In a surprise move last week, the Senate agreed to pass a cut-down version of the Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014, first introduced into Parliament in March 2014.

The good news is that financial planners can now get on with business in the certain knowledge that Future of Financial Advice (FoFA) reforms are unlikely to be tinkered with again in the life of this government. Focusing on providing excellent and professional advice to clients will be the name of the game, with a chance for the industry to focus on how to lift professional standards through the government’s commitment to the three E’s: education, experience and ethics.

The bad news is that many of the government’s commitments to improve the operation of the FoFA regime have been abandoned as a result of the intransigence of the opposition and cross-benchers in the Senate.

What’s left?

One piece of good news celebrated by the industry is the extension of the time allowed for giving fee disclosure statements and renewal notices. Planners will now have up to 60 days (previously 30 days) after the end of the last disclosure period to notify clients. This will obviously provide much-needed flexibility and allow more time to arrange meetings with clients if required.

Another useful change is to expand the training that can be given by issuers to planners without infringing the ban on conflicted remuneration. Currently, training is limited to training relevant to providing advice to retail clients. The Bill will extend this to any training relevant to carrying on a financial services business. This means that issuers can offer and planners can attend a wider range of courses and seminars – the only requirement is that it is relevant to your business as a planner.

The rest of the Bill is mainly clarification of certain provisions and confirming the scope of the exemptions available to bankers when advising on deposits, non-cash payment products, general insurance and consumer credit insurance.

What’s gone?

The key changes that will not be made now are those that planners had no doubt given up on already:

  • The two-year opt-in requirement will continue to apply
  • The best interests duty safe harbour remains unchanged
  • There will not be any express recognition of scaled advice.

Opt in

The implications of the opt-in notice requirement have been discussed long and often over the past few years and do not need repeating here. It is enough to say that planners will need to make sure that clients renew their relationship at least every two years. This can be in a meeting, over the phone, by email or any other contact. But contact will be required.

The simplest way to meet the requirement will be to do what planners want to do in any case – meet with your clients every year to review their circumstances and the advice you have given. The only difference is that you should get your client to formally renew the relationship at that time – that may be as simple as confirming the fees for the next year and having your client sign to confirm this. This will of course be a challenge with regard to clients who are harder to get hold of or those you deal with more informally. You will need their regular confirmation of your fee arrangements. While there is no particular formal requirement for this, it is important that you retain a proper record.

Best interests duty

The biggest concern for planners about the best interests duty safe harbour will be the fact that the catch-all step remains. This means there is no real safe harbour because you always need to think what else needs to be done to act in the client’s best interests. As a lawyer, this worries me because it creates uncertainty. There is always a risk that a client will say with the benefit of hindsight that you should have done something different.

As a professional financial adviser, you will want to make sure that your client does what is best for them. Doing this should mean you meet the catch-all requirement. It is also worth noting that ASIC has indicated that planners should be doing the following to meet this requirement:

  • Explain what advice you are and are not providing
  • Provide recommendations on strategy and not only product recommendations
  • Indicate when and how often any advice should be reviewed
  • Offer to advise on or refer your client to another person to advise on any other key issues within the subject matter of the advice sought by the client (ASIC RG 175.336).

Scaled advice

The Streamlining Bill proposed to expressly recognise that the client and the planner can together reach agreement on the subject matter of the advice. The opposition have been concerned that clients might agree to limit the advice too narrowly in a way that suited the planner but not the client. However, the safe harbour has always required planners to identify the subject matter of the advice sought by the client, and ASIC has recognised that this means the scope of advice can be limited to a single issue if this is consistent with the subject matter of advice sought by the client.

Financial advice is always limited in scope to some extent. Advisers focus on the money that clients have available for investment and on the asset classes they are competent to advise in. There is no expectation that planners would normally be expected to consider whether a client should invest in complex investments or non-financial assets such as artworks unless the client specifically requests it or they are part of the client’s existing portfolio. So while the proposed amendment was useful to confirm that scaled advice can be given by planners, planners can continue to limit their advice to the areas sought by the client that the planner is able to advise on. You just need to make sure you consider whether limiting your advice in this way is in the client’s best interests and, if not, alert them to this fact; and if necessary refer them to someone who can provide the advice you think they need if you cannot give it.

The final cut

Other elements of the Streamlining Bill that did not make the final cut include:

  • The Palmer United Party amendments to statement of advice requirements
  • Certain conflicted remuneration exemptions, including the general advice exemption for product issuers and their representatives
  • Fixing the defective volume-based shelf space fee provisions which apply to platform operators.

As can be seen, the Bill that passed the Senate last week is much reduced from the government’s original proposals. The changes that remain will become law once the Bill is passed by the House of Representatives once again.

While FoFA will always be less than perfect, the latest development does at least close the chapter on this period of uncertainty. The changes that have not been made would have been an improvement, but the reality is that the expectations remain the same: provide the best advice you can for your client.

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