Don Trapnell

Synchron Director, Don Trapnell is calling the deal struck by the Government and Opposition last week, which will deliver relief on the Grandfathering provisions of the Future of Financial Advice (FoFA) legislation before the end of the year, a victory for advisers.

“The unintended consequence of FoFA that prevented advisers from moving between Licensees because they would lose grandfathered commissions has been removed and common sense has prevailed,” Mr Trapnell said. “Likewise, the grandfathered commissions of a register bought by an adviser will also be protected.”

Earlier last week, Mr Trapnell said legislation around Grandfathering, reinstated by the disallowance of the Future of Financial Advice (FoFA) Amendments, effectively shackled advisers to their existing licensees. At the time, Mr Trapnell said the disallowance had the potential to embody in legislation, a Hotel California clause, whereby advisers could check out of a licensee arrangement anytime they liked, but would never leave without suffering a significant financial penalty.

“The deal struck by the Government and the Opposition around Grandfathering yesterday is a good outcome and one that Synchron has lobbied strongly for,” he said.

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Andrew Bragg

Support from the Parliament on grandfathering arrangements under the Future of Financial Advice (FoFA) reforms along with technical amendments is a sensible outcome the Financial Services Council said yesterday.

Andrew Bragg, FSC director of policy said: “The bipartisan agreement provides certainty and stability for small businesses in the financial advice industry.”

“It means that small financial advice practices will not lose value during when businesses are sold. It will also assist sustainability for advice businesses while they transition to new business models.”

“This is good news for small businesses as they will not be subject to unfair, retrospective losses,” Mr Bragg said.

“The agreement restores the prospective nature of the FoFA grandfathering rules.

“Structural reform of any industry must always be prospective. It is the hallmark of good policymaking.”

“It also alleviates some of the cost and disruption caused by policy changes made without warning when businesses were operating within the law.”

“The Government and Opposition are to be congratulated for reaching a sensible agreement on FoFA.”

“The industry can now transition to the new FoFA laws with certainty,” Mr Bragg said.

FoFA regulations released by the Parliament yesterday include:

1. Grandfathering arrangements which allow financial advice businesses to be sold without losing considerable value
2. An exemption to ensure education and training is not treated as conflicted remuneration; and
3. Exemption of stamping fees from the FOFA regime.

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Brad Fox

The Association of Financial Advisers (AFA) applauds the swift response from both sides of Parliament in addressing concerns around Grandfathering following the Senate’s disallowance last week of the Future of Financial Advice (FoFA) Amendments Regulation package previously implemented by the Government.

Grandfathering is an essential mechanism that allows a self-employed financial adviser to change the licensee through which they are authorised to provide financial advice and retain the relationships that they have with their existing clients.

AFA CEO, Brad Fox says, “Following the disallowance last week, we sought urgent action from both the Government and the Opposition in order to deliver a solution to Grandfathering which would address the reduction in competition and the inability of a client to choose their financial adviser.

“Both the ALP and the Coalition were quick to acknowledge that the removal of Grandfathering when an adviser changes licensee was a significant issue likely to reduce competition and that addressing it was crucial to ensuring certainty for licensees, financial advisers and their clients. To see the issue resolved in this way reflects a sensible bi-partisan approach and we appreciate the efforts of both the Minister and Shadow Minister in moving so quickly given the circumstances.

Mr Fox says the resolution to this issue announced today recognises the quality relationships held between most financial advisers and their clients and protects the right of the client to choose their adviser.

“Smaller licensees will be able to grow their adviser numbers, new licensees will be able to launch and larger licensees will need to continue to compete to retain their existing advisers,” he says. “Good judgment has prevailed and market competition is ensured through this pragmatic solution.”

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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.

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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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Brad Fox

The Association of Financial Advisers (AFA) has highlighted the fact that 1 July 2014 will mark 12 months since the commencement of the grandfathering problem that puts clients at risk should their financial adviser choose or need to move to a new licensee. 

The consumer perspective on this issue requires greater focus as the regulations fail to protect those consumers who hold older style products, have advisers providing advice to them on those products and who want or need to retain them.

“Now that the Senate Economic Legislation Committee has reported on the FoFA amendments proposed by the Coalition, we have reminded the Government that the Regulations need to be urgently fixed so that consumers who are happy with their current product and adviser can keep them. We are confident that this will be resolved shortly,” said AFA CEO Brad Fox.

The AFA has been very active in advocating with Treasury, Government and other stakeholders to resolve the issue and Mr Fox said that it appears that bipartisan support exists to amend the grandfathering provisions. “The good news is that both sides of politics have indicated a willingness to address this issue as an unintended consequence of the original FoFA Regulations,” he said.

If grandfathering is not amended then consumers who want to retain their existing adviser may, in certain circumstances, have to switch to a new product. “This could have serious consequences for the consumer in terms of capital gains tax, reduced insurance benefits or hefty exit fees,” Mr Fox said.

“The grandfathering problem, known as Hotel California occurs because grandfathering makes it difficult for advisers to leave their current licensee,” he said. “This means that better licensees can’t attract advisers and poor performing licensees are retaining advisers who want to leave. It has removed open market competition at a critical time.

With the anniversary of the commencement of this problem fast approaching, the AFA appreciates the previously announced commitment of the Government and the messages of support offered by the Opposition to resolve the grandfathering issue in the interests of consumers who are disaffected by the current regulation.

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Paul Tynan

As the grandfathering issue steadily tracks towards a resolution that will satisfy most parties, Financial Service Brokers (Connect) CEO Paul Tynan says that although grateful his call for a balanced industry centric approach and outcome to the debate has been heeded, it has been the Adviser that has suffered the most during the recent stalemate.

Earlier this month, Tynan said that everyone has endorsed the new world of FoFA and the intended outcome of a fee transparent client focused infrastructure with a professional industry delivering advice.

However, he felt that the primary cause of the problems and complaints directed towards FoFA came down an overabundance of self interest groups lobbying intensely to ensure that the interests of their particular sector, company or association had priority.

Through the finger pointing blame game, one side effect that has been lost in the grandfathering stalemate and debate by many parties has been the personal hardship endured by the Adviser.

Tynan asks the industry to pause for a minute and consider the Financial Adviser that needs to exit the industry and sell his business for a potential myriad of reasons that may include retirement, illness, death, divorce, and the list goes on.

How do these business owners realize a financial outcome that acknowledges and compensates them for the personal endeavour and lifetime of hard work that they have devoted to their financial services practice?

Financial Advisers have marketed a product with embedded commission because that was the only product that was available that satisfied the consumers’ needs at that time.

Tynan asks the industry to further consider a situation if an employee worked under certain laws and framework to accumulate a capital amount and then through a change of legislation lost all his / her entitlements – who would be complaining then?

In his proposed solution to bring the FoFA debate to a satisfactory conclusion and enhance the legislation so it is unmistakably transparent for all consumers, Tynan advocates that advice should simply be either aligned or non-aligned.

Aligned advice is where the adviser is in a salaried position and licensed via a bank, industry fund etc.  There is a restriction of ownership of client and buyer of last resort (BOLR) terms in place.

Non-aligned advice is where the adviser is a self-employed business owner and there is no restriction with respect to client ownership and if the adviser wishes to leave a licensee the clients are clearly transferable.

Tynan has observed with interest that the big end of town i.e. Industry Super Australia and large institutions / banks are in the same camp, supporting aligned general advice.

“Why don’t we have aligned legislation for non-independent advice and non-aligned legislation for independent advice (personal advice) and work together to ensure that the Australian advice profession is the world’s best – is it really that hard?” asks Paul Tynan.

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