Deputy Chairman Peter Kell said, ‘Engaging with industry and stakeholders gives ASIC a greater understanding of key issues facing AFS licensees.

‘These projects allow ASIC to focus future regulatory actions on areas that the industry identifies as posing higher risks’.

Future of Financial Advice (FOFA) reform implementation

ASIC yesterday released Report 407 Review of the financial advice industry’s implementation of the FOFA reforms (REP 407), which presents the findings from an ASIC review of the implementation of the FOFA reforms by 60 AFS licensees.

Key findings in REP 407 include:

1. Impact of FOFA on adviser numbers, products and services:

• a number of AFS licensees reported an increase in their provision of scaled advice and strategic advice as a result of FOFA, however, for most AFS licensees, the type of advice they provided and their adviser numbers had not changed
• the advice industry continues to be highly concentrated, and AFS licensees are often affiliated to issuers of financial products, and
• most AFS licensees had reviewed their approved product lists in light of the FOFA reforms.

2. Conflicted remuneration:

• most AFS licensees reported changes to their revenue streams as a result of the ban on certain forms of conflicted remuneration, and
• blended fee models were common, with AFS licensees stating their advisers charged for advice through a range of methods, including advice fees and commissions.

3. Compliance challenges and risks:

• most AFS licensees stated the biggest challenges they had experienced in implementing the FOFA reforms related to the requirement to provide fee disclosure statements, and the changes they needed to make to their systems, and
• AFS licensees considered the best interests duty posed a relatively high risk of non-compliance in the future. To mitigate this risk, AFS licensees had revised their advice systems and procedures, and most were relying on the ‘safe harbour’ steps under the Corporations Act 2001 to demonstrate their compliance with the best interests duty and related obligations.

ASIC notes that it collected the data for this report prior to the recent amendments to the FOFA reforms.

Download REP 407

New AFS licensee visits

In a separate project, ASIC visited 35 newly licensed financial advice businesses, a sample representing just over a quarter of AFS licensees that were granted an AFS licence between July 2012 and June 2013, with an authorisation to provide personal financial advice to retail clients.

A similar project was conducted in the 2012–13 financial year (refer: 13-197MR).

The intention behind these visits is to proactively engage with our newer regulatory population, as well as assisting them to better comply with the AFS licensee obligations.

We asked AFS licensees questions about their business model, advice processes, and approach to risk and compliance. Some of the key findings from the project include:

• In light of the FOFA obligations commencing on 1 July 2013, 97% of new AFS licensees indicated they could demonstrate compliance with the new FOFA obligations.
• Just over 80% of AFS licensees providing self-managed superannuation fund (SMSF) advice require their advisers to undergo additional training before providing SMSF advice. This is significantly stronger compared to the 2012–13 project, in which only 48% of new AFS licensees required their advisers to undergo additional training before providing SMSF advice.
• 82% of AFS licensees sought external assistance in relation to some compliance functions (compared to 86% in 2012–13). It is important for AFS licensees to understand that, while using the services of external parties for certain compliance functions may be necessary for some AFS licensees, doing so doesn’t alter the AFS licensee’s obligations under the law.

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Wade Matterson

With a growing trend both globally and in Australia around low volatility, managed volatility, and portfolio risk management strategies, it is imperative that advisors and research consultants explore each strategy to uncover how different risks are being addressed. Identifying those techniques that are robust and able to address both diversifiable and systematic risks is likely to provide better overall results for investors and fund members.

Traditionally, portfolio construction and diversification across asset classes has been the major focus of risk management for the asset management industry. However, as the global financial crisis (GFC) highlighted, diversification alone cannot provide adequate protection in highly stressed markets. During the GFC, balanced and conservative portfolios experienced significant drawdowns, with some falling by more than 25%. This acutely highlighted the Risk Tolerance Paradox faced by investors approaching and entering retirement: Risk levels expected by investors over the long term are rarely the same as the risk levels they experience over shorter periods.

Historically, the industry’s preferred approach to overcoming portfolio volatility and large portfolio losses has been to stay invested, ride out the storm, average down, keep investing, and eventually growth will return and damage to the portfolio will be repaired. While this still holds true for the young, who have substantial time left before retirement, it may not be practical or realistic for those near retirement or already retired. As demonstrated during the depths of the GFC, many fund members acted against these principles and realised losses at the worst possible time.

The other traditional answer for those near or in retirement has been to de-risk the portfolio by reducing exposures to growth assets — an approach which has been reflected in the increased adoption of life cycle strategies. However, as retirees live longer and interest rates remain at historically low levels, life cycle or annuity solutions may lock in low levels of income or create a higher likelihood of exhausting savings early in retirement. Given current global market conditions and increases in average life expectancies, the answer will most probably include an element of continued exposure to growth, albeit with some explicit ‘managed risk’ or ‘managed volatility’ approach.

Wade Matterson of Milliman Australia stated: ‘With large demographic shifts well underway in the developed world, including Australia, investment strategies focused upon retirement are starting to resonate with local industry and retail funds. The growing issues of balancing longevity risk with the risk of permanent capital loss have continued to grow in importance for most of our clients.

‘Following several years of preoccupation with FOFA and MySuper, we have begun to see a strong increase in demand for retirement solutions that address key issues around risk management and retirement.

‘Our work with Plato Investment Management, who recently launched a Managed Risk Income Fund and Maritime Super, highlights the momentum that is building in the industry and the increased appetite to create solutions which address some of these issues.’

In a new Risk Tolerance Paradox paper published by Milliman, we explore the main reason for this paradox, and introduce a risk management strategy that seeks to solve the problem.

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Simon Wu

The companies announced this morning that they have executed a non-binding indicative offer under which Australian Unity Personal Financial Services would acquire all the shares in Premium Wealth Management.

The board of Premium Wealth Management is recommending to shareholders that they consider the terms of acquisition with Australian Unity.

Australian Unity said its desire is to retain the Premium brand strategy, operating model and client proposition.

Commenting on the potential acquisition, Australian Unity Personal Financial Services CEO Mr Steve Davis said the addition of Premium would increase Australian Unity’s financial advice capability and its exposure in the accountants’ space.

“It should also better position Australian Unity Personal Financial Services to take advantage of opportunities arising from the significant regulatory and environmental changes impacting the profession,” he said.

Mr Davis added: “Premium is a successful business, with a high quality group of advisers that has substantial revenue, funds under advice and clients, and will be a significant contributor to increasing the scale and strength of Australian Unity Personal Financial Services.

“Importantly, it will be business as usual for Premium’s authorised representatives and clients,” he said.

Premium Wealth Management chairman and founder, Mr Simon Wu, said his board is attracted to Australian Unity for many reasons, including their long term involvement in the accountants’ market and that they clearly see the value of Premium and recognise the quality of their practices.

“Also, Australian Unity is culturally and philosophically aligned with us.  They are a well respected 174 year old mutual and they have always prioritised client best interest and advisory integrity, and have an open architecture environment for investments and insurances,” Mr Wu said.

Mr Paul Harding-Davis, CEO of Premium, said FoFA was a catalyst for Premium to explore other options.

“FoFA effectively closed down many organic growth options, and it became clear we would need to either engage in mergers and acquisitions of our own, or invite a like-minded organisation to partner with us, to enable us to compete in a predominately vertically integrated world.

“In the end, we think the option of engaging with a culturally aligned entity to acquire us makes sense and will, we believe, deliver the most benefits to each shareholder and practice,” he said.

The acquisition requires approval by Premium shareholders and the Australian Unity board, and is subject to due diligence by Australian Unity Personal Financial Services.

The acquisition, should it proceed, is expected to take effect on October 2014.

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Brad Fox

The establishment of a central register of financial advisers, which was included in the Future of Financial Advice (FoFA) amendments deal announced last week by the Coalition, with the support of Palmer United Party (PUP), will benefit both consumers and Association of Financial Advisers (AFA) members.

AFA CEO, Brad Fox, said the creation of a detailed register is an excellent step forward in helping Australian consumers identify and engage with AFA members and other professional financial advisers.

“Research into consumer understanding of financial advice identifies a number of barriers to seeking financial advice. One of those barriers is identifying who a professional adviser is and who is not, which includes identifying whether an individual has the legal authority to provide personal financial advice,” Mr Fox said. “A central register will simplify the selection process for consumers and help ensure they are getting advice from a professional adviser.”

Mr Fox said consumers should be able to use this register to understand that they are seeing, or going to see, an adviser that can provide the expertise they need.

“We have seen examples where unqualified people have held themselves out to be a financial adviser,” he said “Only people with appropriate qualifications, experience and legal authority will be on the register. This will increase the protection available to consumers.”

While the exact details of the content that will be included on the register are not yet finalised, the AFA expects that it will include professional association memberships and any professional designations held by an individual adviser.

“We believe that a member of the public looking at this register will want to see the qualifications held by the adviser including any designations they may have such as the AFA’s Fellow Chartered Financial Practioner (FChFP) or Chartered Life Practioner (ChLP), as well as their AFA membership, meaning they are therefore accountable to the AFA Code of Ethics,” Mr Fox said. “In this way the consumer gains added assurance their adviser is acting professionally, and advisers will see further benefit from joining the AFA. Professional association membership is an obvious and important point of difference.”

Mr Fox said that the rebuilding of consumer trust in financial advice will need to overcome several hurdles, but the adviser register is a step in the right direction. “Transparency builds trust, and the register, along with the other requirements suggested by PUP that explicitly require an adviser to ensure the client is aware of their rights, and the adviser’s responsibility under the Best Interests Duty, shows FoFA has moved in the right direction.”

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John Brogden

The Financial Services Council commends the Senate for supporting the amendments to the Future of Financial Advice laws yesterday.

“With the critical support of cross bench Senators, the Government’s amendments to FoFA have withstood an attempt to have them disallowed today”, FSC CEO John Brogden said.

“With the support of the Palmer United Party, Family First, Liberal Democrat and Motor Enthusiast Party Senators, the Government defeated the Opposition’s attempt to disallow the FoFA regulation this afternoon.”

“The new FoFA regime will allow more accessible and affordable quality advice to millions more Australians whilst maintaining the highest level of consumer protection in the world.

“The best interest duty remains in tact. Financial advisers will, by law, be required to act in the best interests of their clients”, Mr Brogden said.

“The amendments proposed by the Palmer United Party − accepted by the Government − are constructive, practical and sensible.”

“We thank the cross bench Senators for their support.”

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John Brogden

The financial advice industry is open to any Parliamentary inquiry provided it focuses on the future, not just the past, the Financial Services Council said yesterday.

John Brogden, CEO of the FSC said: “The industry is an open book. We will work with any public inquiry.”

He was speaking in response to an announcement made by the Leader of the Opposition − The Hon  Bill Shorten MP, Shadow Treasurer − The Hon Chris Bowen MP and Shadow Minister for Financial Services and Superannuation – The Hon Bernie Rippoll MP yesterday which called for a Senate inquiry into the financial advice sector.

“However, the Parliament needs to ensure they review whether  the Opposition’s FoFA laws will actually deliver more affordable and accessible quality advice – as promised when they announced the FoFA legislation in April 2010,” Mr Brogden said.

“Everybody agrees more Australians should get financial advice.”

“Whilst FoFA has delivered reforms over the past five years that give the best consumer protections in the world, it will fail if millions more working Australians do not seek financial advice.”

“We believe the Government’s proposed changes to FoFA will make advice more affordable and accessible while maintaining quality and consumer protection.”

Mr Brogden also said: “The financial advice industry has been through several inquiries since the GFC which have resulted in significant legislative changes,” Mr Brogden said. (* see Appendix)

“We are still in the process of implementing the MySuper, FoFA and TASA regimes which are the result of inquiries into all aspects of financial services practises from 2009 to date.”

Mr Brogden also said the Parliament needs to remember that consumers will end up bearing the costs of any new regulation.

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Claire Wivell Plater

The Future of Financial Advice (FoFA) deadlines are upon us and financial advisers should by now have taken several steps to ensure they meet their new obligations, according to the Fold Legal’s managing director, Claire Wivell Plater.

“By 30 June, advisers should have completed their first round of Fee Disclosure Statements,” Ms Wivell Plater said. “This is the only imminent deadline that will be affected by the proposed FoFA amendments.”

Ms Wivell Plater said if the amendments proceed, FDSs will only need to be provided to clients who were first advised after 1 July 2013. “But, by 30 June 2014, advisers would have already provided an FDS to their pre 1 July 2013 clients if they’ve complied with the current requirement. Go figure!”

Advisers must also ensure that they have non-conflicted fee arrangements in place for clients who first join a platform after 30 June 2014 and for all new investments by non-platform clients made after 30 June 2014.

“What this means is that, unless it’s grandfathered, after 30 June 2014 remuneration can’t be received from a product provider without the client’s clear consent and direction,” she said. “And all employee remuneration arrangements must be un-conflicted, regardless of when the employee began working for you.”

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Brad Fox

On the same day that ASIC issued a statement indicating that Industry Super Australia (ISA) has agreed to change its Compare the pair advertising campaign in response to concerns raised by ASIC, the Association of Financial Advisers (AFA) has released a Future of Financial Advice (FoFA) Fact Sheet to provide consumers and observers with the information they need in order to understand the FoFA debate.

Commenting on the ASIC statement issued today, AFA CEO Brad Fox said, “If you can’t trust what ISA has said in its multi-million dollar Compare the Pair advertising campaign, how can you trust what they have to say about the FoFA amendments?”

Mr Fox said millions of dollars of industry fund members’ money have been spent on advertising that did not meet the standards expected of them by the regulator. “This from the very group that has been so vocal about the FoFA amendments and the need for consumer protection,” he said. “This really calls into question the ISA’s integrity when lobbying against the proposed FoFA changes.”

Mr Fox said now is the time for the facts to rule the FoFA amendments debate. “The AFA has released a FoFA Fact Sheet to provide the basis for sensible discussion around what the FoFA amendments really mean for consumers,” he said.

Click here to access the Fact Sheet.

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Brad Fox

The Association of Financial Advisers (AFA) welcomes the release this morning of the Government’s details relating to the Future of Financial Advice (FoFA) amendments, but is cautioning advisers and consumers to brace for mistruths and false claims about the Amendments.

In assessing the release from Senator Cormann, Minister for Finance, AFA Chief Executive Brad Fox, said, “It is absolutely clear that the protection of consumers will remain enshrined in law with Section 961B(1), which confirms that the Best Interests Duty remains unchanged.”

Mr Fox said it is also clear from comments relating to Grandfathering that both the interests of advisers and their clients will be served. “The Grandfathering issue has been resolved – clients will be able to retain existing products when their adviser changes licensees, where it is prudent to do so,” he said. “We have worked diligently on this issue and are very pleased to see it is being resolved. We are further encouraged that the Opposition has also expressed its support for repairing the Grandfathering provisions which have significantly reduced competition and consumer rights.”

However, Mr Fox cautioned advisers, their clients and the public to be prepared for inaccurate and misleading claims in relation to the FoFA amendments. “We have seen blatant mistruths, as recently as this week, on the FoFA issues and it is likely that we will see them again now,” he said. “The Industry Super lobby will again attack these reforms because in most cases they do not benefit when members of industry super funds see a financial adviser.”

Mr Fox said the AFA believes the Industry Super lobby will again claim that consumer protections have been stripped and the Best Interests Duty has been removed.  “It is categorically wrong to say or in any way infer that the Best Interests Duty has been stripped away,” he said. “The Best Interests Duty is enshrined in Section 961B(1) and it remains unchanged. It is further supported by Sections 961G, 961H, 961J and 961L. Any declarations that the Best Interests Duty has been removed are deceptive and misleading.”

What is being amended, Mr Fox said, is the guidance for financial advisers on what is required to meet the Best Interests Duty. “A substantial amount of legal opinion from highly respected, experienced experts in financial services law indicated that the removal of subsection 961B(2)(g) – the so called ‘catch-all’ phrase – improves the legislation and has no material impact on the protection of consumers. The catch-all phrase did not add to consumer protection, it merely increased uncertainty for advisers, which meant the cost of providing advice has risen. This amendment is a sensible and pragmatic decision that will lower the cost of advice for clients.”

Mr Fox said the Minister has also made it very clear that financial advisers providing personal advice on matters like superannuation and investments will be prevented from receiving commissions. “The AFA has gone to great lengths to help the media understand the difference between general advice and personal advice and how this relates to the General Advice Exemption on conflicted remuneration,” he said. “It is abundantly clear that financial advisers will not be benefiting from a return to commissions on superannuation and investments.  The Minister has spelt it out clearly and consumer groups and opponents to the amendments need to read the detail.  Financial advisers will not be receiving commissions on these products.  The public will be able to see a licensed financial adviser with complete confidence that when they get superannuation or investment advice no commissions will be payable.”

The AFA also welcomed other reforms including the removal of the paternalistic ‘Opt-In’ requirement. “Any client paying fees to an adviser can contact that adviser for advice at any time,” he said. “The better facilitation of scaled advice is also a sensible pragmatic step that will see consumers protected and the access and affordability of advice improved. Advisers are often faced with the dilemma of wanting to help clients with relatively simple needs and at a reasonable price.  This will be possible when this reform is enacted.”

Mr Fox said the AFA is also very pleased to see support for the extension of the notice period to provide Fee Disclosure Statements (FDS)’s increased from 30 days to 60 days.  “The AFA raised with the government the need to amend this on the basis that it will increase the contact between advisers and their clients, as many advisers will provide the FDS in face-to-face reviews with their clients.”

The AFA also supported the process put forward to managing the introduction of these changes saying that it appears pragmatic. “The advice profession has taken significant steps in the last five years to raise the standard of advice and heighten focus on their clients,” Mr Fox said. “This momentum is well established and with the support of these reforms more Australians will be able to get great financial advice. We look forward to the Parliament considering these reforms in detail.”

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Andrea Slattery

Finance Minister Senator Mathias Cormann’s statement on the Coalition Government’s FoFA amendments is a positive step in the right direction for the financial advice industry, says the SMSF Professionals’ Association of Australia (SPAA).

SPAA CEO Andrea Slattery says it has always been the organisation’s position to support the removal of the best interest duty catch-all provision because of its potential to be too broad in its application, create uncertainty and involve a high compliance burden for financial advisors.

“The Minister’s statement today should reassure the industry and consumers that best interest duty has not been watered down and will still ensure financial advisors act in their clients’ best interests when providing personal advice.

“This was a point made strongly by SPAA’s Patron and former Chief Justice of the High Court, Sir Anthony Mason, at the 2014 SPAA National Conference, when he said: ‘If it should come about that some aspect of the best interests duty is to be wound back, it would be a grave mistake to think that a financial advisor is under no duty to act in the interests of the client.

‘Quite apart from relevant statutory provisions, the common law imposes a duty on an advisor to act in the interests of its client’.”

“We were also encouraged by the Minister’s commitment to improving the professionalism of financial advice through lifting professional, ethical and educational standards. These are goals at the core of SPAA’s pursuit to improve the competency and quality of financial advice delivered to SMSF trustees and consumers more generally.”

In regards to the announcement on conflicted remuneration and general advice, Slattery says the Minister’s announcement is a positive move which helps in addressing the industry’s concerns about the conflicted remuneration exemption.

“It is encouraging that the Government has listened to the industry’s concerns on this issue and has heeded them.”

SPAA has been concerned about the ramifications of the conflicted remuneration general advice exemption, but is reassured by the Minister’s announcement that there will be no wholesale reintroduction of commissions to financial advice.

“We are especially pleased to see that the amendments will still prohibit ‘any payment made solely because a financial product of a class in relation to which the general advice was given has been issued or sold to the client’.”

SPAA supports the Government’s intentions to put in place regulation-making powers that may prescribe circumstances in which all or part of a benefit is to be treated as conflicted remuneration to stop institutions inappropriately using the conflicted remuneration exemption.

Slattery says: “We will be keeping a very close eye on how industry practices develop around the provision of general advice and the conflicted remuneration exemption and will continue to work closely with the Government to ensure that the exemption does not lead to undesirable advice practices and consumer outcomes.

“SPAA sees FoFA as a critical element in improving the quality of financial advice and increasing consumer protection.  However, in the longer-term SPAA wants high-quality financial advice to be driven by a professional industry of competent advisors.”

“We have proposed a streamlined financial advice licencing model that removes the general advice category and has a simple split between a consumer being provided with factual/sales information or personal financial advice.

“This model promotes professionalism of financial advice and is easier for consumers to understand the nature of the advice they are receiving,” Slattery says.

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