By Charis Palmer, The Conversation
The Federal Government has confirmed it will push ahead with controversial moves to water down the Future of Financial Advice (FoFA) law reforms, on the grounds the current legislation reduces the affordability and accessibility of financial advice.
Finance Minister Mathias Cormann said the plan was never to bring back commissions for financial advisers, however the regulation would be changed to allow “incentive payments which do not conflict advice” to be permitted.
The government said it would make legislative amendments if required to deal with unintended consequences arising as a result of the changes, to further protect consumer interests, but said it did not believe this would be necessary.
The government will also remove the “opt-in” requirement for financial advice customers to re-sign contracts with advisers on a regular basis, and remove the catch-all provision of the best interest duty requiring advisers to have “taken any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances”.
The changes have been announced ahead of the July 15 release of an interim report from the Financial System Inquiry, headed by David Murray.
A panel of experts respond below.
Deborah Ralston, Professor of Finance and Director of the Australian Centre for Financial Studies
It’s really disappointing to see the government come out with a change to financial sector operations when they have said there would be a moratorium on that during the course of the financial system inquiry. It would have been good to see them defer this and put it into the mix.
The move to water down FoFA is really disappointing.
When you’re in a vertically integrated wealth management organisation you can refer individuals out from personal advice to general advice within the same organisation, and that will really undermine the whole spirit and intent of FoFA.
The fact they’re allowing commissions on some really quite complex products, which probably would be much better dealt with in terms of personal advice not just over the counter sales, is a matter of real concern – it’s a retrograde step.
I think it’s disingenuous for the government to say it will make these exemptions with regards to commissions and then come back and say “We will make changes to regulation later if we need”. It is very poor policy.
Two thirds of financial advice clients are completely passive and may not know they’re paying trailing commissions – they should be advised. How hard is it to write to them every two years and advise them what their position is?
A disclosure statement would be something we’d expect to see in any professional services firm, so to exempt the financial planning industry from this just does not make sense at all. From a business point of view it’s always good practice to have a trigger to make contact with clients on a regular basis – it’s often a chance to up-sell, and quite apart form ethical considerations it makes good business sense.
There are a proportion of financial planning practices who do the right thing and this is what’s so disappointing. It was a real opportunity for the financial planning industry to clearly state it worked with ethical standards and in the best interest of clients. It’s very important for people to have confidence in the sector, and the changes undermines what was a great step forward in my view.
Warren McKeown, Teaching Fellow, Financial Advice, University of Melbourne
In finance minister Mathias Cormann’s press release he uses opposition leader Bill Shorten’s words that remuneration is not conflicted (and is not banned) when remuneration is paid which could not be expected to influence the choice of financial product. He uses such statement to justify that under balanced scorecard arrangements certain incentive payments related to the provision of general advice are not conflicted remuneration.
So, if direct commissions or a referral fee (based on commission percentages) are banned then there is no ban on some form of other incentive or reward system payment. It appears that under this system, people will still walk into a bank and be asked by the teller if there’s anything they can do for them, including insurance and investment products, or a discussion of what to do with a lump sum of money.
There may not be a direct referral fee to the teller, but some notation will be made in favour of that employee and they will receive some form of bonus… without it being directly related to the provision of the product. It seems that there will be ways in which the big players, the banks, will be able to get around the banning of commissions. Commissions (rewards) by another name?
On the issue of the Best Interest Duty, it does seem that it was over-kill to catch every possibility and subject to legal challenge but, the steps still required of a financial adviser cover off the “best interests duty” that should continue to provide a high-degree of protection for clients. Other changes assist in the objective of reducing red-tape without impacting on the quality of advice to clients.
Paul Latimer, Associate Professor of Business Law and Taxation, Monash University
Why wouldn’t we expect a financial planner to be like a doctor – to look for the best “cure” from all options? I would hope a doctor might go beyond the “checklist” if necessary and consider other solutions like acupuncture, chiro, Chinese medicine etc.
Repealing the open ended section 961B(2)(g) means that financial planners are no longer expected to be able to “take any other step in the best interests of their client” – their recommendations are now limited to financial products and not any other investments including real estate.
This article was originally published on The Conversation.
Click on the links below to read other articles from this week’s newsletter