FoFA Update: Bill tabled; Senate Committee review; FoFA reforms paused

The federal government has 'paused' its proposed FoFA reforms.

In March 2014, the government introduced a bill to give effect to a range of FoFA reforms, targeted at reducing the regulatory burden on the financial industry. The bill, among other things:

• removes the so-called 'catch all' provision in relation to an advisor's 'best interests duty'; and
• makes ongoing fee arrangements opt-out rather than opt-in.

Almost immediately after the bill's introduction, it was referred to the Senate Economics Legislation Committee for review and the Assistant Treasurer, Arthur Sinodinos — who was handling the FoFA reforms — temporarily stepped down from his responsibilities due to a NSW ICAC investigation.

The Senate Economics Legislation Committee is due to report on the bill in June 2014.

The Finance Minister, Mathias Cormann — who has assumed responsibility for the FoFA reforms — has announced that the government has 'paused' implementation of its FoFA reforms pending this Committee process, and a broader consultation about the reforms with stakeholders.

This article summarises that status of the government's proposed FoFA reforms — and what we can expect to happen next.

A brief history of FoFA

'FoFA' (or 'Future of Financial Advice') refers to the previous (Labor) government's package of reforms targeted at improving the quality of financial advice and expanding the availability of more affordable forms of advice in Australia.

These reforms included the introduction of a ban on 'conflicted remuneration' (discussed in an earlier ClearLaw article titled "Future of Financial Advice: second tranche draft legislation released") and making ongoing fee arrangements 'opt-in', by requiring providers to obtain their client's approval to these arrangements every 2 years.

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

Why is FoFA being amended?

The proposed reforms deliver on a Coalition election commitment to amend FoFA to reduce the compliance burden on the financial services industry while maintaining (but not increasing) consumer protections.

The government has stated that while it agrees with FoFA's broad policy objectives, it considers the current laws are too complex, too expensive to implement and create too much red tape.

What does the Bill do?

The government has not proposed a wholesale repeal of FoFA. Rather, the Bill targets key areas, as summarised in the January 2014 ClearLaw article titled "Government announces major FoFA reforms". These reforms include:

• Removing the 'catch-all' provision: When providing personal advice to a retail client, the provider must act in the client's best interests in relation to that advice — the so-called 'best interests duty'.

  The Corporations Act sets out 7 steps by which a provider can prove they have satisfied the best interests duty. The seventh and final step is that the provider has 'taken any other step [in addition to the six preceding ones] that ... would reasonably be regarded as being in the best interests of the client'. This final step is known as the 'catch-all' provision.

  The Bill removes this final step — there is no requirement for providers to prove they have 'taken any other step' in order to discharge the best interests duty. The first 6 steps remain.

• Removing the "opt-in" requirement: Currently, where an ongoing financial advice relationship exists between an adviser and a retail client — where the adviser charges an 'ongoing advice fee' (a fee for a period longer than 12 months) — the client must give their consent every 2 years to be charged the fee.

  Such ongoing fees are 'opt-in' only: they automatically cease if the client does not give the required consent.

  The Bill makes these arrangements 'opt-out' only, by removing the requirement to obtain the client's consent to charge an ongoing advice fee.

• Making disclosure obligations prospective only: FoFA introduced retrospective operation for disclosure statement obligations, which apply to ongoing fee arrangements entered into both before and from 1 July 2013.

  The Bill makes these obligations only apply to arrangements entered into from 1 July 2013.

What happens next?

The FoFA reforms are currently in limbo — the Bill is being reviewed by the Senate Economics Committee, and debate in the Senate will not occur until the Committee process is complete.

The Senate Economics Legislation Committee is currently accepting submissions in relation to the Bill. Submissions close on 30 April 2014, and can be made here.

The Committee is due to report on 16 June 2014.

During the Committee review process, the government has pledged to consult in good faith with stakeholders about its FoFA reforms.

We are therefore unlikely to see any FoFA amendments until the 2015 financial year.

While the amendments have not yet taken effect, ASIC stated in December 2013 that it would take a 'facilitative approach' to FoFA until mid-2014 and will not take enforcement action in relation to the FoFA provisions which are the subject of the proposed amendments during this time.

Why have the FoFA reforms been 'paused'?

The government's official reason for 'pausing' the FoFA amendments is to:

• allow the Senate Economics Legislation Committee review process to complete; and
• enable the Government to consult in good faith with all relevant stakeholders on the FoFA regulations. The Bill only deals with amendments to the FoFA provisions of the Corporations Act.

The government's unofficial reasons for hitting 'pause' on the FoFA reforms likely also include:

• the unfortunate timing of the responsible minister — the Assistant Treasurer — temporarily stepping down from his responsibilities in light of a well-publicised NSW ICAC investigation just as the Bill was tabled in Parliament;
• the unlikelihood of the current Senate passing the Bill — given that it is controlled by both Labor (who introduced FoFA) and the Greens (who supported the introduction of FoFA); and
• criticism of the proposed FoFA reforms from a wide range of sources, including:
  • community groups (for example, National Seniors Australia have criticised changes to the 'best interests duty' as effectively removing advisers' obligations to act in their clients' best interests);
  • consumer groups (for example, Choice considers the reforms go too far in eroding consumer protections);
  • financial journalists (for example, Alan Kohler in the Business Spectator, has been critical of the exemptions to the ban on conflicted remuneration and the change to the 'opt-in' requirement for ongoing advice fees); and
  • superannuation bodies (for example, Industry Super Australia has cited a desire for financial advice to be driven by a client's best interests and not 'tainted' by commissions and ongoing advice fees).

There is a view that because of these factors the government was losing the public debate about the merits of its FoFA reforms. The government may be hoping that 'pausing' — but not abandoning — the reforms to allow the Committee process, will act as a circuit breaker to allow the government to either gain the necessary support for the Bill, or to propose an alternative set of FoFA reforms for which it can gain support.

Will the FoFA reforms survive in their current form?

While the government has stated its commitment to passing its desired FoFA reforms as contained in the Bill, whether this will be possible depends on a range of factors — including:

• whether the Bill survives the Committee process unscathed — which will not be known until, at the earliest, the Committee reports on 16 June 2014;
• how the new Senate will view the Bill — which will become clearer the closer we get to the new Senators commencing on 1 July 2014. It is not yet clear whether the incoming crossbench Senators — such as the Palmer United Party — will support the Bill; and
• whether and, if so, how the government seeks to placate those groups which have campaigned against the FoFA reforms.

Cleardocs will monitor the progress of the FoFA Committee review and the Bill, and update you through ClearLaw.

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's genesis in our earlier ClearLaw articles, and on Treasury's dedicated FoFA website.

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