In the shadow of the GFC and in response to the recommendations made by a parliamentary Joint Committee on Financial Services, the Federal Government has proposed wide-reaching reforms to the financial services sector. The proposed reforms outline measures to improve financial planning advice in light of the failures of significant companies which destroyed the savings of ordinary investors.

The key elements of the proposed reform package include:

  • a ban on remuneration structures, including commissions and payment based on sales volumes
  • percentage-based fees charged only on ungeared products and only if the investor agrees
  • more transparent and flexible methods for paying advisers
  • an inquiry into a statutory compensation scheme for cheated investors
  • more powers for ASIC to act against unscrupulous operators
  • financial advisers will have a duty to act in the best interest of clients and without conflicts of interest
  • accountants will no longer be able to advise on setting up DIY super plans
  • a review of the current method of classifying unsophisticated and sophisticated investors (retail and wholesale clients)
  • simpler disclosure of advisory services provided to consumers, and
  • an expert advisory panel to review professional standards for advisers.

One of the most significant reforms proposed is the imposition of a fiduciary duty on financial advisers. The duty indicates the existence of a special relationship between an adviser and their client, comparable to the relationship between a lawyer and client. While the existence of a fiduciary duty will transcend all aspects of the relationship between adviser and client, advisers will have to be particularly mindful of the duty as regards remuneration – a key aspect of an adviser's fiduciary duty is that they are prohibited from benefiting from their relationship with a client without the client's informed consent.

Reinforcing the adviser's fiduciary duty on their remuneration are reforms directly targeting the issue. The proposed reforms ban certain remuneration structures, including sales commissions, but introduce percentage based fees as an alternative. Fees can be charged as a percentage of the client's assets but borrowed investment capital will be excluded from this calculation. This is a move designed to stop the mis-selling of margin loans.

To police the reforms, further powers and resources are proposed to be granted to ASIC to act against financial advisers, establish a professional standards board and establish an expert review into a statutory compensation scheme.

Most of the proposed reforms will commence on 1 July 2012.

Further reforms may follow as the Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen, has asked the convener of the Corporations and Markets Advisory Committee, Richard St John, to examine a statutory compensation scheme. Despite the positive signs, including the recovery of employment in financial services to levels higher than that seen prior to the global financial crisis, the clean up continues.

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