Brad Fox
In light of the disallowance of the Government’s Future of Financial Advice (FoFA) Amendments regulation in the Senate last night, the Association of Financial Advisers (AFA) is encouraged that both the Government and the Opposition are showing signs of a willingness to address the Grandfathering issues.
“The disallowance of the Government’s FoFA Amendments puts a big question mark back over Grandfathering,” said AFA CEO Brad Fox. “The removal of the Grandfathering amendments will reintroduce a roadblock to competition in the advice market, without any demonstrable benefit to consumers and we believe our concerns are shared by both the Government and the Opposition.”
The Grandfathering amendments introduced by the Government allowed advisers to move between licensees without terminating the existing remuneration arrangements on products provided to clients in pre-FoFA days.
“This is a revenue stream which was legitimately established in line with the products and laws of the day,” Mr Fox said. “It stands to reason that if advisers will now lose this revenue when they move licensees, then they will be forced to stay where they are.”
Mr Fox said the market place saw the effect of this when FoFA was first introduced.
“What it meant then, and what it will mean again unless the issue is addressed, is that licensees will not be able to recruit advisers from other licensees. Smaller licensees will not be able to grow their adviser bases and larger licensees will have their advisers locked in. New licensees will not be able to be launched. The small will get smaller and the big, bigger and that’s not a competitive market place.”
Mr Fox said the market also needs the ability for individual advice businesses to be bought and sold to ensure new advisers are attracted and older advisers can realise the value of their businesses when they retire.
“If this is prevented, it will be another competition failure in the market place,” he said. “Large institutions will be likely to gain even greater control over advice, smaller licensee businesses will shrink or disappear and consumers will have less choice about where they seek advice.”
Given that advisers may not be able to be paid by pre-FoFA clients from their existing products, they may need to consider advising clients to change to new products. However, moving from one product to another is problematic. “There could be some very significant negative consequences such as exit fees, capital gains tax, buy-sell spreads and where insurance inside super is involved, a possible loss or reduction in insurance cover,” Mr Fox said. “Acting in the client’s best interests may prevent the financial adviser from recommending that the client change products. Therefore unless the client is prepared to pay an additional fee for advice, then the advice relationship would almost inevitably end.”
As the costs to clients do not reduce if the Grandfathering amendments are removed, Mr Fox argued there is no tangible reason to abandon them. “The cancellation of the payment of an inbuilt adviser remuneration to an adviser, does not result in the payment being rebated to the client, nor does it in any way reduce the client’s costs,” he said. “The amount will be retained by the product provider or the licensee.”
Mr Fox also highlighted that there are many advisers who are currently in the process of changing licensee who have been caught by this sudden disallowance. “In this environment, they will be confused, stressed and uncertain about whether they should proceed with the move or be forced to stay where they are,” he said.
For all these reasons, Mr Fox said preventing Grandfathering for advisers changing licensee does not help the client in any way – in fact, quite the reverse. “Given that a regulation cannot be re-issued within six months, without the support of the Senate, we call on both the Government and the Opposition to take the necessary action to resolve this issue as a matter of urgency,” he said.