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Financial Services Update
30 August 2011

Draft Future of Financial Advice legislation released

Treasury yesterday released draft legislation of the first tranche of the Future of Financial Advice (FOFA) reforms for public consultation. The key measures contained in the draft legislation include:

  • Best interest duty

Persons providing personal financial product advice to retail clients will be subject to a duty to act in the best interests of clients and give priority to the interests of clients in the event of a conflict of interests. The introduction of a statutory best interest duty was previously announced by the Government as a part of its initial package of proposed FOFA measures released in April 2010 (April 2010 announcements). The penalty for breaching this duty will be a maximum of $250,000 for individuals and $1 million for corporate entities (licensee or authorised representative).

Our comments

The draft legislation provides a series of steps which, although not exhaustive, give advisers some guidance as to how they might discharge the duty to act in the best interests of clients.  These steps arguably go no further than what most advisers would consider good practice already (ie identify the clients needs, determine whether the adviser has complete information about the client, consider whether there are other options outside of the advice sought by the client that could be relevant to the client and, if so, inform the client).  The draft legislation also confirms that, where the adviser is working with an approved products list, it does not need to go outside the products on the list in order to discharge the duty.  However, if it becomes 'reasonably apparent' to the adviser that there is no product on the list that can satisfy the client's objectives, the adviser must notify the client accordingly and refuse to give the advice.
 
On the other hand, the draft legislation gives no such guidance on how advisers can discharge their duty to give priority to client's interests when giving advice.  Advisers will have to look to the common law, and existing guidance from regulators, for assistance on managing such conflicts of interest.
 
  • Opt-in

There will be a requirement that, if an adviser is to charge an ongoing adviser fee to a retail client, the advisor must provide a renewal or 'opt-in' notice to the client every two years as well as an annual fee disclosure statement including the dollar amount of fees. A renewal notice must be provided to a client at least 30 days before the end of  the relevant two year period and, unless the client notifies the advisor in writing within 30 days of being sent the notice, the ongoing fee arrangement will terminate at the end of a further 30 days. If a client does not renew the adviser's services by 'opting in' to the renewal notice, they are assumed to have opted out and ongoing adviser fees can no longer be charged. The 'opt-in' requirement will apply from 1 July 2012. The April 2010 announcements had originally envisaged an annual renewal or 'opt in' process for advisors. 

Our comments

The information that must be included in the 'opt-in' and disclosure notices is set out in the draft legislation, so it would appear that the form of the notices will not be mandated.  This may give advisers some flexibility as to how they frame these notices, provided they include the mandated information.  There does not appear to be any requirement that the disclosure notices be sent to the client as 'stand alone' documents, so they may be able to be included with other information that is sent to the client.  However, a client must agree to renew their ongoing fee arrangement in writing within 30 days of being sent the 'opt in' notice – penalties apply if an advisor charges a client fees after a fee agreement has terminated – so advisers will need to actively bring these 'opt in' notices to the attention of their clients. 
  • Enhancements to ASIC powers

Under the draft legislation, the Australian Securities and Investments Commission's (ASIC) powers to suspend or cancel licenses of or ban persons, who are not fit and proper, from providing financial services will be enhanced. 

Our comments

In particular, in applying the fit and proper powers, ASIC will have scope to have regard to any matter it considers relevant when considering whether, at a particular time, there is reason to believe that a person is not of good fame and character (which is relevant to whether the person is fit and proper).  However, the draft legislation does not appear to extend ASIC's powers so it can drill down into shareholdings and other equity arrangements and act against a corporate licensee or representative on the basis of concerns about the good fame and character of its shareholders.
 
The draft legislation forming the first tranche of the FOFA reforms will be open for consultation until 16 September 2011.

In addition to the measures set out in the draft legislation summarised above, Treasury has also provided clarification on a number of other FOFA measures which had been previously announced. Some of these measures will be covered in the second tranche of FOFA reforms which is expected to be released shortly.  These include: 
  • Grandfathering of existing trail commission arrangements

It has been clarified that the proposed ban on trailing commissions, proposed by the April 2010 announcements, will not apply to any existing contract where the adviser has a right to receive trailing commissions after 1 July 2012 (or 1 July 2013 for certain risk insurance policies).

Additionally, there is some good news, and some bad news, for platform operators and dealer groups using platforms.  It is proposed that the reforms will prohibit future payments to licensees (or their representatives) in respect of new investments through a platform, but will grandfather future payments to licensees (or their representatives) in respect of investments in a platform accumulated prior to 1 July 2012. In short, this means that the level of volume payments from platform providers to dealer groups will 'crystallise', and should not increase in size after the commencement of the reforms on 1 July 2012.  We will await the wording of this draft legislation, but it appears that the Government intends to cap the amount a platform operator can pay to a dealer group at whatever the amount is at 30 June 2012, irrespective of how much funds under management increase after that time.

  • Treatment of insurance commissions
  • In its April 2011 announcements on FOFA (April 2011 announcements), the Government indicated that it would ban all up-front and trailing commissions and like payments relating to individual and group risk insurance within superannuation from 1 July 2013. Treasury has now clarified that this ban will apply to commissions on group life insurance in all superannuation products and to any life insurance policies in a default or MySuper product. This means that commissions on individual life insurance policies within superannuation would only be allowable on Self Managed Superannuation Funds and Choice products (ie options in a superannuation product that is not the default option). Additionally, by 1 July 2013, the superannuation industry is required to unbundle disclosures so that the dollar and percentage value of commissions is disclosed for all new and renewed policies.

    • Extension of bans on soft dollar benefits

    The ban on soft dollar benefits has been extended to include non investment-linked life insurance outside of superannuation (but not general insurance). Previously, the proposed ban on soft-dollar benefits only covered retail investment financial products and life insurance within superannuation but not risk insurance outside of superannuation.

    • Stamping fees or similar payments to stockbrokers for capital raising  

    In order to continue to facilitate and encourage capital raising by stockbrokers, stamping fees and similar payments will be carved out of the prohibition on conflicted remuneration models. The announcement noted that "broking firms will not be unfairly impacted so that employee brokers can continue to be remunerated on brokerage they generate, including, where remuneration is set as a percentage of the firm's income from broking fees". 

    • Restrictions on the use of the term "financial planner"

      It has been proposed that the use of the term "financial planner" be restricted. Details of the restriction will be made clear in a consultation paper proposed to be released by the Government by the end of this year.

    We will provide further updates as more information comes to hand.

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