Australia: What is the future of the Future of Financial Advice (FoFA)?

The Future of Financial Advice (FOFA) reforms came into effect on 1 July 2013, and introduced changes that among other things banned conflicted remuneration (a benefit that might reasonably be expected to influence the financial advice given by advisers to their retail clients), required advisers to act in the best interests of their clients, and required advisers in ongoing relationships (of more than a year) with those clients to give a fee disclosure statement every year and the opportunity to renew that relationship (known as the opt in requirement) every two years.

The Abbott Government's changes to FOFA were announced on Friday 20 June. After months of debate and a Senate Committee Inquiry, and despite an uncertain grip on control of the Senate, the Government has resolved to proceed with the partial rollback of the FOFA reforms that it announced prior to the election.

There has been much media coverage of these changes, not all of it accurate. Here are the facts.

The implementation of these changes took effect by regulation on 1 July 2014 in two categories. Some of these regulations are to be replaced by legislation and will sunset on 31 December 2015. Others will remain in force as regulations.

The following changes, now in force, will be replaced by legislation by 31 December 2015:

  • The 'catch all' provision in the s961B(2) 'best interests' safe harbour is removed, although advisers' obligation to act in the best interests of clients remains unchanged. There has been some confusion in how this change is reported. The current arrangements provide for a safe harbour under which advisers are deemed to have acted in the best interests of their clients if they have taken a certain steps. The catch all provision is an element of the safe harbour that deems an adviser to have acted in the best interests of their client, if apart from the specified actions they have "taken any other steps to act" in the best interests of the client. The Government argues that this redundant repetition increases uncertainty about the scope of the safe harbour and is therefore to remove it;
  • A note is added to the existing exemption from the ban on conflicted remuneration for amounts given by (or a the direction of) the client to clarify that these payments must be given out of the clients own money;
  • The obligation to give fee disclosure statements is restricted to clients who entered the fee arrangement with their adviser after 30 June 2013;
  • The "opt in" requirement under which advisers must renew ongoing fee arrangements with clients every two years, is removed; and
  • Advisers and their clients will be able to agree on the scope of the advice to be provided – the adviser's best interest duty will then be limited to that scope (although in our view this is already the case); and
  • The ban on conflicted remuneration will still be lifted in relation to general advice given by employee advisers provided the employee has not given personal advice in the previous twelve months, and the financial product in question is issued or sold by the licensee.

In addition, under these regulations:

  • permit incentive payments based on a balanced scorecard of criteria which do not conflict advice. This is already a mechanism contemplated by ASIC in Regulatory Guide 246; and
  • extend the current grandfathering arrangements to:
    • permit advisers to move from one licensee to another, and retain grandfathering protection for remuneration payments received in respect of clients they take with them; and
    • extend by 12 months the time at which grandfathering ceases for benefits paid to an employee under an agreement with their employer. Generally this means that previous bonus arrangements under existing contracts can continue until 1 July 2015.

Finally, the Bill currently still before Parliament includes changes, not to be implemented first by regulation, that will increase the time advisers have to send fee disclosure statements, and clarify the operation of volume-based shelf space fees, among other things.

This is the current law, but the future of the regulations remains uncertain, as they remain subject to disallowance in the Senate. If that happens, the law will revert to what it was before the regulations were made.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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