As you have no doubt heard, the government’s changes to the Future of Financial Advice Reforms (FoFA) have been unexpectedly, and dramatically, unwound by the senate.
If you use a financial adviser, what changes can you expect to see?
Best interest duty
The government had attempted to water-down this change put in place by the ALP government. The financial services industry had lobbied hard to remove this controversial “catch-all” provision that says an adviser must take any step that would be reasonably regarded as being in the best interests of the client. But the reforms’ failure in the Senate means this requirement will remain.
Further, before providing advice, an adviser must fully investigate a client’s circumstances. The government wanted to reduce this requirement, if a client wanted to keep their circumstances private.
I think this will change the type of advice some advisers are prepared to provide.
Asset based fees on borrowed amounts
Asset based fees on borrowed funds, if used to acquire financial products, are banned. This applies to all borrowed monies, including lines-of-credit on home loans. However, it only applies to the amount borrowed as long as the borrowed amount and non-borrowed amounts can be separately identified.
Volume based payments
These payments – paid based on the amount of business an adviser has placed with a product provider – are banned as they’re automatically assumed to be conflicted remuneration. This ban may not apply if a payment is “promptly passed on to the client” or is retained by an Australian Financial Services Licencee and not passed on to an Authorised Representative.
A ban on conflicted payment won’t apply to existing contractual rights entered into before “application date” – which for most licencees was 1 July 2012. There remains a lot of debate about what this means. Some licencees have elected to interpret this provision very liberally.
Fee disclosure statement
These were going to be eliminated in most cases and they will now need to be sent to every client and must contain the following information:
- Details of each fee where arrangement for fee is paid for more than 12 months.
- Amount of each ongoing fee.
- Information about the services the client was entitled to receive during previous year.
- Information about service the client received.
- Information about other prescribed matters (none have been put in place).
Some fees aren’t defined as ongoing fees – for example, fees fixed at the time the arrangement was entered into.
Importantly for an adviser, any ongoing fee arrangements will cease if a disclosure statement, or renewal notice obligation, is not complied with.
The statement must be provided before the end of a 30-day period beginning on “disclosure day”, which is the anniversary day that an arrangement is entered into.
These must be provided within the same period of time as a Fee Disclosure Statement and must state that a client may or may not renew, that fees won’t be paid to the adviser unless the client renews, and the adviser/client relationship is automatically terminated if clients don’t follow-up before the end of the renewal period.
The Palmer United Party (PUP) and Motoring Enthusiast Party (MEP) changes survive for now!
The following regulations were put in place to enable the government’s changes to the FoFA rules to pass. Now that these government changes haven’t been finalised, these PUP and MEP changes don’t seem to be necessary, however they haven’t been removed. The following is a brief summary of these changes, which apply from 1 January 2015:
- A Statement of Advice (SoA) must be signed by the adviser and client.
- Additional documentation if a client asks for additional or a variation to existing advice.
- Additional statements within a SoA about the quality of work done by the adviser and products.
There will be no substantial changes between now and 1 July 2015
Technically the original ALP Future of Financial Advise reforms have now been in operation since July 2013, however ASIC has announced that it intends to give financial advisers and their licencees time and space to comply with all these rules.
Don’t shed any tears for financial advisers
The government has had to regulate the financial services industry because it has consistently and belligerently refused to regulate itself.
In other words, this mess is really the making of everyone who works in financial services.
Senate completely unpredictable
I think it’s possible that before 1 July we might see further changes made to the financial advice laws but unfortunately trying to predict what might happen is a waste of time.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.