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.
|16 June 2014||
The Senate Economics Legislation Committee tabled its report on the FoFA reforms. The majority report by Government senators was, unsurprisingly, broadly supportive of the reforms.
The full report is available here.
|20 June 2014||The Finance Minister, Mathias Cormann, announced that the Government's FoFA reforms would be implemented through regulations to take effect on 1 July 2014.|
|21 June 2014||Clive Palmer indicated the PUP did not support the FoFA reforms, announcing that the PUP would 'get rid of' the changes when they are put before the Senate.|
|30 June 2014||
The Government registered the Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014 (Cth) (Regulation), which gives effect to its proposed FoFA reforms.
The Government delayed tabling the Regulation in the Senate — which would allow them to be debated — citing a need to consult the new Senate.
|1 July 2014||The Regulation came into effect.|
|10 July 2014||
Labor, with the support of the Greens, the Democratic Labor Party, Nick Xenophon and Ricky Muir of the Australian Motoring Enthusiast Party, tabled the Regulation in the Senate.
The tabling of the Regulation allowed the Senate to debate the Regulation — and the Senate to disallow the Regulation (rendering it ineffective) by vote.
There was widespread speculation that the FoFA reforms would be disallowed, given Clive Palmer's previous announcements that the PUP did not support the reforms.
|14 July 2014||Labor gave notice of a motion to disallow the Regulation on 15 July 2014.|
|15 July 2014||
The Senate voted on Labor's motion to disallow the Regulation.
The motion to disallow the Regulation was defeated, as it was opposed by the Government, Australian Motoring Enthusiasts Party, Family First, the Liberal Democratic Party and (crucially) the PUP.
The motion to disallow was supported by Labor, the Greens and Nick Xenophon.
As the motion to disallow the Regulation failed, the Regulation remains in effect.
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