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Focus: Government announces further financial advice reforms

3 May 2011

In brief: The Federal Government has announced further details regarding its proposed Future of Financial Advice reforms regarding the provision of simple, limited personal advice to superannuation fund members. There are also some noteworthy new elements to the reform package. Partner Mark Cerché (view CV), Senior Associates Larissa Macpherson and Geoff Sanders and Lawyer Brendan Wood report.

How does it affect you?

  • The additional guidance released by the Government on 28 April 2011 on the proposed Future of Financial Advice (FoFA) reforms provides further detail about the existing FoFA reform proposals regarding the provision of simple, low cost, limited personal advice to fund members.  This will be achieved by entrenching in legislation the concept of 'scaled advice', which builds on the existing concept of superannuation 'intra-fund advice'. 
  • The announcement also contains some new measures arising from the Government's extensive consultation process following the original release of the proposed reforms, including expanding the prospective ban on conflicted remuneration structures to insurance offered within superannuation. 
  • There will be further consultation on key matters, including the possibility of expanding the scope of intra-fund advice.  In addition, much of the FoFA reform details provided to date remains of a very general nature and so careful scrutiny of the details will be necessary when exposure draft legislation is released for public comment in the coming months. 
  • Superannuation trustees will need to be mindful of the areas of overlap between the FoFA reforms and the proposed Stronger Super reforms (which are subject to ongoing Government consultation), particularly those relating to the provision of intra-fund advice and the fee and cost restrictions for MySuper products. 

What further reforms were announced?

Significant new elements of the FoFA reform package announced by the Government include the following:

New legislative concept of scaled advice

The Government has proposed that a new category of scaled advice will be entrenched in the legislation, in order to facilitate the provision of simple, low-cost personal advice targeted at one aspect (or a limited number of aspects) of an investor's financial situation or needs, as an alternative to the preparation of a holistic financial plan that takes into account the entire financial circumstances of, and options available to, the investor. 

This proposal is in response to industry concerns that the existing 'reasonable basis for advice' legislative requirements are not scaleable to a particular client's request or needs and are therefore hampering the provision of inexpensive, focused advice along the lines of superannuation intra-fund advice.  Scaled advice will be directed at a single issue or limited range of issues relevant to the member's financial needs, rather than all aspects of their financial circumstances.  It is proposed that scaled advice will be able to be provided by any appropriately licensed participants in the advice industry, including superannuation trustees, financial planners and, potentially, accountants. 

Scope of ban on conflicted remuneration structures

The recent announcement expands and clarifies the scope of the proposed prospective ban on conflicted remuneration structures that will generally apply from 1 July 2012 in the following ways:

  • extended application to insurance products within superannuation – most significant is the prospective ban on up-front and trailing commissions and similar payments that will now apply to all risk insurance products (under either individual or group risk policies) offered within superannuation from 1 July 2013.  The ban will not extend to risk insurance products offered outside superannuation arrangements;
  • confirmation of application to volume-based payments – in spite of strong lobbying to allow volume rebates or bonuses from platform providers to dealer groups, the Government has reiterated its initial position that the ban should extend to any form of payment that is related to volume or sales targets from any financial services business to dealer groups, authorised representatives or advisers; and
  • exception for basic banking products – the ban will not apply to advice given by employees of authorised deposit-taking institutions (ADIs) about basic banking products of the ADI such as savings accounts, other simple deposit accounts and non-cash payment products (eg traveller's cheques and cheque accounts).
New ban on soft dollar benefits

Following input from the expert advisory panel established to review professional standards for financial advisers, the Government is proposing to introduce a prospective ban on all soft dollar benefits exceeding $300 in value (per benefit) from 1 July 2012, subject to exceptions for benefits provided for the purpose of professional development or administrative IT services.  Benefits not exceeding the $300 threshold will be permitted subject to an 'infrequent or irregular' test for identical or similar benefits.

'Opt-in' renewal period extended to two years

The Government proposes to extend the compulsory client renewal period for 'opt-in' ongoing advisory service fee arrangements to every two years rather than annually, as originally proposed.  Advisers will be required to provide clients with annual disclosure notices detailing fees and services and reminding the client of their 'opt out' rights.  The Government will consult further on practical details of the opt-in regime.  Consistent with the proposed Stronger Super reforms, it is proposed that the new adviser charging regime (including renewal obligations) will not apply to intra-fund advice.

Scope of statutory best interests duty clarified

The recent announcement clarifies the following elements of the proposed statutory duty for financial advisers to act in the best interests of clients:

  • reasonableness test: the duty will focus on the adviser's actions in providing the advice rather than the outcomes of the advice, and compliance with the duty will be assessed against what was reasonable in the circumstances, having regard to the scope of the client's request and needs;
  • liability: financial liability for breach of the duty will rest with the relevant licensed entity who is responsible for the provision of the advice rather than the individual adviser, although non-financial penalties, such as banning orders, may be imposed directly on the adviser;
  • no contracting out: it will not be possible for the adviser to contract out of the duty, meaning that advisers who do not consider that they can provide advice that is in the best interests of the client must refuse to provide the advice; and
  • ADI exception: the duty will not apply to advice given by employees of ADIs about basic banking products of the ADI.

Impact of the announcement on the superannuation industry

While the Australian superannuation industry continues to await the outcomes of the ongoing Stronger Super reform consultation process, the FoFA reforms represent an important step in improving members' access to advice about their superannuation and offer an important opportunity for superannuation trustees to reposition their role within the advice industry.

Of particular interest in the recent announcement is the confirmation of the Government's commitment to facilitating the provision of simple financial product advice to superannuation members.  While the details of the legislative changes giving effect to the proposed new category of scaled advice remain unclear, it appears that the FoFA reforms will build on the achievements of ASIC's recent intra-fund advice project by clearly entrenching in legislation the ability of appropriately licensed trustees to provide simple, low cost, targeted personal advice to existing superannuation members. 

In addition, the Government has again foreshadowed the future expansion of intra-fund advice to include the provision of single issue personal advice to members on matters such as transition to retirement, intra-pension advice, nomination of beneficiaries, Centrelink payments and retirement planning generally, although this continues to be subject to further consultation. 

Finally, it has long been anticipated that the proposed ban on conflicted adviser remuneration will result in the restructure of fee arrangements between superannuation trustees and aligned financial adviser distribution channels (including dealer groups who act as fund promoters or sponsors).  However, particularly for vertically integrated wealth management groups that include superannuation, advice and life insurance businesses, the proposed extension of the ban to risk insurance products offered within superannuation will also necessitate a review of any remuneration arrangements between these entities that involve commissions and like payments being deducted from members' premiums. 

Timing and next steps

The most recent announcement clarifies the Government's policy position on key elements of the FoFA reform package.  However, it is important to note that the public announcements remain at a fairly high principled level and there are important operational and transitional details that are still subject to further industry consultation.

Accordingly, there is uncertainty as to the form that many of the key reforms will ultimately take and how the changes will interact with the existing legislative regime.  The industry is eagerly awaiting the release of exposure draft legislation giving effect to the proposed FoFA reform package.

Key aspects of the draft legislation that will require careful scrutiny include:

  • the scope of the new category of scaled advice and its interaction with the existing recognised categories of general and personal financial product advice;
  • the scope of the conflicted adviser remuneration bans, particularly having regard to the multitude of different adviser remuneration structures currently in place throughout the advice industry; and
  • the exact formulation of the statutory best interest duty for financial advisers and the implications of this duty on advisers operating from approved product lists.

An exposure draft of the FoFA legislation is expected to be released for public comment in the second half of 2011.  The bulk of the FoFA reforms are anticipated to come into effect from 1 July 2012, although some elements of the reform package, such as the ban on conflicted adviser remuneration in respect of risk insurance offered within superannuation, are proposed to take effect from 1 July 2013.

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