John Brogden

The Financial Services Council has obtained new legal advice which confirms proposed amendments to the best interests duty in the FoFA amendments will continue to require a financial adviser to act in the be interests of their client and will not reduce consumer protection.

FoFA has many layers of consumer protection obligations in place which are collectively titled “best interests obligations” in the law. The government is proposing to remove one step of the seven “safe harbour provisions” and to clarify that scalable advice is permissible.

John Brogden, CEO of the FSC said: “We have received advice from leading commercial counsel Ian Jackman SC and Gregory Drew on the government’s proposed amendments.”

Jackman and Drew state the removal of the “catch-all” phrase in the best interests provision of the Corporations Act would not compromise the protections provided by the best interests obligation. They also advised that scalable advice is allowable and the manner in which it is drafted does not enable an adviser to avoid acting in their clients’ best interest.

“The legal advice is clear. The proposed amendments do not reduce in any way a financial adviser’s legal requirement to act in the best interest of their clients,” Mr Brogden said.

“Consumers will not be impacted by the amendment being proposed to the best interests duty.  In fact, removal of the catch all phrase will provide clarity to consumers on what they can expect from their adviser.”

“We also have clarity that scalable advice is permissible under the proposed FoFA amendment.”

“Scalable advice is imperative if the FoFA reforms are to meet their objective to increase the number of Australians who receive advice.”

“Our advice confirms these small technical amendments do not change the substance nor the intent of the FoFA reforms. That is, to improve the quality and quantity of financial advice and to make it accessible for all Australians.”

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Brad Fox

Amendments to the Future of Financial Advice (FoFA) legislation are sensible and pragmatic and, in general, much of the commentary around the impact of these changes has not correctly addressed the issues necessitating the changes nor accurately expressed the impact on consumers, according to the Association of Financial Advisers (AFA).

“We believe that in fact the amendments improve FoFA and are therefore likely to improve outcomes for consumers by reducing the cost and complexity of delivering financial advice,” said AFA CEO Brad Fox. “We want to see great advice for more Australians and these amendments will better ensure this outcome.”

A Regulation Impact Statement released by Treasury confirms the AFA’s belief that the FoFA amendments will have little impact on consumers.

“In their initial form, FoFA requirements were complex and time consuming and would inevitably have resulted in increased costs being passed on to consumers,” Mr Fox said. “The Regulation Impact Statement specifically addresses the issue of the impact on consumers and concludes that they will have little impact.”

Suggestions that the amendments remove key parts of FoFA are incorrect, according to Mr Fox.  “The Best Interests Duty and the obligation to give priority to the client’s interests remain, as does the ban on conflicted remuneration and Fee Disclosure Statements for new clients.”

Mr Fox said the AFA welcomes the obligation for advisers to always act in the best interests of their clients. “In no circumstances can this obligation be avoided,” he said. “The best financial advisers have operated in this way for many years and having it legislated sends a clear message to consumers that they can seek financial advice with greater confidence than ever before.  The amendments remove one step from the Best Interests Duty, where there was a lack of clarity.”

The AFA supports the removal of this step, believing it will make it easier to deliver scaled advice, scoped to a consumer’s area of need – which will make financial advice more affordable and accessible.

In relation to the Fee Disclosure Statement (FDS) obligation, Mr Fox said, “Modern systems better enable the production of these statements for new clients.  For existing clients in older products on legacy systems however, the complexity of generating these statements posed significant cost and timing issues. What may not be well understood, in terms of the FDS, is that the FoFA legislation did not require an FDS to include trail commission payments. This would have led to a high level of confusion for existing clients.”

Mr Fox said the AFA has always been of the view that the cost of the production of an FDS for existing clients, across the entire profession, significantly exceeded the value to clients. “AFA members have reported an exceptionally low response rate from existing clients who received an FDS, which further demonstrates the insignificance of their value to these clients.”

On the removal of Opt-in, Mr Fox said the obligation had only ever applied to new clients, who will have an FDS along with a range of other documents that clearly disclose fees. “We did not see value for clients from this requirement and were concerned that in the context of having only 30 days to renew, there was a large risk that many clients would unintentionally fail to respond and therefore terminate their adviser arrangement, exposing themselves to additional risks and costs.”

Mr Fox said the removal of Opt-in in no way prevents clients from terminating their adviser’s remuneration at any point in the future; that right is unchanged.

Legislation around conflicted remuneration, which bans financial advisers from receiving trail commissions on investment and superannuation products, also remains intact. “The only important change in relation to conflicted remuneration is on insurance inside superannuation,” Mr Fox said. “The fundamental problem with the original FoFA legislation was that commissions could be paid on insurance outside superannuation, but not on insurance inside superannuation, which created a distorted market which might have had an inappropriate impact on financial advice. This amendment is positive for the quality of financial advice and for consumer outcomes.”

The Government has also agreed to resolve some of the particular problems around FoFA, including the Grandfathering regulation that prevents advisers moving from one licensee to another. “This will remove the anti-competitive impact of Grandfathering on the financial advice profession and will also remove the real obstacles in the way of licensees wanting to terminate problematic advisers,” said Mr Fo

The financial advice profession continues to evolve over time as new advisers enter the profession and skill levels constantly rise.  The AFA welcomes the finalisation of the FoFA reforms through these amendments, which will resolve outstanding problems.

“The amendments allow the profession to maintain a focus on achieving the right outcomes for consumers and enabling more Australians to experience the significant value that flows from receiving quality financial advice.”

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