Advisers need to focus on good record-keeping processes: ASIC.

The move comes as the financial advice industry beds down the Future of Financial Advice (FOFA) and Stronger Super reforms, which will result in big changes for most Australian financial services (AFS) licensees including a thorough review of how they go about compliance.

‘Keeping records is important. Not only is it required by law, it’s also good business practice,’ ASIC Commissioner Greg Tanzer.

One of the key FOFA reforms is the new best interests duty. ‘Licensees and their representatives have an opportunity to drive real change in their business’s customer focus as they implement this new obligation, and their record keeping can help cement that change,’ Mr Tanzer said.

‘It is in the interests of everyone – the firm, advisers and clients – to maintain good record-keeping practices, and is an important element of risk management.’

Consultation Paper 214 Updated record-keeping obligations for AFS licensees (CP 214) outlines the types of records that must be kept, including:

• records to prove that the licensee and its representatives have complied with the best interests duty and related obligations
• records of ongoing fee arrangements entered into with a client
• copies of documents – such as, fee disclosure statements and renewal notices – that fee recipients must receive for an ongoing fee arrangement, and
• records to prove the licensee and its representatives have complied with the ban on conflicted remuneration.

On the Stronger Super reforms, ASIC is also considering whether to impose a specific requirement on superannuation trustees to keep certain records where the trustee provides personal advice to members which they charge collectively as ‘intra-fund’ advice.

‘Our proposed record-keeping guidance is not designed to impose an additional administrative burden on industry. Instead, it is intended to give industry greater certainty about what they have to do,’ Mr Tanzer said.

In line with ASIC’s approach to the FOFA and Stronger Super reforms more broadly, ASIC will take a facilitative approach to compliance with the requirements until 30 June 2014.

‘We expect industry participants to make a reasonable effort to comply with the new regime, and we will take a measured approach where inadvertent breaches arise, or system changes are underway,’ Mr Tanzer said.

‘However, where we find deliberate and systemic breaches we will take stronger regulatory action.’

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The work seeks to promote confident and informed investors and financial consumers, noting the value good financial advice can provide to consumers in helping them make important financial decisions.

ASIC Chairman, Greg Medcraft, said: ‘FOFA contains significant reforms intended to bring about real changes in the way financial advice is provided. These measures aim to improve the standard of adviser conduct and improve engagement by retail clients with advisers and advice.’

ASIC’s proposed guidance on the best interests duty covers the following areas:

• acting in the best interests of the client
• satisfying the ‘safe harbour’ for the best interests duty – including providing guidance on each element of the safe harbour
• providing appropriate personal advice; and
• prioritising the interests of the client.

ASIC’s proposed guidance on scaled advice will apply to all industry sectors, including super, financial planners, and banks and insurers, and includes practical guidance and examples about giving scaled personal advice, as well as practical examples about giving factual information and general advice to clients.

ASIC’s proposed guidance in this area indicates:

• All advice is scaled to some extent – advice is either less complex or more complex along a continuous spectrum (i.e. there are not two categories of advice ‘scaled’ and ‘holistic’).
• In general, the same rules, including the best interests duty, apply to all personal advice, regardless of the scope.
• It is possible to provide less complex advice in a way that is consistent with the best interests duty and the law generally.

To read the consultation papers, click here.

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“The AFA has always supported legislation which will improve transparency around advice and increase consumer access to advice,” Mr Klipin said. “However we believe that the draft  FOFA legislation, as it currently stands, fails on both these counts.”

Mr Klipin said the Parliamentary Joint Committee (PJC) majority report on FOFA contained a number of misunderstandings in relation to evidence from the industry. 

“It was disappointing to see how they have ignored consistent feedback from the industry on the significant issues with this legislation,” Mr Klipin said.

“While the Dissenting Report addressed these misunderstandings, the Government’s FOFA position appears to have hardened.”

Mr Klipin said the AFA visited Canberra last week and had many constructive high level discussions.

“We met with the key advisers of Independents, we had forthright and honest dialogue with the Greens and the Government and we continue to have good ongoing dialogue with the Coalition,” he said.

“After the release of the PJC report and as a result of our discussions, we have formed the opinion that the Independents will be key in amending FOFA.”

Click here to read a copy of the AFA’s letter to politicians.

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“On the one hand, FOFA demands advisers act in the best interests of clients but on the other, where acting in the best interests of the client involves moving them from one insurance product to another, the regulations label advisers churners and penalise them for it,” said Synchron Director, Don Trapnell.

The draft FOFA regulations relating to churning which are now under consideration include:

• A two-year commission responsibility – if a client terminates a policy within two years, the adviser will suffer substantial write-back of upfront commission
• Level commissions for re-written policies – advisers who move clients on a like-for-like basis from one insurance company to another within five years will be forced to accept level rather than upfront commissions.

“I don’t think there is a professional adviser out there today who has not reassessed a client’s situation within five years and made some recommendation where it has been appropriate to do so,” Mr Trapnell said.

“It is an adviser’s job to do this and in fact, under FOFA, there will be a financial penalty if they don’t.”

However, Mr Trapnell said the way the draft legislation is slanted presupposes that advisers who move clients from one insurance company product to the product of another insurance company are ‘churners’, out to financially benefit only themselves.

“This presumption is quite simply wrong and seems to have been predicated on a move from the Financial Services Council in its representations to the Minister for Financial Services,” he said.

“Over the past few years, all the life companies have had a very strong push to try to reduce their lapse rates and increase their rates of retention of the policies on their books. To aid them in this cause, the FSC appears to have taken statistics relating to lapse rates to the Government and convinced them that they are evidence of adviser churning.”

Mr Trapnell said that life insurance companies count any policy that discontinues, for any reason whatsoever, as part of their lapse rate, including policies which have run their course and, in the case of one life insurance company, death claims. “Policies which lapse for these reasons cannot possibly represent churning because they are not re-written,” Mr Trapnell said.

Mr Trapnell also argued that life company actuaries are making unrealistic assumptions on retention rates in order to keep the cost of premiums down in what is a fiercely competitive environment.

“When these unrealistic rates of retention aren’t met, life companies blame advisers for churning,” he said.

Mr Trapnell said Synchron had approached the four major life insurance companies to provide statistics on churning and none was able to furnish any meaningful evidence of the practice.

“We believe the FSC’s views on the topic of churning are ill-placed and wrong,” Mr Trapnell said.

“And yet, the Government seems likely to press ahead with regulation. Regulation which will unfairly penalise honest advisers who act in the best interests of their clients, in order to combat a problem which we believe simply doesn’t exist.” Synchron is one of the largest and fastest-growing non-institutionally owned licensees by adviser numbers in the country.

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Commenting on the AFA’s submission to the Parliamentary Joint Committee on Corporations and Financial Services (the PJC) reviewing the FoFA Bills, AFA CEO, Richard Klipin, said that the FoFA draft legislation, when measured against the twin objectives of improved access for consumers to quality advice and the removal of conflicts of interest, fails miserably on both counts.

“While the AFA supports the Government’s objectives, we believe the proposed legislation, as it currently stands, will in fact bring about opposite outcomes,” Mr Klipin said. “The introduction of some of the measures proposed, notably opt-in, will impose unnecessarily onerous obligations on the advice industry, hampering their ability to provide timely and effective advice and adding significant costs which will ultimately price ordinary Australians out of advice.”

The AFA’s submission (number 67) can be found at the following link – http://www.aph.gov.au/senate/committee/corporations_ctte/future_fin_advice/submissions.htm

Mr Klipin argued that the cost of opt-in put forward by the Government of $11 per client was mischievous and neglected the significant practice time required to research, and prepare for key client meetings.  “The costs imposed on the industry as a result of opt-in will arise at three levels,” Mr Klipin said, “The adviser to client level, the licensee level and the product manufacturer level. At the adviser to client level alone we believe the cost will be significantly north of $95 per client.”

Mr Klipin again called on the Government to provide robust modelling that proves that the proposed legislation can deliver on its promises.

“We believe that the legislation currently on the table is poor – and that’s a reflection of poor modelling and poor process,” he said. “The proposed legislation has very little in common with the sensible recommendations put forward by the Ripoll Inquiry, which had the general support of the financial services community, and two years on, the eventual outcome of FoFA still remains unclear. This state of uncertainty is not good enough – it’s not good for the industry, it’s not good for advisers and it’s not good for consumers.”

Mr Klipin also said that the Government’s prediction that FoFA will result in 40% of advisers losing their jobs spelt decimation of the industry and bad outcomes for consumers.

“In a world where there are fewer advisers and the cost of advice is pushed up, it’s difficult to see how the Government sincerely believes that FoFA will improve consumer access to advice,” he said. 

Specific concerns
1. Lack of robust modelling – the government must provide modelling which proves that FOFA legislation will fulfil its strategic intent
2. Insurance Remuneration – the government has created confusion with different insurance remuneration arrangements for inside and outside superannuation. This confusion will ultimately affect the take-up of insurance in an already dramatically under-insured population
3. Opt In – opt in will add three levels of costs: at the adviser to client level, the licensee level and the product manufacturer level. This will price advice out of the reach of many ordinary consumers
4. Projected loss of jobs for 6,800 advisers (as noted in the Tranche 1 Explanatory Memorandum – 13 October 2011) + staff + clients + communities – the costs to small business advice practices of implementing changes associated with FOFA will force many out of business resulting in tens of thousands of job losses. The market will be concentrated and consumers will have fewer choices in where they access advice.
5. Lots of devil in the detail – the legislation as it currently stands is complicated and confusing for both consumers and the advice profession.
6. Best interests duty – while the principle is sound, the AFA believes the devil will be in the detail. A best interests duty may also increase the cost of professional indemnity insurance.
7.  Start date of July 2012 is unworkable – implementation will take a considerable investment of time, energy and money.

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According to research conducted by Investment Trends, CFP® holders lead the shift to a post- FoFA world already deriving over half (54 per cent) of their revenue from fees compared to the industry average of 43 per cent.

“By 2014 CFP® advisers have indicated almost 70 per cent of their revenue will come from fees versus 60 per cent for the industry as a whole,” FPA chief executive, Mark Rantall said. “It’s clear the FPA’s 2009 remuneration policy, which laid the groundwork for a fee-based world well before FoFA, has given our members a head-start for the transition.”

Rantall said the Investment Trends research confirmed FPA members were on track to cope with the FoFA remuneration reforms due to be implemented in July next year.

However, a survey of FPA members has also found the proposed FoFA Opt-in rules were a source of concern with the majority expecting they would have a negative impact on their clients.

“While we support sensible reforms which bolster the momentum we have created in enhancing consumer trust in advice, the FPA remains opposed to the Opt-in requirements,” said Mr Rantall. “It is redundant and adds nothing but cost and administrative red-tape when the introduction of a best interests duty and banning of commissions, both of which the FPA fully supports, already ensures that consumers get the advice they need and know what they’re paying for that advice. 

“Our members continue to tell us, as evidenced in our most recent survey, that their clients won’t be better off, especially if clients neglect to renew their contract and are left without access to critical financial advice when they are at their most vulnerable – such as just prior to retirement or when markets are volatile.”

While Opt-in topped the list of regulatory worries, the FPA survey found continuing market volatility was the biggest concern for members over the next 12 months.

“The recent events in Europe have demonstrated once again the ongoing fragility of world’s financial markets,” Rantall said. “Our members are telling us that they’re ready for, and indeed, moving beyond FoFA now, and are focused on how they can add value to their clients within this continuing landscape marred by volatility.”

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The request was put to the Government in the CSSA’s submission responding to the Exposure Draft Superannuation Legislation Amendment (MySuper Care Provision) Bill 2011.

“Corporate super specialists currently provide a range of highly valued insurance services to members of corporate super funds, including things like negotiating reduced premiums and better features, ensuring members are not subject to automatic acceptance levels and helping them navigate the maze of paperwork that accompanies claims,” said CSSA President, Douglas Latto. 

“While the CSSA recognises that it is inappropriate for commissions to be included in a premium when no service is being delivered, if corporate super specialists cannot be effectively remunerated, members of corporate super funds would ultimately lose their services.”

Under the Future of Financial Advice (FoFA), Tranche 2, commissions on insurance within superannuation will only be allowable on choice funds and products; group insurance is excluded.

“We suggest that an explicit insurance service fee, which defaults to zero, be charged to all members at an agreed percentage with the consent of the employer,” Mr Latto said. “This is specifically relevant when a tailored default insurance strategy is selected by an employer – rather than the standard default strategy.”

Mr Latto said the insurance service fee could operate within group insurance in the same way that asset-based fees operate within investment and superannuation. “This should ensure that only those receiving insurance services are paying the fee,” he said.

Mr Latto argued that ultimately group insurance is a better solution for members, offering lower costs and more tailored features than a series of individual contracts. “It makes no sense that payment for providing services associated with insurance to members can only be made from the least efficient solution,” he said.

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