New consumer protection measures targeting the competency of financial advisers, better management remuneration-based conflicts of interests and strengthened product issuer and distributor obligations have been announced by the Federal Government in its response to the Financial System Inquiry. In addition, ASIC will be granted sweeping powers to modify and ban financial products that present a risk of significant consumer detriment.

Motivating this new wave of legislative reform is the Federal Government's view of recent product and advice failures being caused by commercial incentives overriding commercial interests. Aside from significant consumer protection reforms, the Government has, however, promised to further ASIC's efforts to remove regulatory impediments to innovative product disclosure to consumers, on which we have previously reported.

STRICTER PROFESSIONAL STANDARDS FOR FINANCIAL ADVISERS

To enhance consumer protection, new legislation will be introduced by mid-2016 to raise the professional, ethical and educational standards of financial advisers.

Financial advisers will be required to hold a degree, pass an exam, undertake continuous professional development, subscribe to a code of ethics and undertake a professional development year. It is proposed these standards will be developed by an independent, industry funded body, with consultation on transitional arrangements for existing financial advisers.

Other amendments will be made to the register of financial advisers to include whether advisers meet the new standards and whether there are relevant bans, disqualifications or code breaches applicable to that individual. Further, the Government is proposing to restrict use of the term 'financial adviser' and 'financial planner' to only those individuals listed on the register.

FURTHER REFORM OF REMUNERATION STRUCTURES

In addition to stricter professional standards for financial advisers, the Federal Government is proposing to strengthen prohibitions on conflicts of interest between financial firms and consumers by improving the disclosure of conflicted remuneration in life insurance, stockbroking and mortgage broking.

While no concrete reforms have been proposed by the Government, ASIC's current review into the effect of remuneration structures in stockbroking on the quality of consumer outcomes will be expanded to the mortgage broking sector, while the significant remuneration reforms in the retail life insurance industry (on which we have previously reported) is likely to be enshrined into legislation.

A Government commissioned review in 2018 will consider whether the new industry arrangements for life insurance advice have better aligned the interests of firms and consumers. If the review suggests further reform, consideration would be given to the Inquiry's recommendation for a level commission structure or further extending the existing Future of Financial Advice provisions on conflicted remuneration to life insurance advice.

ADDITIONAL FINANCIAL PRODUCT LEGISLATION

ASIC will be given a new financial product intervention power to enable it to modify, or if necessary, ban harmful financial products where there is a risk of significant consumer detriment. This will complement new legislation which will require greater accountability for financial product issuers and distributors and a power to ban managers of financial advisers from the industry.

No firm details about these changes have been provided in the Federal Government's FSI response, with the Government proposing detailed consultation with stakeholders before implementing any of these reforms.

REFORM TIMELINE

The timeline for reform is as follows: [1]

By end-2015

  • Develop measures to address the misalignment of incentives in life insurance.

By mid-2016

  • Develop legislation which provides a professional standards framework for financial advisers.
  • Consult on development of accountabilities for issuers and distributors of financial products and ASIC product intervention powers.

By end-2016

  • Develop legislation to give ASIC the power to ban individuals from managing financial firms.
  • Consult on strengthening ASIC's enforcement tools in relation to the financial services and credit licensing regimes. ASIC will review remuneration arrangements in the mortgage broking industry.

Beyond 2016

  • Consult on and develop legislation to enable innovative disclosure for financial products and to improve the regulation of managed investment schemes.

Please click here to access the Federal Government's response to the Financial System Inquiry.

If you have any queries as to how these developments could impact your business, please contact a member of our team.

Footnotes

[1] Department of Treasury, Improving Australia's financial system: Government response to the Financial System Inquiry, pages 7 and 8.

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