Government announces major FoFA reforms

On 20 December 2013, the Assistant Treasurer announced reforms the Government intends to make to the Future of Financial Advice (FoFA) legislation. Senator Sinodinos said the Government supported the principles of FoFA, but considered the previous Government's reforms went too far, creating unnecessary complexity, imposing significant burdens on industry and reducing the availability and increasing the cost of advice to consumers.

Key elements of the reforms include:

• Removing the "opt-in" requirement: The Government will remove the need for clients to complete unnecessary paperwork in order to continue their arrangement with their adviser. This means advisers will no longer need to seek their clients' agreement every 2 years.
• Annual fee disclosure: The Government will streamline the existing requirements to ensure that the requirement to provide fee disclosure statements only applies to new clients from 1 July 2013. In other words, the retrospective application of the fee disclosure requirement will be removed, so that advisers will not need to provide fee disclosure statements (FDS) to clients who entered into a fee arrangement before the mandatory 1 July 2013 commencement date of FoFA. The Government considers that applying this requirement to existing clients is overly onerous as the fee disclosure arrangements are significantly more costly to apply to pre-1 July 2013 clients.
• Removing "catch-all" from the best interests duty: The Government will amend the best interests duty to ensure that advisers can be confident that they have provided compliant advice to their clients. The Government said the existing catch-all arrangements in s 961B(2)(g) of the Corporations Act have left advisers uncertain as to whether they have satisfied the best interests duty.
• Scaled advice: The Government will amend the best interests duty to explicitly allow for the provision of scaled advice. The changes will enable advisers to agree on the scope of advice to be provided with their clients, whilst ensuring that the advice is still appropriate for the client.
• Conflicted remuneration: The Government will amend the conflicted remuneration provisions to:
  1. allow for the payment of benefits under "balanced" remuneration structures;
  2. expand the basic banking exemption to include all simple (that is, "Tier 2") banking products; and
  3. permit the payment of performance bonuses that are calculated by reference to remuneration which is exempt from the ban on conflicted remuneration.
• Exempting general advice from conflicted remuneration: The Government will ensure that the ban on conflicted remuneration only applies to personal financial advice.
• Grandfathering: The Government will amend the existing grandfathering provisions to ensure that advisers can move between licensees whilst continuing to access grandfathered benefits. It said the current grandfathering provisions are reducing competition in the industry by impeding the movement of advisers between licensees.
• Life insurance inside super: The ban on conflicted remuneration will only apply to commissions on risk (life) insurance products inside superannuation in circumstances where no personal financial advice about these products has been provided ie where automatic coverage is provided inside a default (MySuper) superannuation fund.
• Training exemption: The Government will broaden the existing training exemption, that provides for training in relation to providing financial product advice as a permitted non-monetary benefit, to include other forms of training that are relevant to conducting a financial services business.
• Define intra-fund advice: The definition of intra-fund advice will be referenced in the FoFA provisions.
• Stockbroking: The existing stockbroking-related exemptions will be amended to:
  1. clarify the application of the stamping fee exemption to initial purchasing offer arrangements; and
  2. clarify the application of the brokerage fee exemption to products traded on the ASX24.

A detailed summary of the Government's amendments is in the Assistant Treasurer's media release.

FPA welcomes changes, but still room to improve

The Financial Planning Association (FPA) welcomed the Government's announcement as a "sensible outcome" for the financial planning industry and consumers alike.

CEO of the FPA, Mark Rantall, said that while the FPA and its members strongly support the underlying goal of the FoFA reforms, it was pleased to see amendments to underpin a more workable FoFA framework for financial planners and their clients. "The Government's estimated average savings of $190 million a year as a result of these amendments will go some way in helping to improve access and affordability of advice to more Australians", Mr Rantall said.

Mr Rantall said the changes are a positive step, but there was still room to improve. Specifically, he said the FPA considers there is more to be done to streamline the Fee Disclosure Statement process and the FPA will continue to work with Government and Treasury for improvements in this area. ( Source: FPA release, 20 December 2013.)

Source: This article was first published in Thomson Reuters' Weekly Tax Bulletin. To subscribe to Weekly Tax Bulletin, or for more information, please:

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