The Federal Government has provided the advice, funds management, superannuation and life insurance industries with further insights into the Future of Financial Advice reform package (FoFA), a major regulatory overhaul that was announced last year.
The two key aspects of the Government's 28 April announcement are arguably concessions to an industry facing material operational, commercial and compliance challenges. The first is a ban on volume-based payments related to risk insurance which has been limited to insurance within superannuation, with a delayed start date of 1 July 2013. The second is the timing of the opt-in on the adviser charging regime which will now be every two years rather than every year.
When the Government announced the FoFA reforms last year, the approach in relation to risk insurance was not articulated in detail, and was pending further consultation. Having now considered the position, including in light of the Cooper Review recommendations, the Government has decided to distinguish risk insurance within superannuation on the basis that it has arguably unique features which merit special treatment. In particular, it is stated that fees and charges within superannuation come at the cost of foregone retirement savings and insurance commissions in this context have the potential to affect the quality of advice.
It remains to be seen whether the distinction will address concerns around adequacy of insurance. However, it leaves the potential for a two-speed pricing structure for insurance, determined by whether the product is issued within or outside a superannuation fund. Advisers may therefore need to consider these pricing differences in light of the new statutory best interests standard (see below).
Adviser charging regime
The shift to a two year opt-in for the adviser charging regime also comes as a result of further consultation by the Government. The change in timing has been justified on the basis that it gives greater flexibility for advisers in terms of implementation. The prospective commencement date is however unchanged at 1 July 2012. The opt-in will now be supplemented by an intervening annual disclosure notice to be provided to the client which will include fee and service information for the previous and upcoming year and remind the client of their right to opt out at any time.
A key issue with the adviser charging regime is how existing arrangements are to be dealt with given that the opt-in is intended to be prospective. This approach may result in new clients being provided with higher levels of protection and disclosure than existing clients. Consultation on the practicalities of the opt-in policy is ongoing and the Government has indicated that issues around grandfathering arrangements will be considered. We can therefore expect to see further detail on how advisers are expected to meet this new compliance obligation.
Other key details
In spite of industry lobbying to narrow the impact of the ban on conflicted remuneration, the Government has re-emphasised the policy position of a broad comprehensive ban on conflicted remuneration, including volume-based payments. This means that volume-based payments paid from platform providers to financial advisory dealer groups will be prohibited as originally announced. The Government views this reform as necessary if structural change to remuneration arrangements in the industry is to eventuate.
Other key details coming out of this announcement are:
- Certain soft dollar benefits which did not originally fall within the conflicted remuneration prohibition will now be subjected to a prospective ban from 1 July 2012. Limited exceptions will be available for benefits under $300 which relate to 'professional development' and 'administrative IT' services. Further details on the criteria for determining the types of services which fall within the exception are expected.
- The new statutory best interests standard should not be regarded as imposing a 'trustee-style' standard on advisers. Instead, the duty will be measured by reference to what is reasonable in the circumstances and will be scalable to the client's needs. A number of fundamental practical issues with how this qualified fiduciary-style standard is to work remain. Further guidance is expected.
- There will be a limited carve-out from the ban on volume-based payments and best interests duty for basic banking products which are being sold by employees of authorised deposit-taking institutions.
- Other key points concern changes to promote the provision of 'scaled' advice (i.e. advice about one area of an investor's needs, such as insurance, or a limited range of issues), consideration of whether use of the term 'financial planner/adviser' should be restricted, further consultation on the replacement to the accountants' AFS licensing exemption and a possible extension of the concept of 'geared investments' for the purposes of calculating percentage based fees.
In terms of next steps, consultation on the key points will continue with draft legislation scheduled to be released in the second half of this year. Legislation effecting the reforms is proposed to be introduced into Parliament before the end of the year. Meanwhile, the industry will have to digest the prospect of a staggered set of implementation dates and, potentially, complex grandfathering arrangements. This will add to the mix of compliance issues which the industry will need to address.
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