
• ASIC will not pursue breaches where immediate compliance with the rules is not possible due to systems and other reasons;
• ASIC will not pursue breaches where compliance will take a reasonable time, due to legitimate operational reasons.
The increased cost of compliance is unlikely, of itself, to be seen as a justification for non-compliance.
In view of the above, the disruption caused by the FoFA disallowance will not be small.
The Government has announced that it will reinstate some of the other regulations which were disallowed. To that effect the determination of measures to be reinstated include the stamping fee exemption and as mentioned earlier; the Hotel California provisions.
