FoFA Update: FoFA reforms take effect, likely to survive

The federal Government's FoFA reforms look likely to survive — albeit on a temporary basis and subject to minor changes due by October 2014.

In our April 2014 ClearLaw article titled "FoFA Update: Bill tabled; Senate Committee review; FoFA reforms paused", we summarised the state of the reforms at that time, noting that the Government had 'paused' — but not abandoned — the reforms pending a Senate committee review.

Since this time, the committee completed its review and the Government introduced regulations to give effect to its reforms from 1 July 2014 until 31 December 2015.

The survival of the regulations — and the Government's FoFA reforms — was ensured by the Government (eventually) obtaining the support of the Palmer United Party (PUP).

As a condition of the PUP's support, the Government has agreed to make further regulations by mid-October 2014, and to establish an enhanced public register of financial advisers.

This article summarises the progress of the FoFA reforms since April 2014, and what we can expect to happen next.

A brief (recent) history of FoFA

A brief history of FoFA is set out in our April 2014 ClearLaw article titled "FoFA Update: Bill tabled; Senate Committee review; FoFA reforms paused".

At the time of that article, the FoFA reforms had been 'paused' pending a review of the changes by the Senate Economics Legislation Committee.

The Government's official reasons for 'pausing' the reforms were to allow the Senate committee review process to complete and to enable the Government to consult in good faith with all relevant stakeholders on the FoFA reforms.

The unofficial view was that the 'pause' was intended to act as a circuit breaker to allow the Government to wait for the new Senate to commence on 1 July 2014, and to deal with ongoing criticism of the FoFA reforms from superannuation bodies, community and consumer groups, and finance journalists.

A brief history of the recent progress of the FoFA reforms is set out in the table below.

What's in the Regulation?

The Regulation makes a number of amendments to the Corporations Regulations 2001 (Cth) to give effect to the Government's FoFA reforms.

Rather than change the FoFA provisions of the Corporations Act 2001 (Cth) (Corporations Act) — which must be done by legislation — the Regulation gives effect to the FoFA reforms on a temporary basis, by excluding financial advisers from certain parts of the laws between 1 July 2014 and 31 December 2014.

The content of the FoFA reforms are summarised in an earlier ClearLaw article titled "Government announces major FoFA reforms". The reforms include:

• removing the 'catch-all' provision from the best interests duty; and
• ensuring that the wholesale and retail client distinction that currently applies in other parts of the Act also applies in respect of the FOFA provisions.

The full Regulation is available here.

Why was the PUP's support crucial?

The Government decided to give effect to its FoFA reforms on a temporary basis by making regulations under the Corporations Act.

The making of regulations means that the Government did not need to pass the changes through Parliament — but left them vulnerable to a vote by the Senate to disallow the regulations, which would render them ineffective.

As the Government does not have a majority in the Senate, it needed enough of the minor party Senators to vote with the Government against any motion by Labor and the Greens to disallow the Regulation. Without PUP's support, the motion to disallow the Regulation would have succeeded and FoFA (as enacted by Labor) would be in effect.

PUP's support will also be crucial to the Government passing any further FoFA amendments through the Senate.

What happens next?

In addition, as a condition of gaining the PUP's support for the Regulation, the Government has committed to make further regulations within 90 days of 15 July 2014 (that is, by 13 October 2014) which impose 4 requirements in relation to statements of advice provided by financial advisers, being:

• statements of advice must be signed by both the adviser and the client;
• statements of advice must explicitly:
  • state that the adviser is required to act in the best interests of their client and prioritise their client's interests ahead of their own;
  • disclose any fees;
  • state that the adviser will provide a fee disclosure statement annually if the client enters into (or has entered into) an ongoing fee arrangement after 1 July 2013;
  • state that a client has the right to return financial products after a 14-day cooling off period in accordance with the Corporations Act;
  • state that the client has the right to change his or her instructions to the adviser, if for example they experience a change in their circumstances; and
  • state that the adviser genuinely believes the advice provided to the client is in the client's best interests, given the client's relevant circumstances; and
• any instructions from a client to an adviser to alter or review instructions must be in writing, signed by the client and acknowledged by the adviser.

There has already been criticism that these requirements will only restate (rather than add to) existing requirements under the Corporations Act and/or impose additional red tape, while adding little or no consumer protection.

As a further condition of gaining PUP's support, the Government has agreed to work in consultation with stakeholders to establish an 'enhanced' public register of financial advisers, including details of each adviser's 'credentials and status in the industry'. No further details of this 'enhanced' register have been announced.

The full details of the Government and PUP agreement is set out in the letter from the Finance Minister to Clive Palmer, available here.

What happens later?

As noted above, the Regulation only makes interim changes valid from 1 July 2014 to 31 December 2015. To make the changes permanent, the Government will need to pass the changes by legislation.

The Government's plan is that the Regulation will be repealed once the Government passes its legislation to implement its FOFA reforms, the Corporations Amendment (Streamlining of Future of Advice) Bill 2014 (Cth) (Bill).

The Bill which was introduced into federal Parliament on 19 March 2014, is discussed in our April 2014 ClearLaw article. The Bill is currently before the House of Representatives and the Finance Minister has announced the Government will progress the Bill through Parliament in an 'orderly fashion'.

You can monitor the progress of the Bill here.

More information from Maddocks

For more information, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the General Commercial group

More information on related topics

You can read about FoFA in our earlier ClearLaw articles, and on Treasury's dedicated FoFA website.

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