Introduced heightened obligations on advisers to act in the
best interests of retail clients and place the interests of clients
ahead of their own ("Best Interests Duty")
Imposed a ban on conflicted remuneration structures (for
example, volume based commission payments)
Implemented requirements for advisers to renew ongoing fee
arrangements with clients every 2 years (the opt-in requirement),
Imposed an obligation on advisers to send annual fee disclosure
statements to clients.
These consumer protections have been the subject of much
criticism and debate, with arguments that the reforms created
unnecessary red tape on industry participants and are too costly to
implement. In December 2013, acting on its election commitment to
reduce this compliance burden on the financial services industry,
the Federal Government announced a further package of changes to
FOFA. New legislation to implement this suite of changes to reverse
and water down some of the FOFA laws is currently before the
In the meantime, due to a "need for swift action", the
Government controversially implemented regulations that took effect
on 1 July 2014 which mirror many of the Bill's proposed
changes. These interim regulations will be repealed once the new
legislation takes effect.
WHAT ARE THE IMPLICATIONS OF THE CHANGES?
For advisers, the changes mean reduced compliance obligations.
The new regulations have removed the opt-in requirement for all
clients and it is no longer necessary to send fee disclosure
statements to pre 1 July 2013 clients.
Some positive changes, from the advisers' point of view,
Giving clarity as to the steps to be taken by advisers to
discharge their Best Interests Duty, including removing the
obligation to take any other steps reasonable in the circumstances
(known as the "catch-all provision")
An explicit acknowledgment that advisers and clients may agree
that the advice is limited to a particular product or range of
products (known as scaled advice), and
Carving out general advice from the conflicted remuneration
provisions so that performance related benefits may be provided to
employees of AFSL holders who provide general advice in certain
WHAT DOES IT MEAN FOR THE MUM AND DAD INVESTORS?
For retail clients, the amendments essentially mean less
Advisers will not need to renew ongoing fee arrangements every 2
years and the onus will fall on investors to cancel arrangements
that are no longer required. The risk for investors is that they
may continue paying fees indefinitely for advice they are not
For arrangements entered into before 1 July 2013, advisers will
no longer need to provide annual fee disclosure to their clients.
The onus will be on clients to seek this information from their
Retail clients should also be mindful of the concept of scaled
advice. While scaled advice arguably was available before the
changes took effect, the express recognition of its availability
may lead to an increase in advisers offering to provide more
specific or targeted advice, as opposed to more holistic advice.
Whilst this will undoubtedly provide more affordable access to
advice for retail clients, individuals must be conscious that the
Best Interest Duty of the adviser will be limited to the scope of
the advice agreed upon.
The Senate Committee examining the new legislation has
recommended the Bill be passed. However, given the present
unpredictability of the Senate, the passage of the new legislation
is somewhat uncertain. If the Bill is disallowed in the Senate,
then it is likely the regulations will be repealed and FOFA laws
will revert to the more stringent requirements for advisers as
originally enacted. Time will tell.
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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In the years following the global financial crisis of 2008 many Australian investors lost their life savings as financial products failed and the Australian Stock Exchange shed over 3,000 points.
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