The Minister for Finance, Senator Mathias Cormann, has reacted promptly to a Senate committee’s recommendations on streamlining the Future of Financial Advice (FoFA) legislative reforms. The changes it has outlined will be enacted by regulation and where legally possible will come into effect on July 1 this year.
Cormann has announced that the government will “proceed with the best interests duty test in the form as previously outlined in the lead-up to the election and since”.
Cormann says the government will amend the legislation to impose “an explicit prohibition” on:
– Any payment made solely because a financial product of a class in relation to which the general advice was given has been issued or sold to the client; and
– Any recurring payment made because the person has given the general advice.
“To put absolutely beyond doubt how serious the Government is about not permitting commissions in these circumstances, we also intend to put in place regulation-making powers that may prescribe circumstances in which all or part of a benefit is to be treated as conflicted remuneration,” Cormann says, in a statement released this morning.
“The Government will also make improvements to the FoFA grandfathering provisions to address unintended consequences and to facilitate competition in the financial advice industry, by enabling advisers to move licensees with their clients whilst continuing to receive grandfathered remuneration.”
The statement says that “pending consideration of the various changes of our financial advice laws by Parliament” the following changes will be implemented by regulation with effect in the particular period from July 1, 2014 until December 31, 2015:
– Removal of the costly and ineffective “opt-in” requirement which forces investors to complete unnecessary paperwork in order to continue their arrangement with their financial adviser;
– Removal of the catch-all provision of the best interests duty to provide clarity and certainty on how a financial adviser has to comply with the best interest duty;
– Better facilitation of access to scaled advice, thereby enabling investors to access more affordable financial advice; and
– Removing the requirement for fee-disclosure statements to be sent to pre-July 1, 2013, clients.
It says that “the necessary change to better support the provision of general advice to consumers while putting beyond doubt that commission-style payments cannot be re-introduced will also be implemented through regulation and eventually through legislation”.
It says the following changes will be progressed through amendments to the Corporations Act and not through regulation:
– Clarification of the operation of the volume-based shelf-space fees;
– Extension of the time period advisers are required to send a fee disclosure statement to a client in an ongoing fee arrangement from 30 to 60 days after the client’s anniversary date; and
– Expansion of regulation-making powers in relation to the conflicted remuneration provisions to allow the Government to react quickly to address unintended consequences or if industry were found to be misusing the provisions.
The following changes will be made solely through regulation:
– Balance scorecard incentive payments which do not conflict advice are permitted; and
– Improvements to the FoFA grandfathering provisions to address unintended consequences and to facilitate competition in the financial advice industry.
“The final FoFA package has been informed by a further round of consultations by Government and also the inquiry undertaken by the Senate Economics Committee,” the statement says.
The Senate Economics Legislation Committee tabled its report into the Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014 on Monday night. It contained only three recommendations, and effectively rubber-stamped the proposed amendments to the original FoFA legislation.
Recommendations of the Senate Economics Legislation Committee inquiry into the Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
Recommendation 1
– That the the Explanatory Memorandum to the Bill “include a paragraph that clearly and unambiguously spells out the best interests obligations—961B(1) and (2), 961G, 961J and 961H—and the level of consumer protection they provide”; and
– That the government “consider closely how these separate obligations work together and whether any further strengthening is required to ensure that a provider cannot circumvent these best interests obligations”.
Recommendation 2
– That the Explanatory Memorandum make clear that “it is not the government’s intention to reintroduce commissions”, including on “general advice”;
– That the government “consider the provisions governing conflicted remuneration and redraft them to ensure that there is greater clarity around their implementation”; and
– That the government “give consideration to the terminology used in the Explanatory Memorandum and legislation (for example, section 766B), such as information, general advice and personal advice, with a view to making the distinction between them much sharper and more applicable in a practical sense when it comes to allowing exemptions from conflicted remuneration”.
Recommendation 3
– That “after the government gives due consideration to recommendations 1–2, the bill be passed”.
