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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
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2013-2014

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Corporations » amendment (streamlining of future of financial advice) « Bill » 2014

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

(Circulated by the authority of the

Treasurer, the Hon J. B. Hockey MP)

 



Table of contents

Glossary.............................................................................................................. 1

General outline « and » financial impact............................................................ 3

Chapter 1               Best interests obligation...................................................... 7

Chapter 2               Ongoing fee arrangements.............................................. 19

Chapter 3               Conflicted remuneration « and » « other » banned remuneration 27

Chapter 4               Statement of Compatibility with Human Rights........... 41

Chapter 5               Regulation impact statement........................................... 45

 

Do not remove section break.



The following abbreviations « and » acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

ADI

Authorised Deposit-taking institution

ASIC

Australian « Securities » « and » Investments Commission

« Corporations » Act

« Corporations » Act 2001

« Corporations » Regulations

« Corporations » Regulations 2001

Dissenting Report

Dissenting Report by Coalition members of the Parliamentary Joint Committee on « Corporations » « and » Financial Services inquiry into the FOFA Bills

FOFA

Part 7.7A of the « Corporations » Act 2001 , as introduced by the « Corporations » Amendment (Future of Financial Advice) Act 2012 « and » the « Corporations » Amendment (Further Future of Financial Advice Measures) Act  2012, also known as the Future of Financial Advice

FOFA Bills

« Corporations » Amendment (Future of Financial Advice) « Bill » 2012 « and » the « Corporations » Amendment (Further Future of Financial Advice Measures) « Bill » 2012

ICCPR

International Covenant on Civil « and » Political Rights

Licence

Australian Financial Services Licence

Licensee

Holder of an Australian Financial Services Licence

Representative

Representative of an Australian financial services licensee

RIS

regulation impact statement

SIS Act

Superannuation Industry (Supervision) Act 1993

the « Bill »

« Corporations » Amendment (Streamlining of Future of Financial Advice) « Bill » 2014



 

General outline « and » financial impact

Outline

The « Corporations » Amendment (Streamlining of Future of Financial Advice) « Bill » 2014 (the « Bill » ) implements the Government’s election commitment to reduce compliance costs imposed on the financial services industry by amending Part 7.7A of the « Corporations » Act 2001 ( « Corporations » Act).   Part 7.7A is also referred to as Future of Financial Advice (FOFA).

FOFA was announced by the former Government in April 2010, « and » introduced to Parliament in 2011.  FOFA was the former Government’s response to the 2009 Inquiry into Financial Products « and » Services in Australia by the Parliamentary Joint Committee on « Corporations » « and » Financial Services (PJC Inquiry), which was established to inquire into, « and » report on, issues associated with financial product « and » services provider collapses that occurred in the wake of the Global Financial Crisis.

The underlying objective of FOFA was to improve the quality of financial advice whilst building trust « and » confidence in the financial advice industry.

The FOFA « amendments » commenced, on an optional basis, from 1 July 2012, « and » became compulsory from 1 July 2013.

The Government agrees with the policy intent of FOFA, but considers that the legislation has, in parts, placed an unnecessarily heavy compliance burden on the financial services industry.   When the « Corporations » Amendment (Future of Financial Advice) « Bill » 2012 « and » the « Corporations » Amendment (Further Future of Financial Advice Measures) « Bill » 2012 ( FOFA Bills) were introduced into Parliament, they were referred to the Parliamentary Joint Committee on « Corporations » « and » Financial Services (the Committee).

The Committee delivered its report on the FOFA Bills in February 2012; the report included a Dissenting Report by Coalition members of the Parliamentary Joint Committee (Dissenting Report).   The Dissenting Report put forward 16 recommendations for changes to FOFA, reflecting the Coalition’s concerns that the FOFA Bills were too complex, costly to implement « and » created unnecessary red tape.  

In July 2013, the Coalition released its Policy to Boost Productivity « and » Reduce Regulation , in which it committed to reduce compliance costs for small business, financial advisers « and » consumers who access financial advice, by implementing the recommendations from the Dissenting Report.

The « amendments » in this « Bill » reduce compliance burdens whilst maintaining consumer protections.  

On 20 December 2013, the Assistant Treasurer, Senator the Hon Arthur Sinodinos AO, announced « amendments » to FOFA.   The « amendments » implement the Government’s election commitment to reduce compliance costs for the financial services industry.

The « Bill » includes the following key « amendments » to FOFA:

•        removing the need for clients to renew their ongoing fee arrangement with their adviser every two years (also known as the ‘opt-in’ requirement);

•        making the requirement for advisers to provide a fee disclosure statement only applicable to clients who entered into their arrangement after 1 July 2013;

•        removing paragraph 961B(2)(g), the ‘catch-all’ provision, from the list of steps an advice provider may take in order to satisfy the best interests obligation;

•        better facilitating the provision of scaled advice; « and »

•        providing a targeted exemption for general advice from the ban on conflicted remuneration in certain circumstances.

Time sensitive « amendments » will be reflected in the « Corporations » Regulations to the extent allowed under the relevant regulation-making powers.   These « amendments » include: the removal of the opt-in requirement; changes to fee disclosure statements; removal of the ‘catch-all’ provision under the best interests obligation; the facilitation of the provision of scaled advice; « and » changes to conflicted remuneration.   These « amendments » will subsequently be repealed once this « Bill » receives the Royal Assent.  

Until the « amendments » are in place, « and » consistent with Australian « Securities » « and » Investments Commissions (ASIC’s) stance during the introduction of « other » major policy reforms, ASIC announced on 20 December 2013 [1] that it would take a facilitative approach to the FOFA reforms until mid-2014.

ASIC has indicated that it will not take enforcement action in relation to the specific FOFA provisions that the Government is planning to repeal through this « Bill » « and » the associated regulations.   For example, ASIC will not take action for breaches of the section which requires fee disclosure statements to be provided to retail clients with ongoing fee arrangements entered into before 1 July 2013. 

However, ASIC’s stance does not remove a client’s right to take private action against a provider in the event they feel they are disadvantaged.

Consultation : The Government has undertaken extensive consultation on these « amendments » to the FOFA legislation.  

Consultation on an exposure draft « Bill » « and » Regulation was conducted for three weeks in February 2014.  Various consultation meetings were also held.   A total of 57 written submissions were received. 

These consultations have informed the final position of this « Bill » .  

Date of effect The « amendments » commence upon the day after this Act receives the Royal Assent.

Proposal announced :  The « amendments » to FOFA were announced on 20 December 2013 by the Assistant Treasurer, Senator the Hon Arthur Sinodinos AO.

Financial impact This « Bill » has no significant financial impact on Commonwealth expenditure or revenue.

Compliance cost impact The « amendments » have no compliance cost impact; they are deregulatory in nature.  

Regulation impact statement

A details-stage regulation impact statement (RIS) for the « amendments » to FOFA has been prepared « and » can be found in Chapter 5. 

Information gathered through the consultation process has been used to inform this details-stage RIS.



Chapter 1          

Best interests obligation

Outline of chapter

1.1                   Schedule 1 to the « Bill » amends Part 7.7A of the « Corporations » Act to: remove the ‘catch-all’ provision from the list of steps an advice provider may take in order to satisfy the best interests duty; better facilitate the provision of scaled advice; « and » make consequential changes to the modified best interests duty.

Context of « amendments »

1.2                    The Government has committed to provide certainty « and » reduce compliance costs for small business, « and » financial advisers, whilst maintaining the quality of advice for consumers who access financial advice.   See Outline for further information.

Removal of the ‘catch-all’ provision

1.3                   Currently, the law requires advice providers to act in their client’s best interests when providing « personal » advice.   Subsection 961B(2) of « Corporations » Act lists a number of steps that a provider may take in order to show they have satisfied the best interests duty.   There are seven steps, the last of which is paragraph (g), also known as the ‘catch-all’ provision.  Paragraph (g) states that a provider must prove that they have ‘taken any « other » step [in addition to the six preceding ones] that … would reasonably be regarded as being in the best interest of the client.’

1.4                    The Government has committed to removing the catch-all provision to remove legal uncertainty on how to satisfy the best interests duty.

Facilitating scaled advice

1.5                   Scaled advice is « personal » advice where the scope of the advice has been limited or scaled.   There is currently uncertainty over the amount of work that is required for providers to satisfy their best interests duty when providing scaled advice.  There is also uncertainty over the ability for providers « and » clients to agree on the scope of scaled advice.

1.6                   The Government has committed to amending the legislation to better facilitate the provision of scaled advice to reduce uncertainty « and » enable cost-effective scaled advice to be provided to consumers.

Modified best interests obligation

1.7                    The current best interests duty in the FOFA provisions provides a modified best interests duty for certain advice providers who provide advice on basic banking products or general insurance products.

1.8                    Consequential changes to the modified best interests obligation are required given the Government’s commitment to include consumer credit insurance products in section 963D of the « Corporations » Act.

Exemptions from the client priority obligation

1.9                    Under the current law, exemptions from the client priority obligation in section 961J are provided where the advice sought by the client relates solely to a basic banking product or a general insurance product. 

1.10                To ensure consistency with the « amendments » to the modified best interests duty that flow on from the inclusion of consumer credit insurance in the basic banking exemption, consequential changes to the client priority obligation exemptions are required.

Summary of new law

1.11               The « Bill » amends the best interests duty in section 961B by:

•        removing paragraph (g) (the catch-all provision) from the best interests duty;

•        better facilitating scaled advice by explicitly allowing clients « and » providers to agree the scope of advice to be provided « and » limiting the best interest duty to this agreed scope; « and »

•        consequential changes to the modified best interests duty.

1.12               The « Bill » also « amendments » the appropriate advice requirement in section 961G to clarify that it operates as a separate provision « and » makes consequential « amendments » to the client priority obligation.

Comparison of key features of new law « and » current law

New law

Current law

There is no requirement for providers to prove they have ‘taken any « other » step’ in order to discharge the best interests duty.

 

In order to satisfy the best interests duty, providers may be able to prove that they have ‘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.’

Clients « and » providers can explicitly agree on the scope of any scaled advice.

Providers need only investigate the objectives, financial situation « and » needs of their client that are relevant to the scaled advice to be provided.

However, the scoping of any advice would still need to be considered appropriate to the client.

 

There is uncertainty on whether clients « and » providers can agree on the scope of the advice to be provided.

Some providers are concerned that they are required to undertake a fulsome investigation into the client’s objectives, financial situation « and » needs before any scaled advice can be provided.

An agent or employee of an Australian Authorised Deposit-taking institution (ADI) need not satisfy certain steps in the best interests duty in relation to advice provided on a basic banking product or general insurance product if they provide « personal » advice on a basic banking, or general insurance, or consumer credit insurance product, or a combination of these products.

However, the full best interests duty applies to the advice about consumer credit in this situation.

An agent or employee of an Australian Authorised Deposit-taking institution (ADI) need not satisfy certain steps in the best interests duty if they provide « personal » advice on a basic banking or general insurance product.

Advice provided to a client must be appropriate having regard to the best interests duty.

Advice provided to a client must be appropriate had the provider satisfied the best interests duty.

An agent or employee of an ADI will be exempt from the client priority obligation in relation to advice that relates to a basic banking product or a general insurance product, or a combination of these products, if the subject matter of the advice sought by the client relates only to a basic banking product, a general insurance product, a consumer credit insurance product, or a combination of any of these products.

Further, all providers will be exempt from the client priority obligation in relation to advice on a general insurance product to the extent that the subject matter of the advice sought by the client relates to a general insurance product.

An agent or employee of an ADI is exempt from the client priority obligation if the subject matter of the advice sought by the client relates only to a basic banking product.

Further, all providers are exempt from the obligation if the subject matter of the advice sought by the client relates only to a general insurance product.

Detailed explanation of new law

Remove the ‘catch-all’ provision

1.13                The « Bill » addresses concerns that there is significant legal uncertainty over how financial providers can satisfy their duties to their clients.

1.14                Subsection 961B(2) of the « Corporations » Act currently provides seven steps that the provider may take to satisfy the best interests duty.  Paragraph 961B(2)(g) is the last of the seven steps.  It states that a provider must be able to prove that they have ‘taken any « other » step [in addition to the six preceding ones] that, at the time the advice is provided, would reasonably be regarded as being in the best interest of the client, given the client’s relevant circumstances.’  Paragraph 961B(2)(g) is known as the ‘catch-all’ provision.

1.15               The « Bill » removes paragraph 961B(2)(g), « and » makes a related consequential amendment to section 961E by removing it; section 961E specifies what would reasonably be regarded as being in the best interests of the client.   As the phrase ‘reasonably be regarded as being in the best interests of the client’ is only contained in paragraph 961B(2)(g), which is being removed, section 961E is not required.   [Schedule 1, items 9, 10 « and » 14, section 961E « and » subsections 961B(2)(f) « and » 961B(2)(g)]

1.16                The removal of paragraph 961B(2)(g) removes the legal uncertainty over how advice providers can satisfy their best interests duty whilst maintaining consumer protections.   Even without paragraph 961B(2)(g), subsection 961B(2) still sets a high standard for providers to show they have acted in the best interests of their client.

Facilitating scaled advice

1.17                The « Bill » amends the best interests obligation to better facilitate the provision of scaled advice by clarifying that an advice provider « and » a client may agree on the scope of advice to be provided.   The « Bill » provides that the best interests duty applies to the scope or subject matter of the advice agreed upon between the client « and » the provider.  

1.18                The « Bill » also clarifies the appropriateness of advice requirement.

1.19                The best interest duty applies to « personal » advice provided to retail clients.   « Personal » advice is advice that considers the financial objectives, situation, « and » needs of a person (as defined in subsection 766B(3) of the « Corporations » Act).   All « personal » advice is ‘scaled’ or ‘limited in scope’ to some extent: advice is either less or more comprehensive in scope along a continuous spectrum.

1.20                Whilst scaled advice is not specifically defined in the « Corporations » Act, it is usually referred to in the industry as a targeted form of « personal » advice.   For example, scaled advice may cover a specific area of a client’s needs such as insurance or superannuation, « and » can be contrasted to holistic advice that usually considers all of the client’s financial needs.

1.21                The limited scope of scaled advice usually makes it much cheaper than more fulsome « personal » advice.   This may be due to the fact that a provider does not need to consider as many of the client’s circumstances, needs « and » objectives to provide the advice.

1.22                As holistic « personal » advice can often be expensive, scaled advice is an affordable avenue for many consumers seeking « personal » advice.

1.23                The « Bill » addresses uncertainty over whether a client « and » adviser can agree on the scope of the advice to be provided by inserting a specific provision indicating that such an agreement can occur.   [Schedule 1, item 13, subsection 961B(4A)]

1.24                It is quite common for a client who may not have had any prior contact with a provider to initially seek advice on either a broad range of services that, due to the breadth of scope may be unaffordable for the client, or to not be sure of what advice they really want or need.  In many instances, even if the client knows the advice they want or need, they may not be able to afford the advice; thus, the scope may need to be limited in some form to reduce the cost of the advice.

1.25                In such situations, a provider « and » their client will usually have a series of conversations to explore « and » understand the advice the client wants; these conversations help to better define possible subjects of the advice.

1.26                Once the provider « and » client have explored « and » better understood what the client wants, agreement between the provider « and » the client on the subject of the advice usually occurs.   The new provision explicitly indicates that this agreement can take place.  [Schedule 1, item 13, subsection 961B(4A)]

1.27                It is important to note that this new provision does not alter the operation of section 947D; section 947D requires an advice provider to disclose certain information about the costs « and » benefits of switching between one financial product « and » another financial product.  As such, providers must still be mindful of their section 947D obligations when providing scaled advice.

1.28                In agreeing the subject of the advice, there needs to be a ‘meeting of the minds’ between both the provider « and » the client.   The provider should clearly explain to the client the consequences of not receiving advice on those « other » subjects.

1.29                For example, a retail client, who does not want to spend too much money on financial advice, seeks advice on financial matters.  After having a conversation about the client’s financial objectives, circumstances « and » needs, the client « and » provider agree that advice on superannuation, debt consolidation, « and » life insurance are topics that are particularly relevant to the client at this time.

1.30                The client, being only able to afford to receive advice on one of these topics, « and » having been informed « and » having considered the benefits « and » drawbacks of receiving advice on only one of these topics, can agree with the provider to receive advice on a particular topic.   For the purposes of this example, assume the client decides to receive advice on debt consolidation; the new law clarifies that the client « and » provider can agree that advice on debt consolidation will be provided.

1.31                There is currently uncertainty over the advice that the best interest duty applies to, specifically when scaled advice is provided.  Some industry stakeholders have questioned whether the duty applies to the advice as initially sought by the client (in the scenario above: the advice as initially sought would be advice on financial matters) or whether the duty applies to the advice as ultimately sought.

1.32                The « Bill » inserts an example of a client « and » provider agreeing the subject matter of advice.   The example clarifies that the best interests obligations apply to the advice ultimately sought (in the scenario above: the advice ultimately sought is the advice on debt consolidation).  [Schedule 1, item 13, subsection 961B(4A)(example)]

1.33                There is also currently uncertainty over the extent of the investigations that are required to be undertaken when providing scaled advice.  

1.34                A number of industry participants consider that the current paragraph 961B(2)(a), which is the first of the steps in subsection 961B(2) « and » requires the provider to identify the objectives, financial situations « and » needs of the client that were disclosed to the provider by the client through instructions, requires the provider to perform a ‘full fact-find’ with the client before any « other » steps are to be taken.

1.35                A full fact-find is generally associated with holistic advice, « and » requires a provider to consider—in great detail—the client’s financial objectives, circumstances « and » needs.   Given the time taken by a provider in considering these details, advice provided when a full fact-find is undertaken is usually quite expensive.

1.36                A full fact-find was never the intention behind paragraph 961B(2)(a); rather, paragraph 961B(2)(a) requires consideration of the objectives, circumstances « and » needs relevant to the client « and » the advice that is sought.   The relevant objectives, circumstances « and » needs usually only become apparent after talking to the client to understand the advice they are after.

1.37                The « Bill » removes doubt about the necessity of a full fact-find by repealing paragraph 961B(2)(a) « and » inserting a new paragraph that requires the provider to identify the objectives, financial situation « and » needs of the client that are disclosed to the provider by the client .   The new paragraph will be inserted after paragraph 961B(2)(b).  [Schedule 1, items 7 « and » 8, paragraphs 961B(2)(a) « and » (ba)]

1.38                Notwithstanding the fact that the steps in subsection 961B(2) do not need to be followed in the order as written, the position of the new paragraph (after paragraph 961B(2)(b)) should help alleviate concerns that an up-front full fact find is required to be performed ahead of any « other » steps.

1.39                The new paragraph requires the provider to assess the facts that have been presented by the client, « and » to perform a comparison between the facts disclosed « and » the facts that would be relevant to the advice sought as required by subparagraph 961B(2)(b)(ii); subparagraph 961B(2)(b)(ii) requires the provider to identify the objectives, financial situation « and » needs of the client that would reasonably be considered as relevant to advice sought on that subject matter (the client’s relevant circumstances).

1.40                The « Bill » further clarifies that the investigations a provider needs to conduct when providing advice—regardless of the scope—are those that are reasonably considered as relevant to the subject matter of the advice sought.   [Schedule 1, item 11, subsections 961B(2)(note)]

Operation with the appropriate advice requirement

1.41                The best interests duty operates in conjunction with the appropriate advice requirement set out in section 961G but both operate as separate obligations.  Currently, section 961G requires advice provided to be appropriate had the best interests duty been satisfied.

1.42                To ensure the appropriateness requirement operates as a separate obligation, the « Bill » amends section 961G to provide that advisers must only provide advice to the client if it would be reasonable to conclude that the advice is appropriate to the client ‘having regard to’ section 961B.   [Schedule 1, item 15, subsection section 961G]

1.43                By specifying that a provider must have regard to section 961B, the best interests duty forms a central, although not absolute, basis for determining the appropriateness of the advice.   In some instances, consideration of the best interests duty may be sufficient; in « other » instances, « other » factors may also need to be considered.

1.44                Consumers who seek financial advice expect that their adviser will act in their best interests « and » that, as a result, the advice provided will leave them in a better position.   In addition, consumers expect that any advice provided will be tailored to their relevant circumstances.  Accordingly, when determining the appropriateness of advice, an adviser must consider whether the advice provided could reasonably be expected to leave the client in a better position given their relevant circumstances.

1.45                Whilst the changes to the best interests duty explicitly allow a client « and » adviser to agree the scope of the advice, it does not allow a client « and » adviser to agree that the advice is appropriate for the client: this is a judgement call for the adviser.   As such, agreeing on the scope of advice does not mean that inappropriate advice can be given; the appropriateness of the advice will need to be assessed by reference to the information obtained from the client « and » the client’s relevant circumstances.

1.46                In certain circumstances, it may not be appropriate for the adviser to provide advice on the agreed topic, « and » so it may be necessary to warn the client or advise that certain action will not be appropriate; in « other » instances, a warning may not be necessary.   This is ultimately an ‘on balance’ decision that will depend on the facts at hand « and » will require the adviser to exercise their judgement using their skills « and » experience.

1.47                Where the adviser, in having regard to section 961B, concludes that it is not appropriate to provide advice on a subject matter that has been agreed upon, the adviser should not provide that advice to the client.

Modified best interests obligation

1.48                The « Bill » makes consequential changes to the modified best interests duty as a result of the inclusion of consumer credit insurance products in section 963D of the « Corporations » Act.

1.49                Currently under subsection 961B(3), an agent or employee of an ADI is not required to satisfy the steps in paragraphs 961B(2)(d) to (g) when the subject matter of the advice sought by the client is solely in relation to a basic banking product.  Subsection 961B(4) further provides that a provider need not satisfy those steps when the subject matter of the advice sought by the client is solely in relation to a general insurance product. 

1.50                The « Corporations » Regulations also provide that an agent or employee of an ADI need not satisfy the steps in paragraphs 961B(2)(d) to (g) when the only « personal » advice provided is in relation to a basic banking product « and » a general insurance product.

1.51                The Regulations also  provide that the steps in paragraphs 961B(2)(d) to (g) do not need to be followed by any provider if the subject matter of the advice relates to a general insurance product.

1.52                The « Bill » provides that an agent or employee of an ADI need not satisfy the steps in paragraphs 961B(2)(d) to (f) in relation to « personal » advice on a basic banking or general insurance product where the subject matter sought by the client relates to a basic banking product, general insurance product, consumer credit insurance product, or a combination of these products.   [Schedule 1, item 12, subsection 961B(3)]

1.53                To the extent that the subject matter of the advice sought by the client is a general insurance product, the provider satisfies the best interests duty if the provider takes the steps outlined in paragraphs (2)(b), (ba) « and » (c).   [Schedule 1, item 12, subsection 961B(4)]

1.54                It is important to note that this amendment does not extend the modified best interests duty (under the current law, the need to satisfy the steps in paragraphs 961B(2)(a) to (c) but not paragraphs 961B(2)(d) to (g) in relation to « personal » advice) to the provision of consumer credit insurance; rather, it allows the modified best interests duty to apply to a basic banking product and/or general insurance product where the subject matter of the advice sought also relates to consumer credit insurance.  

1.55                As such, the provision of consumer credit insurance still requires all the steps in subsection 961B(2) (the best interests duty) to be satisfied.

Exemptions from the client priority obligation

1.56                The « Bill » amends the exemptions from the client priority obligation t o ensure consistency with the « amendments » to the modified best interests duty that flow on from the inclusion of consumer credit insurance in the basic banking exemption.

1.57                Section 961J places an obligation on the provider to give priority to the client’s interests when the provider knows or reasonably ought to know that there is a conflict between the client’s interests « and » the provider’s interests, or the interests of one of the « other » parties listed in subsection 961J(1).  

1.58                Under the current law, a n agent or employee of an ADI is exempt from the client priority obligation if the subject matter of the advice sought by the client relates only to a basic banking product.  Further, all providers are exempt from the obligation if the subject matter of the advice sought by the client relates only to a general insurance product.

1.59                The « Bill » makes consequential « amendments » to the circumstances in which a provider may access the exemptions.

1.60                An agent or employee of an ADI will be exempt from the client priority obligation in relation to advice that relates to a basic banking product or a general insurance product, or a combination of these products, if the subject matter of the advice sought by the client relates only to a basic banking product, a general insurance product, a consumer credit insurance product, or a combination of any of these products.  The client priority rule will continue to apply to advice provided in relation to a consumer credit insurance product.  [Schedule 1, item 16, subsection 961J(2)]

1.61                Further, all providers will be exempt from the client priority obligation in relation to advice on a general insurance product to the extent that the subject matter of the advice sought by the client relates to a general insurance product.  The client priority obligation will continue to apply in providing advice on matters not relating to a general insurance product [Schedule 1, item 16, subsection 961J(3)]

Application « and » transitional provisions

1.62                The « amendments » to the best interests obligation apply in relation to the provision of « personal » advice to a retail client on or after the commencement day.   The « amendments » commence the day after the Royal Assent.   [Schedule 1, item 43, sections 1531A « and » 1531B]

1.63                The current requirements continue to apply until the new law is in place or new regulations are made.



 

Chapter 2          

Ongoing fee arrangements

Outline of chapter

2.1                   Schedule 1 to the « Bill » amends Part 7.7A of the « Corporations » Act to:

•        remove the renewal notice obligation for fee recipients; « and »

•        make the requirement for providers to provide a fee disclosure statement only applicable to clients who entered into their arrangement after 1 July 2013. 

Context of « amendments »

2.2                   The Government has committed to provide certainty « and » reduce compliance costs for small business, financial advisers « and » consumers who access financial advice.   See Outline for further information.

Removal of the ‘opt-in’ requirement

2.3                   The current law provides that licensees who have an ongoing fee arrangement with a retail client whose ongoing fee arrangement commenced after 1 July 2013 must obtain their client’s agreement at least every two years to continue the ongoing fee arrangement, for new clients.  If, after receiving the renewal notice, the client decides not to renew or fails to respond to the fee recipient's renewal notice, the ongoing fee arrangement terminates. 

2.4                   The Government has committed to remove the requirement for licensees to obtain their client’s approval at least every two years in order to continue an ongoing fee arrangement (known as the ‘opt-in’ requirement) on the basis that the current law imposes unnecessary costs.

Changes to fee disclosure statements

2.5                   The current law provides that licensees must give all retail clients who have an ongoing fee arrangement a fee disclosure statement which shows the fees paid by the client, the services the client received, « and » the services the client was entitled to receive, in the previous 12 months.  

2.6                   The Government has committed to making the annual fee disclosure statements prospective only.  In « other » words, a fee disclosure statement only needs to be sent to clients charged an ongoing fee during a period of 12 months or more where the ongoing arrangement was entered into after 1 July 2013.  It is not required for arrangements entered into prior to 1 July 2013.

2.7                   This is on the basis that retrospectively applying the annual fee disclosure statement imposes large costs on industry, with minimal benefit.  

Clarification of intra-fund advice

2.8                   The current law does not define intra-fund advice .  The Government has committed to clarifying this term in the FOFA legislation.

Summary of new law

2.9                   The « Bill » provides that where an ongoing financial advice relationship exists between a licensee (the ‘fee recipient’) « and » a retail client which involves the charging of an ongoing advice fee (however described), the adviser is no longer required to:

•        provide a renewal notice for fee recipients; « and »

•        provide a fee disclosure statement to clients who entered into their ongoing fee arrangement before 1 July 2013. 

2.10               Fee recipients still need to provide an annual fee disclosure statement to all « other » clients (ie post-1 July 2013 clients).  

2.11               The « Bill » defines the term intra-fund advice .

Comparison of key features of new law « and » current law

New law

Current law

No requirement to obtain a client’s agreement to charge an ongoing fee.  

Any ongoing fee arrangement continues to exist unless the arrangement is terminated by either the client or the licensee. 

Licensees who have an ongoing fee arrangement with a retail client must obtain their client’s agreement at least every two years to continue the ongoing fee arrangement, for new retail clients who enter into an ongoing fee arrangement from 1 July 2013.

Licensees who have an ongoing fee arrangement with a client must give retail clients who entered into the arrangement after 1 July 2013 a fee disclosure statement which shows the fees paid by the client, the services the client received, « and » the services the client was entitled to receive, in the previous 12 months.  

Licensees who have an ongoing fee arrangement with a client must give all retail clients a fee disclosure statement which shows the fees paid by the client, the services the client received, « and » the services the client was entitled to receive, in the previous 12 months.  

The term ‘intra-fund advice’ is defined by way of a note which links the term « and » the relevant subject rules under section 99F of the SIS Act.

The term ‘intra-fund advice’ is not expressly defined.

 

Detailed explanation of new law

Removal of the renewal notice ‘opt-in’ requirement

2.12               Under the current law, where an ongoing financial advice relationship exists between a licensee (the ‘fee recipient’) « and » a retail client which involves the charging of an ongoing advice fee, the fee recipient is required to obtain their client’s agreement at least every two years to continue the ongoing fee arrangement by way of a renewal notice , for clients who entered into an ongoing fee arrangement from 1 July 2013.

2.13               An ongoing fee arrangement exists where a retail client is given « personal » advice « and » charged an ongoing fee during a period of more than 12 months.  

2.14               The renewal notice is required to contain information indicating that the client may renew the ongoing fee arrangement, as well as information setting out what will happen if the client elects not to renew the arrangement, or if they do not respond to the renewal notice, in particular, that the arrangement (including the provision of advice « and » the ongoing fee) will terminate.

2.15               The renewal notice must to be sent to the client within 30 days of the end of the two-year period.  The client then has 30 days to agree to renew the arrangement .

2.16               If, after receiving the renewal notice, the client decides not to renew or fails to respond to the fee recipient’s renewal notice, the ongoing fee arrangement terminates.  This means that the fee recipient is not obligated to provide ongoing financial advice to the client, « and » the client is not obligated to continue paying the ongoing fee.

2.17               The current law provides that licensees or representatives may be exempted from the renewal notice obligation by ASIC if they are bound by an approved code of conduct. 

2.18               The new law removes the obligation for a licensee to provide a renewal notice to a client.  [Schedule 1, items 3-5 « and » 17-21, Subdivision B of Division 3 of Part 7.7A (heading), sections 960, 962CA, 962K, 962L, 962M « and » 962N « and » subsections 962F(1), (2) « and » (3)]

2.19               Therefore, under the new law, an ‘opt-out’ system applies where any ongoing fee arrangement continues to exist unless the arrangement is terminated by either the client or the fee recipient.

2.20               The removal of the ‘opt-in’ requirement applies in relation to an ongoing fee arrangement for those renewal notice days for the arrangement that occur on or after the day after the Royal Assent. 

Changes to fee disclosure statements

2.21               Under the current law, where an ongoing financial advice relationship exists between a licensee (the ‘fee recipient’) « and » a retail client which involves the charging of an ongoing advice fee (a fee for a period longer than 12 months), the fee recipient is required to give all retail clients a fee disclosure statement which shows the fees paid by the client, the services the client received, « and » the services the client was entitled to receive, in the previous 12 months.  

2.22               The fee disclosure statement must be provided before the end of a period of 30 days beginning on the 12 month anniversary of the day the arrangement was entered into, or, if a fee disclosure statement has been given to the client since the arrangement was entered into, before the end of a period of 30 days beginning on the 12 month anniversary of the day immediately after final day of the year for which disclosure was provided in the last fee disclosure statement. 

2.23               The new law removes the requirement to provide a yearly fee disclosure statement to clients who entered into their ongoing arrangement prior to 1 July 2013, restricting the requirement for licensees to provide a fee disclosure statement to clients who entered into their ongoing arrangement after 1 July 2013.  [Schedule 1, items 22, 39 « and » 40, Subdivision C of Division 3 of Part 7.7A, table item 22 of subsection 1317E(1) « and » subparagraph 1317G(1E)(b)(v)]

2.24               The obligations for providing a fee disclosure statement to post-1 July 2013 clients, set out in Subdivision B of the « Corporations » Act, remain unchanged.

2.25               The result is that the obligation to provide a fee disclosure statement applies to licensees (‘fee recipients’) in situations where they:

•        provide « personal » advice to a retail client; « and »

•        the client is charged an ongoing fee during a period of 12 months or more; « and »

•        the arrangement was entered into after 1 July 2013. 

2.26               Judgment needs to be used to consider what constitutes a new ongoing arrangement.   As discussed below, a significant alteration of the arrangement between the fee recipient « and » the client might constitute a new arrangement, whereas a small alteration in the terms might not.

2.27               Generally speaking, alterations in the terms such as a simple alteration of an existing fee, an alteration in the duration of the arrangement, or where the fee recipient merged or was taken over by another company, but the existing arrangement did not otherwise change, would not constitute a new ongoing fee arrangement.

Example 2.1 : Changes to an existing ongoing arrangement

YPT Financial Planners have recently been taken over by ABC Incorporated.

Previous YPT clients have had their pre-takeover ongoing fee arrangements continued under the new company, « and » the particulars of the arrangements have not changed.

This would not constitute new ongoing fee arrangements for YPT clients.

Example 2.2 : Changes to an existing ongoing arrangement

Ellen, a financial adviser, works for Sky Limited Financial.  Her clients have ongoing fee arrangements with Sky Limited.  When Ellen moves on from Sky Limited, she passes her clients to another Sky Limited employee, Phil.

As Ellen’s clients have ongoing arrangements with Sky Limited, Ellen leaving Sky Limited would not constitute a new ongoing fee arrangement.

If Phil then negotiates with a particular client to alter the terms of their arrangement, depending on the changes, this may constitute a new ongoing fee arrangement.

2.28               However, if the fee recipient substantially alters the terms of an agreement with a client, for example, through the changing of the advice from insurance only to a much broader ambit, or a change in the structure of the fees paid, it might be considered that a new ongoing arrangement has been entered into.

2.29               Provisions in Part 7.7A of the « Corporations » Act which support the fee disclosure statements to post-July 2013 customers (such as those outlining what information must be included in the fee disclosure statement, « and » what happens when the fee recipient does not comply with the requirement to provide a fee disclosure statement within the specified time) remain unchanged.

2.30               The changes to fee disclosure statements apply in relation to an ongoing fee arrangement for those disclosure days for the arrangement that occur on or after the day after the Royal Assent. 

Clarification of intra-fund advice

2.31               Under the current law, the term intra-fund advice is not expressly defined.

2.32               The « Bill » inserts a note into section 963B to clarify that the term intra-fund advice refers to a type of financial product advice provided to a member of a regulated superannuation fund by a trustee of the fund, or by persons under an arrangement with the trustee of the fund.  

2.33               The note links the commonly used term with the rules under section 99F of the Superannuation Industry (Supervision) Act 1993 , which deal with the subject area. 

2.34               In particular the note clarifies that intra-fund advice is not advice of the kind the cost of which is prohibited from being collectively levied under section 99F of the SIS Act.  [Schedule 1, item 29, section 963B (note)]

2.35               The ban on conflicted remuneration is intended to capture benefits intended to influence the advice or product choice recommendation provided to retail clients.

2.36               Where remuneration structures relating to the provision of intra-fund advice are unlikely to materially influence the intra-fund advice provided to members, for example the levying of administration or management fees by trustees or fee for service type payments to third party advice providers, it is not intended that these arrangements would be captured by the ban on conflicted remuneration.

Application « and » transitional provisions

Removal of ‘opt-in’ requirement

2.37               The removal of the ‘opt-in’ requirement applies in relation to ongoing fee arrangements with renewal notice days (the renewal notice day being either the second anniversary of the day on which the arrangement was entered into or, if the arrangement had previously been renewed, the second anniversary of the last day on which the arrangement was renewed) that occur on or after the day after the Royal Assent.   [Schedule 1, item 43, sections 1531A « and » 1531C]

2.38               The current renewal notice obligations compulsorily apply to clients who entered into an ongoing fee arrangement after 1 July 2013.  Fee renewal notices become due within 30 days of 1 July 2015.  As such, no renewal notice days occur prior to the removal of the ‘opt-in’ provision.

2.39               However, FOFA was optional from 1 July 2012.  For those fee recipients who chose to comply with FOFA early, the renewal notice obligations apply to clients who entered into an ongoing fee arrangement after the fee recipient’s opt-in date.  As such, fee renewal notices could become due earlier than 1 July 2015 for these fee recipients.

2.40               The removal of the ‘opt-in’ provisions apply from the earlier of the day after the regulations are registered, or the time outlined in paragraph 2.36 above.

Limitation of fee disclosure statement

2.41               The removal of the requirement to provide a fee disclosure statement to clients who entered into their ongoing fee arrangement before 1 July 2013 applies in relation to an ongoing fee arrangement for those disclosure days for the arrangement that occur on or after the day after the Royal Assent.  [Schedule 1, item 43, sections 1531A « and » 1531D]

2.42               The current requirement to provide clients with a fee disclosure statement continue to apply until the new law is in place or new regulations are made.    



Chapter 3          

Conflicted remuneration « and » « other » banned remuneration

Outline of chapter

3.1                   Schedule 1 to the « Bill » amends Part 7.7A of the « Corporations » Act to amend the current conflicted remuneration provisions.

Context of « amendments »

3.2                   The Government has committed to provide certainty « and » reduce compliance costs for small business, financial advisers « and » consumers who access financial advice.   See Outline for further information.

General advice

3.3               Under the current law, remuneration (both monetary « and » non-monetary) received in relation to the provision of both « personal » advice (financial product advice that takes into account the client’s objectives, financial situation « and » needs) « and » general advice (financial product advice that does not take into account the client’s objectives, financial situation « and » needs) is captured by the ban on conflicted remuneration.

3.4               The Government considers that the current application of the ban on conflicted remuneration imposes unnecessary burdens on industry by capturing individuals not directly involved in providing advice to clients.  As such, the Government has committed to providing a ‘general advice exemption’ from the ban on conflicted remuneration.

3.5               However, the Government has decided to limit the exemption to only be available in particular circumstances.

Execution-only exemption

3.6               Under the current law, the ‘execution-only exemption’ provides that benefits paid for execution-only services (such as the issue or sale of a financial product) are exempt from the ban on conflicted remuneration.  However, the exemption does not apply in instances where a person within the licensee group (of the person receiving the benefit) has provided advice to the client on the product, or class of product, in the previous 12 months.

3.7               The Government has committed to broaden the exemption to reduce unnecessary administrative complexity « and » ensure that legitimate execution-only services can be provided.

Education « and » training exemption

3.8               Under the current law, the ‘education « and » training exemption’ provides an exemption from the ban on conflicted remuneration for education « and » training relating to the provision of financial product advice.

3.9               In order to facilitate industry attempts to up-skill, the Government has committed to broaden the exemption to include training that relates to conducting a financial services business.

Basic banking exemption

3.10           Under the current law, a ‘basic banking exemption’ is provided that exempts benefits in relation to basic banking products from the ban on conflicted remuneration.  To access the exemption, the benefit must: be received by an agent or employee of an ADI; relate to a basic banking or general insurance product; « and » the agent or employee of an ADI—at the time of providing advice on the basic banking product—must not provide financial product advice on any « other » financial product except for general insurance.

3.11           The Government has committed to broaden the existing basic banking exemption to include all simple, ‘Tier 2’ products.  

Ban on volume-based shelf-space fees

3.12           Under the current law, a platform operator is prohibited from receiving ‘volume-based shelf-space fees’ from a funds manager where the fee is for ‘purchasing’ shelf space or to receive preferential treatment by the platform operator.

3.13           In order to clarify the scope of the ban « and » provide certainty to industry, the Government has committed to amend the ban on volume-based shelf-space fees to clearly identify the payments the ban intends to capture.

Client-pays exemption

3.14           Under the current law, the ‘client-pays exemption’ provides that certain benefits paid by a client to a licensee or representative are exempt from the ban on conflicted remuneration.

3.15           The Government has committed to clarify that the exemption also applies in circumstances where a benefit is paid by another party as long as the payment is made out of the client’s funds, « and » the benefit is given at the direction of the client « and » with the client’s clear consent.

‘Mixed’ benefits

3.16           The current provisions of the « Corporations » Act do not explicitly permit ‘mixing’ of benefits in relation to products or circumstances that are exempt from the ban on conflicted remuneration.   The « Corporations » Regulations has addressed this problem; however, these changes have not been reflected in the « Corporations » Act.

3.17           The Government has committed to amend the « Corporations » Act to reflect the changes in the « Corporations » Regulation.

Regulation-making powers

3.18           Under the current law, regulation-making powers exist that permit certain benefits to be excluded from the definition of conflicted remuneration in prescribed circumstances.  However, there are no regulation-making powers to clarify the operation of the existing exemptions.

3.19           Given the complexity of payment arrangements within the financial advice industry, there is a possibility that future remuneration structures may be developed that are inadvertently captured by the ban on conflicted remuneration.  Regulation-making powers that clarify the operation of the existing exemptions provide a way to address any future unintended consequences.

Summary of new law

3.20           The « Bill » amends the « Corporations » Act to broaden « and » clarify exemptions from the ban on conflicted remuneration.   Specifically, the « amendments » :

•        provide a targeted general advice exemption from the ban on conflicted remuneration;

•        broaden the execution-only exemption so that it applies where no advice on that product, or the class of products of which the product is one, has been provided to the client by the individual performing the execution service in the previous 12 months;

•        expand the execution « and » training exemption to include training relevant to a financial services business;

•        broaden the basic banking exemption so that it can be accessed when advice on « other » simple (‘Tier 2’) financial products is provided at the same time as advice on a basic banking product and/or a general insurance product;

•        clearly define volume-based shelf-space fees « and » the payments the ban on volume-based shelf-space fees intends to capture;

•        clarify the operation of the client-pays exemption;

•        clarify the exemptions from the ban on conflicted remuneration to allow a benefit to relate to more than one exemption; « and »

•        introduce limited regulation-making powers to address future remuneration structures that may be inadvertently captured by the ban on conflicted remuneration.

Comparison of key features of new law « and » current law

New law

Current law

The ban on conflicted remuneration on « personal » advice remains, but a limited general advice exemption is provided.

Benefits on general advice are exempted if:

(a) the benefit is given to an employee in relation to general advice given to a retail client; « and »

(b) the employee has not given « personal » advice to the retail client in the last 12 months; « and »

(c) the financial product in relation to which the general advice is given is a product issued or sold by the licensee.

The ban on conflicted remuneration applies to both « personal » « and » general advice.

The ban currently applies to benefits given to a licensee or a representative that could reasonably be expected to influence the financial product advice provided or the financial products recommended to a retail client.

The execution-only exemption now applies if a monetary benefit is given in relation to the issue or sale of a financial product, « and » the licensee or representative receiving the benefit has not provided « personal » advice to the client in relation to the product— or class of products of which the product is one —in the previous 12 months.

The execution-only exemption exempts a monetary benefit from the ban on conflicted remuneration if it is given in relation to the issue or sale of a financial product, « and » the licensee or representative has not provided financial product advice to the client in relation to the product— or products of that class —in the previous 12 months.  

The education « and » training exemption now applies if it is relevant to the operation of a financial services business , which includes the provision of financial product advice.

The education « and » training exemption exempts a non-monetary benefit from the ban on conflicted remuneration if it relates to education « and » training that is relevant to the provision of financial product advice .

The basic banking product exemption now enables a benefit to be given to an agent or employee of an ADI that also relates to a consumer credit insurance product.   Further, the agent or employee may also provide « personal » advice on a consumer credit insurance product at the same time as providing advice on the basic banking product.

 

The basic banking exemption exempts benefits in relation to basic banking products from the ban on conflicted remuneration.

To access the exemption, the benefit must: be received by an agent or employee of an ADI; relate to a basic banking product or a general insurance product; « and » the agent or employee of an ADI, at the time of providing advice on the basic banking product, must not provide financial product advice on any « other » financial product except for general insurance.

A clear definition of a volume-based shelf-space fee is provided.

Payments that are not considered volume-based shelf-space fees are also clarified.

Volume-based shelf-space fees paid by a funds manager to a platform operator are banned.

However, the term volume-based shelf-space fee is broadly defined « and » has unintentionally captured many legitimate payment types

The existing client-pays exemption is clarified to indicate that it also applies in circumstances where a benefit is paid by another party as long as the payment is made out of the client’s funds, « and » the benefit is given at the direction of the client « and » with the client’s clear consent.

The client-pays exemption exempts certain benefits from the ban on conflicted remuneration if they are paid by a client to a licensee or representative

The « Corporations » Act now explicitly permits ‘mixed benefits’, so a benefit may now be paid in relation to multiple exempt products or circumstances.

The « Corporations » Act does not explicitly permit ‘mixing’ of benefits in relation to products or circumstances that are exempt from the ban on conflicted remuneration.   As such, a payment in relation to multiple exempt products or circumstances would not be considered exempt.

The « Corporations » Regulations has addressed this problem; however, these changes have not been reflected in the « Corporations » Act.

Limited regulation-making powers are provided to clarify the operation of the exemptions from conflicted remuneration.

No regulation-making powers exist to clarify the operation of the exemptions from conflicted remuneration.

Detailed explanation of new law

General advice

3.21           The « Bill » provides a ‘general advice exemption’ that exempts benefits that relate to general advice from the ban on conflicted remuneration in certain circumstances.   This exemption addresses concerns that the current law had unintentionally captured parties that do not provide « personal » advice.

3.22           Currently, section 963A of the « Corporations » Act defines ‘conflicted remuneration’ as a benefit given to a licensee or representative that could reasonably be expected to influence the choice of financial product recommended or the financial product advice provided to a client.   ‘Financial product advice’ is defined in section 766B of the « Corporations » Act to include both « personal » « and » general advice.

3.23           The « Bill » inserts a targeted general advice exemption.   Monetary benefits paid on general advice are exempted from the ban on conflicted remuneration if:

•             the benefit is given to an employee in relation to general advice given to a retail client; « and »

•             the employee has not provided « personal » advice to the retail client in the last 12 months; « and »

•             the financial product in relation to which the advice is given is a product issued or sold by the licensee.

[Schedule 1, item 29, subsection 963B(6)]

3.24           All three requirements must be satisfied to obtain the benefit of the exemption.   The imposed conditions will restrict the general advice exemption to employees who have not provided « personal » advice to the person receiving the general advice in the past 12 months.

3.25           As part of consultation on the exposure draft « Bill » , some stakeholders flagged concerns about the general advice exemption extending to complex products.   ASIC has indicated that it will monitor the use of the conflicted remuneration provisions as they relate to general advice on complex products « and » will provide a report to the Government in the next 12-18 months.  

3.26           The general advice exemption applies to benefits given on or after the day after the Royal Assent, that are not otherwise grandfathered.

Execution-only exemption

3.27           The « Bill » amends the existing ‘execution-only exemption’ in paragraph 963B(1)(c) to provide a closer nexus between the party receiving the benefit « and » any advice that might have been provided in relation to the benefit.

3.28           The current law provides an exemption from the ban on conflicted remuneration for a monetary benefit if it is given in relation to the issue or sale of a financial product « and » the licensee or representative has not provided financial product advice to the client in relation to the product—or products of that class—in the previous 12 months.

3.29           Under the « Bill » , the execution-only exemption will apply if a monetary benefit is given in relation to the issue or sale of a financial product « and » the licensee or representative receiving the benefit has not provided « personal » advice to the client in relation to the product that is to be issued or sold—or advice on a class of financial products, of which the product is one—in the previous 12 months .   [Schedule 1, items 27 « and » 29, subsections 963B(4) « and » (5) « and » paragraph 963B(1)(c)]

Training exemption

3.30           The « Bill » broadens the existing ‘education « and » training exemption’ in paragraph 963C(c) to include education « and » training that relates to the carrying on of a financial services business.

3.31           The current law provides an exemption for a non-monetary benefit that is genuine education or training relating to the provision of financial product advice to retail clients « and » where the benefit complies with regulations made for the purposes of the exemption.

3.32           The « Bill » provides that a licensee or representative may receive a benefit of education or training that relates to the carrying on of a financial services business (for example, training in relation to client administrative services).   The term ‘carrying on of a financial services business’ includes the provision of financial product advice.   [Schedule 1, item 33, subparagraph 963C(c)(ii)]

Basic banking exemption

3.33                The « Bill » broadens the existing ‘basic banking exemption’ to include all simple, ‘Tier 2’ products.  

3.34                ASIC, in its training guidelines, makes a distinction between ‘Tier 1’ « and » ‘Tier 2’ products: Tier 2 products are generally considered simple in nature « and » therefore require less onerous training when providing advice than Tier 1 products.   Tier 2 products include basic banking products, general insurance products, « and » consumer credit insurance products.   Tier 1 products include all « other » financial products not listed in Tier 2 (for example, managed investment schemes « and » superannuation).

3.35                Section 963D currently provides an exemption for benefits that relate to a basic banking product as long as the agent or employee of an ADI—at the time of providing advice on the basic banking product—does not provide financial product advice on any « other » financial product.   Regulation 7.7A.12H of the « Corporations » Regulations allows access to the exemption where the benefit also relates to a general insurance product « and » the agent or employee does not provide financial product advice on any « other » financial product except a general insurance product.  

3.36                The « Bill » enables the benefit that is given to also relate to a consumer credit insurance product.   Further, the « Bill » allows the agent or employee to provide « personal » advice on a consumer credit insurance product at the same time as providing advice on a basic banking and/or general insurance product.   [Schedule 1, item 35, subsections 963D(1) « and » 963D(2)]

3.37                A definition of ‘consumer credit insurance’ is inserted into section 960, « and » is defined as having the same meaning as in the Insurance Contracts Act 1984 .   [Schedule 1, item 1, section 960]

Basic banking products

3.38                Section 961F of the Act defines a ‘basic banking product’.   This definition captures a range of products, including first home saver accounts, non-cash payment facilities, basic deposit products « and » traveller’s cheques.

3.39                Financial products, including basic banking products, are continually evolving.  For this reason, the definition captures a range of « other » functionally equivalent products outside those specifically referenced in the section.   For example, whilst travel debit cards are not explicitly referenced, it serves the same purpose as a traveller’s cheque « and » is thus considered a basic banking product.

3.40                The definition of basic banking products captures all types of basic deposit products such as transaction accounts, savings accounts, cash management accounts, « and » short term deposits.  

3.41                The definition of basic banking products also captures basic deposit products associated with a credit facility (for example a debit account with an overdraft facility, or a mortgage offset account).

Employees

3.42                In accordance with ASIC’s Regulatory Guide 175: Licensing: Financial product advisers - Conduct « and » disclosure , references to an agent or employee, or otherwise acting by arrangement with an Australian ADI under the name of an Australian ADI includes: contractors; employees of employment agencies who may be temporarily working for the Australian ADI/employer; employees of a body corporate related to the Australian ADI/employer; « and » employees of another company who work exclusively for the Australian ADI/employer.

Ban on volume-based shelf-space fees

3.43                The « Bill » clarifies the definition of ‘volume-based shelf-space fee’ « and » the payments the ban on volume-based shelf-space fees intends to capture.

3.44                Currently, section 964 of the « Corporations » Act provides that a platform operator must not accept volume-based shelf-space fees.   However, the term volume-based shelf-space fee is not clearly defined.   Consequently, concerns have been raised that the current provisions capture legitimate payments between fund managers « and » platform operators.

3.45                The « Bill » amends section 964A to clearly define a volume-based shelf-space fee.   The « Bill » also clarifies the types of payments that are not considered volume-based shelf-space fees; platform operators are still required to not accept benefits that are volume-based shelf-space fees.   [Schedule 1, items 6 « and » 38, section 960 « and » subsection 964A]

3.46                Concerns have also been expressed that the current definition of ‘funds manager’—which is used in the definition of volume-based shelf-space fee—is too broad, « and » captures many entities who are not actually funds mangers.

3.47                The « Bill » amends subsection 964(2) to provide a clear definition of a funds manager that better describes the entities the ban on volume-based shelf-space fees intends to capture.   [Schedule 1, items 36 « and » 37, subsections 964(1) « and » (2)]

3.48                Changes to the ban on volume-based shelf-space fees apply to benefits given on or after the day after the Royal Assent that are not otherwise grandfathered.

Client-pays exemption

3.49                The « Bill » provides clarity on the operation of the ‘client-pays exemption’.

3.50                Under the current law, paragraph 963B(1)(d) provides that benefits given by a retail client to a licensee or representative in relation to the issue or sale of a financial product or financial product advice are exempted from the ban on conflicted remuneration.

3.51                In addition, section 52 of the « Corporations » Act provides that: ‘a reference to doing an act or thing includes a reference to causing or authorising the act or thing to be done’.   As Paragraph 963B(1)(d) exempts a benefit from conflicted remuneration if it is ‘given’ to a licensee or representative, applying section 52 would mean that in giving a benefit to a licensee or representative, a retail client is also causing or authorising the benefit to be given.

3.52                The « Bill » inserts a note at the end of section 963A to clarify that section 52 also operates in relation to the conflicted remuneration provisions of sections 963A, 963B, 963C « and » 963D.   [Schedule 1, item 23, section 963A (note)]

3.53                The note clarifies that a benefit may be given either directly by a client or given by another party at the direction of the client; as long as the  benefit is given using the client’s own monies, or funds the client is beneficially entitled to, the client-pays exemption applies.

3.54                Concerns have been raised over whether the client-pays exemption can be used to exempt payments made from a superannuation fund member’s balance.  The « Bill » clarifies that such payments can occur.

3.55                The « Bill » inserts a note at the end of subsection 963B(1) that specifically indicates that the client-pays exemption operates with respect to advice paid from a superannuation fund member’s fund balance.   This principle also applies to « other » investments of the client, such as a platform or a managed investment scheme.   [Schedule 1, item 28, subsection 963B(1) (note)]

3.56                The trustee of the superannuation fund must still consider whether payments out of the client’s superannuation fund is appropriate given the trustee’s « other » obligations, such as the sole purpose test under section 62 of the SIS Act.

3.57                It is important to note that, where the benefit is given by another party, it must be given with the client’s clear consent.  A client would not be considered to have given clear consent if the consent was not clearly « and » expressly sought; for example, where consent has been sought as part of a broad range of terms « and » conditions agreed by the client in aggregate, clear consent would not have been provided.   Rather, a client’s consent could be expressly sought in a separate « and » distinct section of the terms « and » conditions agreed by the client.

3.58                Benefits given by another party at a client’s direction are not given by the client if the benefits are borne out of the « other » party’s funds.

‘Mixed’ benefits

3.59                The « Bill » allows a benefit to relate to more than one exemption from the ban on conflicted remuneration.

3.60                Under the current law, the exemptions relating to general insurance, life risk insurance « and » basic banking products under Division 4 of Part 7.7A of the « Corporations » Act provide that the benefit must ‘solely’ relate to one of these products.   This means that a benefit cannot be given if it relates to one or more exemptions in Division 4—that is, a ‘mixed’ benefit, in relation to more than one exemption, cannot be provided.  This outcome was unintentional, « and » was rectified through the « Corporations » Regulations.   However, the change to the « Corporations » Regulations have not been reflected in the « Corporations » Act.  

3.61                The « Bill » permits such mixed benefits by providing that a benefit is exempt from the ban on conflicted remuneration ‘to the extent’ that it relates to one or more of the products or circumstances described in sections 963B, 963C « and » 963D.   This allows a benefit to relate to one or more exemptions, « and » also allows for circumstances that fall outside the definition of conflicted remuneration .   [Schedule 1, items 24, 25, 26, 31, « and » 32, section 963C, subsection 963B(1), paragraphs 963B(1)(a), 963B(1)(b) « and » 963C(a)]  

3.62                The « Bill » also confirms that the mere payment of two non-conflicted remuneration benefits does not, in « and » of itself, make the combined payment conflicted.   The « Bill » inserts an example at the end of subsection 963B(1) that illustrates this point.   [Schedule 1, item 28, subsection 963B(1) (example)]  

Regulation-making powers

3.63                Under the current law, sections 963B, 963C « and » 963D contain a regulation-making power that allows certain benefits to be excluded from the ban on conflicted remuneration in certain circumstances.   However, the regulation-making power does not extend to clarifying the operation of existing exemptions.

3.64                The « Bill » introduces limited regulation-making powers under sections 963B, 963C « and » 963D to allow such a clarification.   In particular, the regulation-making powers allow a regulation to be created to prescribe:

•        circumstances in which all or part of a benefit is not considered to be conflicted remuneration; and/or

•        the extent to which, or a method for working out the extent to which, a benefit is not considered conflicted remuneration.

[Schedule 1, items 29, 34 « and » 35, subsections 963B(7), 963C(2) « and » 963D(3)]

3.65                Given the complexity of payment arrangements within the financial advice industry, there is a possibility that future remuneration structures may be developed that are inadvertently captured by the ban on conflicted remuneration.   Regulation-making powers that clarify the operation of the existing exemptions provide a way to address any future unintended consequences.

Application « and » transitional provisions

3.66                These provisions commence the day after receiving Royal Assent.

Ban on conflicted remuneration

3.67                The « amendments » made in relation to the ban on conflicted remuneration apply to a benefit if:

•        the benefit is one to which Division 4 of Part 7.7A applies under section 1528, that is, the benefit is not grandfathered; « and »

•        the benefit is given on or after the commencement day.

[Schedule 1, item 43, sections 1531A « and » 1531E]

3.68                Certain benefits given under an arrangement entered into prior to the application day of the ban on conflicted remuneration, as defined in subsection 1528(4), are not be subject to the ban as a result of subsection 1528(1) « and » regulations made for subsection 1528(2).   These benefits are not affected by this « Bill » .

3.69                Benefits given under an arrangement entered into after the application day of the ban on conflicted remuneration « and » certain benefits given under arrangements entered into prior to the application day are subject to the ban.   Under the current law, such a benefit could not be given or received if it is conflicted remuneration.  The « Bill » serves to exempt certain benefits that are subject to the current law.   As such, the « amendments » are not likely to give rise to the risk of acquisition of « property » (within the meaning of paragraph 51(xxxi) of the Australian Constitution ).  In any case, subsection 1528(3) provides that Division 4 of Part 7.7A of the « Corporations » Act will not apply to the extent it would result in an acquisition of « property » from a person otherwise than on just terms (within the meaning of paragraph 51(xxxi) of the Australian Constitution ).

3.70                The current requirements continue to apply until the « Bill » receives the Royal Assent or new regulations are made.

Ban on volume-based shelf-space fees

3.71                The « amendments » made in relation to the ban on volume-based shelf-space fees apply to a benefit if:

•        the benefit is one to which Subdivision A of Division 5 of Part 7.7A applies under section 1529, that is, the benefit is not grandfathered; « and »

•        the benefit is given on or after the commencement day.

[Schedule 1, item 43, sections 1531A « and » 1531F]

3.72                Under subsection 1529(1), the ban on volume-based shelf-space fees applies where the benefit is given under an arrangement entered into prior to the application day, as defined in subsection 1529(3).

3.73                The current requirements continue to apply until the « Bill » receives the Royal Assent or new regulations are made.

Consequential « amendments »

3.74                The new law also contains a range of consequential « amendments » to address matters such as headings, notes « and » definitions.   [Schedule 1, items 2, 16, 30, 41 « and » 42]



Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

« Corporations » Amendment (Streamlining of Future of Advice) « Bill » 2014

4.0                    This « Bill » is compatible with the human rights « and » freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

4.1                    This « Bill » fulfils an election commitment made by the Government to reduce the regulatory overreach of the Future of Financial Advice (FOFA) legislation.  

4.2                    The FOFA legislation, which passed through Parliament in March 2012, was introduced to increase trust « and » confidence in the financial services industry « and » increase access to financial advice for retail investors.   FOFA made a number of changes to financial advice laws, including removing conflicted remuneration structures, to improve the quality of advice « and » enhance retail investor protections. The legislation applied voluntarily from 1 July 2012, « and » was mandatory from 1 July 2013.

4.3                    The Government believes that the FOFA legislation went too far « and » imposed unnecessary red tape « and » costs onto industry, which has pushed up the price of financial advice for consumers, which is contrary to the initial goals of FOFA.   The Government considers that the legislation has also had a number of unintended consequences that have led to uncertainty in the industry.  This « Bill » fulfils the Government's election commitment to unwind the regulatory overreach created by the FOFA legislation « and » provide certainty to the financial services industry.      

Human rights implications

4.4                    The impact of this « Bill » on the following human rights has been considered:

•        the right to privacy « and » reputation;

•        the right to freedom of opinion « and » expression; « and »

•        the right to work « and » rights in work.

Right to privacy « and » reputation

4.5                    Article 17 of the International Covenant on Civil « and » Political Rights (ICCPR) provides that no one shall be subjected to arbitrary or unlawful interference with their privacy.   The right to privacy may be engaged if the « Bill » involves the collection, security, use, disclosure or publication of « personal » information.  

4.6                    This « Bill » removes the need for financial advisers to mail out an annual fee disclosure statement to clients who entered into their ongoing fee arrangement prior to 1 July 2013.  A fee disclosure statement is document that will typically contain the client’s name, address, account number « and » account details; at least some of which is « personal » to the client.  

4.7                    This « Bill » also removes the need for financial advisers to obtain client ‘opt-in’ every two years to continue an ongoing fee arrangement.   To obtain opt-in, an adviser would typically be required to mail out a form for the client to complete.  This form would also contain some « personal » details of the client.

4.8                    This « Bill » therefore engages the right to privacy, as it deals with the disclosure of « personal » information.   However, the « Bill » does not limit the right to privacy in any way.   The information that would be contained in these documents will still be available to the client either through « other » documents they receive, or upon request.  

4.9                    In addition, the risk of this information being intercepted in the mail is eliminated by this amendment.  To the extent that this increases the security of « personal » information, this may advance the right to privacy for the affected clients.

The right to freedom of opinion « and » expression

4.10                The right to freedom of opinion « and » expression is contained in articles 19 « and » 20 of the ICCPR.   The right to w freedom of opinion « and » expression may be engaged if the « Bill » deals with aspects of employment or workplace relations.

4.11                As described above, this « Bill » removes the need for advisers to send fee disclosure statements to pre-1 July 2013 clients.   These statements contain information about the client « and » their account.   As a result, the right to freedom of opinion « and » expression is engaged because it regulates the clients’ access to this information.   The information that is being regulated, however, is still available to the client through « other » means so the right to freedom of opinion « and » expression is not limited.

The right to work « and » rights in work

4.12                The right to work « and » rights in work is contained in articles 6(1), 7 « and » 8(1)(a) of the International Covenant on Economic, Social « and » Cultural Rights (ICESCR).   The right to work « and » rights in work may be engaged if the « Bill » deals with aspects of employment or workplace relations.

4.13                This « Bill » increases the number of avenues through which certain employees in the financial services industry can earn commissions.   As this relates to remuneration, which an aspect of employment, it may engage certain rights in work.  That said, it certainly does not limit the rights of employees; rights in work are advanced to the extent that certain employees can earn a living through additional income streams.

Conclusion

4.14                This « Bill » is compatible with human rights as it does not raise any human rights issues.

 



Chapter 5          

Regulation impact statement

Introduction to FOFA

What is FOFA?

5.1                   Summarily, the Future of Financial Advice (FOFA) legislation—part 7.7A of the « Corporations » Act 2001 (the Act)—imposes the following standards on providers of financial advice:

•        A best interests obligation that requires advisers to act « and » provide advice that is in the best interests of their client;

•        An obligation to disclose ongoing fees « and » charges paid by their client; « and »

•        A requirement to not accept payments that may influence the advice provided to the client.

5.2                   Each of these requirements is discussed in greater detail later in this Regulation Impact Statement (RIS).

5.3                   FOFA represents the former Government’s response to the recommendations of the ‘Ripoll Inquiry’, a Parliamentary Joint Committee on « Corporations » « and » Financial Services (PJC) inquiry into financial products « and » services in Australia.   The Ripoll Inquiry was set up in 2009 to inquire into, « and » report on, issues associated with financial products « and » services provider collapses that occurred in the wake of the Global Financial Crisis (GFC).

5.4                   The dual underlying objectives of FOFA are to:

•        improve the quality of financial advice;

•        increase trust « and » confidence in the financial advice industry.

Why is FOFA changing?

5.5                   The current Government agrees with the policy intent of FOFA, but considers that the legislation has, in parts, placed an unnecessarily heavy compliance burden on the financial services industry.

5.6                   When the FOFA legislation was first introduced to Parliament in late 2011, Parliament referred the then Bills—FOFA was introduced in two tranches [2] —to the PJC; a report on the PJC’s inquiry was released in early 2012.

5.7                   Alongside the main PJC report was a Dissenting Report by the Coalition members of the PJC (the Dissenting Report).  The Dissenting Report contained a number of recommendations to reduce the regulatory burden the FOFA Bills were predicted to impose on the financial services industry.

Timeline of FOFA

Graphic 1:  FOFA history

Graphic 2:  FOFA « amendments »

Overview of the financial services industry

5.8                   The financial services industry is an important part of the Australian economy; it currently employs over 400,000 people « and » is the largest industry in Australia when measured by gross value added (a measure of the economic worth of the goods « and » services produced). [3]   Continued industry growth is expected to be largely driven by Australia’s ageing population « and » the increasing pool of superannuation funds.

Graphic 3:  Structure of financial services industry

5.9                   Product manufacturers, or fund managers, are responsible for creating « and » managing financial products.   Australia’s managed funds industry is one of the largest in the world, « and » the majority of these funds are attributable to the advanced superannuation system, which encourages employees to save for retirement throughout their working life.   The pool of superannuation funds in Australia is roughly the same size as Australia’s economy. [4]  

5.10               Platforms act as intermediaries between product manufacturers « and » dealer groups.   A product manufacturer will typically place their financial products on a platform to make their products accessible to dealer groups.  A dealer group is made up of multiple representatives who are authorised by a licensee to provide financial advice under that licensee’s financial services licence.  In Australia, there are more than 750 dealer groups [5] who compare « and » assess financial products on platforms « and » select a range of products (commonly referred to as an ‘approved product list’) for their aligned advisers to offer to their clients.   Dealer groups also offer a range of « other » services, including back-end support « and » administrative functions.

5.11               Industry estimates indicate that there are around 18,000 financial advisers in Australia, [6] who collectively manage over $500 billion of funds under advice « and » generate over $4 billion revenue per annum. [7]   Between 20 « and » 40 per cent of Australian adults use or have used a financial adviser. [8]

5.12               The financial advice industry is stratified into three distinct segments: large, medium « and » small firms.   There are five large firms, all of which directly employ over 1,000 financial advisers.  These large firms are also financial product manufacturers « and » offer platform services.   Medium sized firms employ between 60 « and » 1,000 advisers, « and » small firms employ less than 60 advisers.   Many, but not all, of the small « and » medium sized firms are aligned with one of the larger firms, often using the platform(s) of a large firm to access « and » manage financial products for their clients.

5.13               The industry is relatively competitive, with around half the market accounted for by the top five firms, « and » the remaining half occupied by small « and » medium firms. [9]   Whilst there are some impediments for consumers switching financial products « and » advisers, the competitive nature « and » the need for advisers to act in the best interests of their clients ensures that clients have the ability to switch products « and » advisers.

Increase in Institutional Ownership

5.14               The introduction of FOFA, along with the impact of the GFC, appears to have had a sizable impact on the industry.  The FOFA « amendments » led many dealer groups to review their remuneration models « and » business entity structures in light of the shift to fee for service « and » the ban on conflicted remuneration.   The outcome has been that, since 2008, there have been a number of major dealer group purchases, with more than a quarter of advisers changing their home licence since 2008.

5.15               Many of these groups merged with, or were purchased, by wealth management groups, with institutional ownership of the financial advice market now controlling the majority of the market.  Five advice conglomerates now control more than half of the advice market.

5.16               Industry consolidation is being driven by the economies of scale achieved by having a large number of advisers within the same group.  This includes the opportunity to distribute financial products through a greater number of aligned advisers.  ASIC has expressed concerns about the number of the largest dealer groups being owned by product issuers, which may give rise to perceived or actual conflicts of interest. [10]   In addition, smaller groups which have found it difficult to adapt to FOFA have proven to be easy « and » desirable targets for larger groups. [11]   The barriers to entry in the industry relate mainly to holding « and » complying with licensing requirements, which have increased since FOFA, « and » achieving a sufficient scale to be competitive. [12]

Impact of FOFA

5.17               While the industry was growing rapidly before the GFC, the economic downturn in 2008 « and » the FOFA « amendments » have led to a decline in financial adviser numbers.   More recently, dealer group numbers appear to have increased « and » funds under advice have remained relatively stable, especially compared with the decline following the GFC.   It is likely that the concentration within the industry « and » FOFA « amendments » encouraged advisers to either move to « other » licensees or to establish themselves under their own licence.

5.18               As revenue has remained relatively steady but compliance « and » servicing costs increased because of the FOFA « amendments » , there has been a decline in the industry’s performance.   AMP, for example, estimated the reduction in embedded value in financial year 2013 because of FOFA at $176 million in respect of anticipated margin impact « and » the remaining cost of implementing FOFA at $4 million in financial year 2014. [13]   The Commonwealth Bank also increased its spend on risk « and » compliance projects by 24 per cent in 2013 compared with 2012 which was, in part, to satisfy FOFA « amendments » . [14]

5.19               The fall in adviser numbers also implies that the industry has been underperforming population growth.   This raises concerns as the industry tries to service more people, particularly amongst the baby boomers heading into retirement.  The decline in adviser numbers is also likely to be a reason behind the merger « and » acquisition activity in the industry, as groups develop alternative pathways for expanding.   Industry employment is predicted to remain flat as uncertainty leads to career changes « and » a pause in recruitment. [15]

Driving Efficiencies

5.20               The relative stagnation in the advice industry « and » the costs associated with FOFA has encouraged advisers « and » dealer groups to gain efficiencies through software « and » « other » tools. Industries servicing the advice industry, including platforms « and » software providers, have been under increasing pressure to provide these efficiencies.

Platforms

5.21               Platforms are administrative systems used by advisers for their clients.  The big four banks plus AMP « and » Macquarie control most of the market.   To capture « and » retain market share, platforms have been focusing on technological advances such as share trading capability.

5.22               Adviser groups often use a number of platforms to serve different needs, but with consolidation in both the platform « and » advice industries by leading players, there is an increasing push from these players for their own, or aligned, advisers to use their own ‘white label’ platforms rather than external platforms. [16]

Research providers

5.23               As a condition of their licence, advisers are required to demonstrate why they recommended particular products to their clients.   This research often informs the formulation of Approved Product Lists (APLs).  Sometimes a second subsidiary list is created from the APL, a Recommended Product List (RPL), which lists the products recommended for advisers to use at that point in time. Almost all licensees outsource this research to external research providers, often to more than one provider. [17]   ASIC has noted that advisers should perform due diligence on potential external research providers, so that they understand the research provider’s business model « and » can take that into account when providing advice to clients. [18]   Under FOFA, where an advice provider considers it reasonable to recommend a financial product they must conduct a reasonable investigation into products relevant to the subject matter of the advice « and » assess the information gathered in the investigation. [19]

5.24               There are only around a dozen research providers in Australia. The market is very concentrated, with the top five research providers controlling almost 90 per cent of the market.  Fund managers now try to strategically target advisers through the research providers they have contracted.  Research providers are therefore important gate-keepers, deciding which products meet the standards required by advisers. [20]

5.25               A 2011 ASIC review of the top 20 advice licensees found that despite the median number of products on approved product lists being around 400, there remained a tendency to concentrate product recommendations into a few key products. [21]   This is relevant to any regulation of the remuneration models used by dealer groups.

Remunerations Models

5.26               Aspects of FOFA, including the ban on conflicted remuneration, the introduction of scaled advice « and » the best interests duty, have led to a widespread shift to fee for service payments. This shift has been noticed by ASIC, « and » it was an anticipated consequence of FOFA. [22] Some groups, most notably MLC/NAB Wealth « and » AMP, [23] have been moving to a fee for service model for several years, but the trend has become more pronounced since FOFA.

5.27               This shift is evident in two ASIC surveys of licensees conducted in 2011 « and » 2013. A 2011 ASIC review of the top 20 advice licensees found that the majority remunerated their advisers based on the volume of financial products sold, which included ongoing commissions, up-front commissions « and » volume rebates. [24]   In regards to total licensee remuneration, 90 per cent was paid by product providers (including asset-based fees), « and » only 10 per cent were paid directly by clients. [25]

5.28               Significant product concentration was also evident in the fees received by advisers. Ongoing commissions from the top three products recommended by all 20 licensees represented 37 per cent of all ongoing fees.  Further, 43 per cent of all up-front commissions were received from the top three recommended products. [26]

5.29               In contrast, in a 2013 ASIC review of the top 21 to 50 licensees, 11 received less than 5 per cent of their remuneration directly from clients, two received over 90 per cent of their remuneration directly from clients. On average, approximately 36 per cent of revenue was received directly from clients. [27]

5.30               The impact of the proposed reforms on remuneration models within the industry is uncertain at this stage.  There has been only limited public comment from the industry on their future plans, although AMP has ruled out reintroducing commission payments on its investment « and » superannuation products. [28]

5.31               The impact of FOFA on the cost of financial advice is not yet evident. It is possible that groups absorbed compliance costs - instead of passing these costs onto consumers - to retain clients « and » maintain market share.   A handful of licensees have been FOFA-compliant for longer than was mandated, giving them the opportunity to transition « and » spread their compliance costs over a longer time frame.

5.32               In general, ASIC has found that the fees charged for advice can vary significantly across advice providers. [29]   In 2010, licensees reported an estimate of the cost of providing comprehensive financial advice to a client in the range of $2500 to $3500. [30]   IBISWorld also reports fees of around $2,500 to receive holistic advice from an adviser. [31]

5.33               Importantly, ASIC found that a significant gap exists between what consumers are prepared to pay for financial advice « and » how much it costs industry to provide advice.   This is the case even though high net worth clients often cross-subsidise lower value clients. [32]   This gap existed prior to the FOFA « amendments » « and » would only have been exacerbated by the compliance costs imposed by FOFA, although this is hard to quantify at this stage.  

5.34               The FOFA « amendments » were expected to increase the provision of scaled advice, that is advice limited to a particular product or range of products.   The number of advisers providing scaled advice was expected to rise from 2 to 2.5 percent in 2013-14 to between 10 « and » 15 per cent in 2018-19, as scaled advice is often cheaper to provide than holistic advice under a shift to a fee for service model. [33]   The proposed explicit provision of scaled advice will further facilitate this growth trend.

Significance of the problem to be addressed

The Ripoll Inquiry

5.35               To understand the significance of the problem to be addressed, it is important to understand the history « and » context of FOFA.   As noted in the introduction, « and » shown in Graphic 1: FOFA history, the current FOFA legislation was a response by the former Government to the findings of the Ripoll Inquiry.

5.36               The Ripoll Inquiry was set up in 2009 to inquire into, « and » report on, issues associated with financial products « and » services provider collapses, such as Storm Financial, Opes Prime, with particular reference to the role of financial advisers; the general regulatory environment for financial products « and » services; the role played by commission arrangements relating to product sales « and » advice, including: the potential for conflicts of interest, the need for appropriate disclosure, « and » remuneration models for financial advisers; « and » the appropriateness of information « and » advice provided to consumers considering investing in products « and » services, « and » how the interests of consumers can best be served.

5.37               The Ripoll Inquiry released its report in November 2009 « and » made 11 recommendations for reform.   The report commented: ‘It is the view of the committee that, if implemented, these changes will act in synergy to provide better outcomes « and » protections for consumers of financial products « and » services’. [34]

FOFA

5.38               Most of the recommendations from the Ripoll Inquiry were adopted by the former Government « and » formed the basis of FOFA.   In some areas, FOFA went further than the Ripoll Inquiry recommendations « and » imposed additional requirements not canvassed.   Table 1 summarises select recommendations from the Ripoll Inquiry that subsequently became part of FOFA, as well as additional measures introduced as part of the original FOFA legislation.

Table 5.1 :  Select Ripoll Inquiry recommendations « and » FOFA

Ripoll Inquiry recommendation

FOFA response

Concerns with FOFA

Recommendation 1:   That the « Corporations » Act be amended to explicitly include a fiduciary duty for financial advisers operating under an AFSL, requiring them to place their clients’ interests ahead of their own.

Introduce a statutory best interests duty —Division 2, Part 7.7A—which requires an advice provider to:

•        act in the best interests of the client;

•        provide advice that is appropriate to the client;

•        warn the client if the advice is based on incomplete or inaccurate information; « and »

•        if there is a conflict between the client’s interests « and » those of the advice provider, give priority to the client’s interests.

•        The current provision is unclear « and » labour-intensive due to its open-ended nature.

•        It has also created significant legal uncertainty as to how advisers can actually satisfy the best interests duty.

Recommendation 4:  That the government consult with « and » support industry in developing the most appropriate mechanism by which to cease payments from product manufacturers to financial advisers.

 

Introduce a ban on conflicted remuneration —Division 4, Part 7.7A—which bans benefits, whether monetary or non-monetary, given to advisers in relation to advice that could reasonably be expected to influence either the choice of financial product recommended or the financial product advice given.

Some exemptions from this ban were introduced, including for basic banking products.

•        The current ban captures activities that were not the objective of FOFA.

•        The financial advice industry is required to maintain complex systems when providing general advice to ensure compliance with the existing conflicted remuneration provisions.

Not included in recommendations

Introduce an opt-in requirement —Division 3, Part 7.7A—which requires an adviser to seek, every two years, their client’s consent to continue an ongoing fee arrangement.

•        The opt-in notices do not arguably offer substantial benefits to consumers; particularly as consumers already have the ability to opt-out of their arrangements.

•        This requirement has imposed significant implementation « and » ongoing costs on advisers.

Not included in recommendations

Introduce a fee disclosure statement —Division 3, Part 7.7A—which requires an adviser to provide, every year, a statement that shows the fees paid by the client, the services the client received « and » the services the client was entitled to receive during the preceding 12 months.

•        Providing fee disclosure statements to pre-1 July 2013 clients has proven to be difficult « and » expensive.

•        Many of these clients are on old legacy systems, predating the FOFA changes; as such, significant manual work is required to prepare statements for these clients.

Dissenting Report

5.39               Upon introduction to Parliament, the FOFA Bills were referred to the PJC for inquiry « and » report.   Alongside the PJC’s report into the FOFA Bills was the Coalition’s Dissenting Report.  The Dissenting Report affirmed the Coalition’s commitment to the recommendations of the Ripoll Inquiry, but criticised the former Government’s proposed legislation.  The Dissent Report comments:

…in pursuing regulatory change the Parliament must focus on making things better not just more complex « and » more costly for everyone.   The Parliament must avoid regulatory overreach where increased red tape increases costs for both business « and » consumers for little or no additional consumer protection benefit. [35]

…the Ripoll Inquiry reported back in November 2009 « and » made a number of well considered « and » reasonable reform recommendations. [36]

…Instead of implementing the very sensible « and » widely supported recommendations made by the Ripoll Inquiry, the government allowed its Future of Financial Advice reform package to be hijacked by vested interests creating more than two years of unnecessary regulatory uncertainty « and » upheaval in our financial services industry.

5.40               The government’s decision making processes around FOFA over the past two years leave much to be desired.  There were constant « and » at time completely unexpected changes to the proposed regulatory arrangements under FOFA right up until the introduction of the current legislation.   Invariably this was done without proper appreciation or assessment of the costs involved, of any unintended consequences or « other » implications flowing from the proposed changes to the changes.

5.41               Important financial advice reforms recommended by the Ripoll inquiry have been delayed by more than two years so the government can press ahead with a number of additional contentious changes.

5.42               It is the view of Coalition Committee members that the FOFA package of legislation in its current form is:

•        Unnecessarily complex « and » in large parts unclear;

•        Expected to cause increased unemployment;

•        Legislating to enshrine an unlevel playing field amonst advice providers, inappropriately favouring a government friendly business model; « and »

•        Likely to cost about $700 million to implement « and » a further $350 million per annum [37] to comply with, according to conservative industry estimates.

5.43               Based on the evidence provided to the Committee, Coalition Committee members conclude that this will lead to increased costs « and » reduced choice for Australians seeking financial advice. [38]

5.44               The Dissenting Report went further to indicate that FOFA would have a widespread, detrimental effect on the financial advice industry.  The Dissenting Report continues:

The Committee received evidence from many industry participants about the very serious detrimental effects the introduction of this legislation in its current form would have on the industry « and » on consumers.   Detrimental effects include high additional costs imposed on industry participants with resulting increased costs of advice for consumers, reduced employment levels in the financial services sector leading to reduced availability « and » access to affordable high quality advice, as well as a further concentration of advice providers which would lead to an undesirable reduction in competition « and » choice for consumers. [39]

Stakeholders argue that FOFA, if passed in its current form, would cause an undesirable restructuring of the financial advice industry, with increased concentration of players in the market « and » less competition. [40]

Coalition Committee members consider that the disproportionate increase in costs to the industry « and » consumers, the reduction in the number of financial advisers in Australia, the associated additional job losses « and » the further concentration of financial advice services providers will have detrimental impacts on the cost, availability « and » accessibility of financial advice across Australia. [41]

5.45               The Dissenting Report made 16 recommendations that would address the Coalition Committee members’ concerns with FOFA.

FOFA today

5.46               There is evidence [42] to suggest that some of the concerns raised in the Dissenting Report have eventuated.  There has been some evidence—depending on reporting sources—of a decline in adviser numbers in recent years.  There has also been evidence of increasing industry concentration—particularly through the consolidation of smaller dealer groups with large institutional advisers; it is reasonable to conclude that such a concentration may result in less competition « and » choice available to consumers.

5.47               During consultations undertaken on the proposed package of « amendments » to FOFA, as well as on the draft legislation « and » regulations, a number of i ndustry stakeholders have indicated that they have incurred, « and » will continue to incur, significant ongoing costs to satisfy the compliance requirements imposed by FOFA.   However, it is currently unclear whether this has translated into higher costs for consumers.  Similarly, it is unclear whether FOFA has resulted in reduced availability « and » accessibility of financial advice.   Given the short time since FOFA became mandatory, « and » given the continuing adjustments that are taking place in the industry, these outcomes may not be known for some time.

Looking forward

5.48               The changes the Government intends to make to FOFA should be considered against the backdrop of an ageing population, declining workforce participation « and » the need for increased fiscal discipline.  

5.49               The Australia to 2050: future challenges report shows that the proportion of Australia’s population aged 65 « and » over is projected to almost double over the next 40 years. [43]   The increased value of individuals’ superannuation « and » « other » private assets represent a significant business opportunity for advisers.   Superannuation « and » retirement products currently comprise the majority of the wealth management market, so growth in this area will have a significant positive impact on the industry.

5.50               While there will be an increase in the number of retirees to advise, the number of advisers in industry in recent years has stagnated or declined slightly.  Some industry stakeholders have attributed this to increased costs « and » uncertainty arising from FOFA.   Reducing the compliance burden on the industry will free up more resources, « and » should facilitate job creation « and » innovation, which will support productivity « and » result in more efficient processes.

5.51               Higher spending on public health care, pensions « and » « other » social services caused by population ageing will also result in higher fiscal pressures on the government.   One guiding principle for achieving fiscal sustainability is that government should ‘do for people what they cannot do, or cannot do efficiently, for themselves, but no more’. [44]   Financially self-reliant individuals will reduce the pressures on government spending, « and » encouraging Australians to take responsibility for their own financial decisions will become increasingly important.   The proposed changes to FOFA will foster an environment where affordable financial advice is more accessible, which will encourage wealth creation.

5.52               In summary, the changes to FOFA are an important first step in reducing the regulatory burden on the financial advice industry, « and » should help in providing the flexibility to take advantage of future opportunities.

Objectives of Government action

5.53               In its pre-election Policy to Boost Productivity « and » Reduce Regulation , the Coalition committed to amend FOFA to: ‘reduce compliance costs for small business financial advisers « and » consumers who access financial advice’. [45]   In particular, it indicated that it would: ‘implement all 16 recommendations made as part of the Parliamentary Joint Committee inquiry into FOFA’. [46]

5.54               Since the election, the Assistant Treasurer has, in a number of speeches, re-affirmed the Government’s commitment to: ‘reducing the regulatory overreach of FOFA’. [47]

5.55               The objective of Government action is threefold:

•        Remove the unnecessary burdens imposed on the financial advice industry from FOFA measures that went beyond the recommendations of the Ripoll Inquiry;

•        Properly implement the finding of the Ripoll Inquiry so as to reduce regulatory overreach whilst maintaining the important consumer protection measures introduced by FOFA; « and »

•        Address « other » technical « and » consequential concerns raised by industry.

5.56               A summary of the key proposed changes is presented in table 2.  These are detailed further in the ‘impact of changes’ section later in this document.

Table 5.2 :  Summary of changes to FOFA

FOFA component

Concern

Change

Best interests duty

The best interests duty, as currently drafted, has created significant uncertainty amongst advisers.  Many industry stakeholders have argued that this uncertainty is ongoing « and » needs to be addressed by regulatory change.

These stakeholders argue that the open-ended nature of the duty leaves advisers uncertain on how to satisfy their duty.  They also expressed concern that advisers are vulnerable to legal action because adviser’s obligations under the duty is not well defined nor well understood.

Government action will remove the open-ended nature of the best interests duty.

Whilst the Ripoll Inquiry recommended imposing a fiduciary duty on advisers, it did not recommend it to be an open-ended obligation.

 

Scaled advice

Scaled advice (a form of targeted advice that is limited in scope, « and » is typically much cheaper than full, holistic advice), was supposed to have been accommodated by the best interests duty.

However, many advisers have indicated that they are not confident that they can legally provide this form of advice.  This uncertainty has resulted in advisers spending more time « and » money on activities than otherwise necessary, such as understanding their legal obligations « and » documenting compliance with the best interests duty.

Government action will facilitate the provision of scaled advice, whilst ensuring advice remains appropriate to the client.

This action will properly implement the policy intent of the Ripoll Inquiry.

 

Fee disclosure statements

Fee disclosure statements are currently required to be provided to all clients, including those in ongoing fee arrangements prior to the introduction of FOFA on 1 July 2013, « and » were designed to increase the engagement of clients « and » improve transparency in the industry.

According to industry stakeholders, providing fee disclosure statements to pre-1 July 2013 clients is difficult « and » expensive: many of these clients are on old legacy systems, predating the FOFA changes; as such, significant manual work is required to prepare statements for these clients.

By contrast, as post-1 July 2013 clients are on newer, FOFA compliant systems, it is—comparatively speaking—much cheaper « and » efficient to produce fee disclosure statements for these clients.

In the exposure draft of the original FOFA legislation, fee disclosure statements were only intended for post-1 July 2013 clients.

Government action will remove the requirement for fee disclosure statements to pre-1 July 2013 clients, but keep the requirement for post-1 July 2013 clients.

The requirement to provide fee disclosure statements was not a recommendation from the Ripoll Inquiry.

Opt-in provisions

The opt-in requirement was introduced to increase client engagement.  However, many industry stakeholders have argued that the opt-in notices do not offer substantial benefits to consumers; particularly as consumers already have the ability to opt-out of their arrangements.

Many stakeholders have also indicated that, whilst the opt-in provisions are trying to institute a behavioural shift in the way clients interact with advisers, the changes required are too great for the financial advice industry to bear alone; rather, any changes in consumer engagement should be part of a broader strategy.

Government action will remove the opt-in requirement.  Opt-in was not a recommendation from the Ripoll Inquiry.

Options that may achieve the objectives

5.57               This regulation impact statement (RIS) assesses the impacts of the Government’s proposed « amendments » based on its election commitment; it does not explore any « other » options (in accordance with the Office of Best Practice Regulation’s (OBPR) guidelines).

5.58               Whilst the Government’s election commitment was to implement the 16 recommendations of the Dissenting Report, a number of the recommendations are no longer applicable as changes have already been made to FOFA that achieve the objectives sought, or the recommendations are no longer relevant due to the passage of time. 

5.59               As such, this RIS considers the impact of a package of « amendments » to FOFA, including all of the (still relevant) Dissenting Report recommendations, as well as some additional « amendments » to address industry concerns.

Impact analysis

Overview of impact on industry « and » consumers

5.60               The proposed « amendments » to FOFA seek to navigate the fine line between ensuring that unnecessary « and » burdensome regulations that drive up the cost of business are removed, whilst ensuring that the consumer protections of FOFA are maintained.

5.61               The proposed « amendments » to FOFA are deregulatory « and » will reduce the compliance burden on the financial advice industry.   Feedback from consultations « and » submissions on the draft « amendments » varied, « and » ranged from a complete rejection that any changes need to be made to FOFA, through to wholesale support.

5.62               Many industry stakeholders indicated that the proposed « amendments » will result in a more practical framework for financial planners « and » their clients.   These stakeholders have argued that the changes will: provide clarity to industry, more closely align FOFA with the intentions of the Ripoll Inquiry, « and » deliver significant cost savings that will ultimately benefit consumers.

5.63               Consumer groups— « and » some industry stakeholders—are far less enthused.   Most of the submissions have argued that the proposed package of « amendments » go too far in winding back the consumer protections introduced by FOFA.   In particular, some stakeholders expressed concern that a number of proposed « amendments » , including the changes to the best interests duty, the removal of opt-in provisions, « and » exempting general advice from the definition of conflicted remuneration, will leave consumers vulnerable to poor quality advice by reducing the standard of advice provided.   Furthermore, it is suggested that the « amendments » could reduce the level of trust « and » confidence in the financial advice industry, all of which runs contrary to the recommendations of both FOFA—as introduced by the former Government— « and » the Ripoll Inquiry.

5.64               A more detailed analysis of the benefits « and » costs of each of the « amendments » is presented below.

Cost savings

Estimates

5.65               Treasury’s estimates of the ongoing cost savings are approximately $190 million per year, with one-off implementation savings of approximately $90 million; these estimates represent just over half of the estimated $375 million ongoing costs of complying with FOFA. [48]   A breakdown of the estimates is presented in Table 3.

Table 5.3 :  Breakdown of FOFA amendment savings estimates

Proposed change

Estimated average ongoing cost saving per year ($Million)*

Estimated implementation cost saving ($Million)*

Remove opt-in requirements

$45.1

$76.9

Limit the annual fee disclosure requirements to be for prospective clients only

$40.8

$0.8

Removal of the ‘catch all’ provision in the best interests duty

$33.3

Nil

Explicit provision of scaled advice

$34.1

Nil

Limit the banning of commissions on life (risk) insurance provided under superannuation

Nil

Nil

Exempt ‘general advice’ from ‘conflicted remuneration’ under certain circumstances

$36.3 [49]

$10.0

Clarify the exemption from the ban for execution-only services

Nil

Nil

That the training exemption permits training expenses related to conducting a financial services business, rather than just the provision of advice

Nil

Nil

« Amendments » to volume-based shelf-space fees

Nil

Nil

Clarify the definition of intra-fund advice

Nil

Nil

Grandfather existing remuneration from the ban on conflicted remuneration

Nil

Nil

Explicitly recognise that a ‘balanced’ remuneration structure is not conflicted remuneration

Nil

Nil

Allow bonuses to be paid in relation to revenue that is permissible under FOFA

Nil

Nil

Include consumer credit insurance in the basic banking carve-out

Nil

Nil

« Amendments » to the FOFA stockbroking exemptions

Nil

Nil

« Other » minor technical changes

Nil

Nil

Total

$189.7

$87.7

*These estimated cost savings refer only to direct cost savings.

Methodology

5.66               Given the size « and » disparity of the financial advice sector, « and » differences in operational aspects « and » cost structures within the industry, it is difficult to reliably estimate costs « and » cost savings.   Notwithstanding this fact, the Australian Government’s Business Cost Calculator was used to produce an estimate of the cost savings from the proposed « amendments » to FOFA (in accordance with OBPR guidelines). [50]

5.67               For the purposes of calculating the cost savings figures, the financial services industry was split into three segments based on firm size.   Adviser groups with more than 1000 advisers were classified as ‘large’ firms.  All adviser groups with less than 60 advisers were classified as ‘small’ firms, « and » the remaining adviser groups were deemed to be ‘medium’ firms.

5.68               Industry data was obtained from all three industry segments through consultations with key industry bodies—these bodies in turn liaised with their membership base— « and » large industry participants.   Industry participants were asked to provide accurate data indicating the cost savings for each of the « amendments » .

5.69               Firms were asked to identify their cost savings as either ‘labour cost savings’, which are calculated by reference to the amount of time saved per firm multiplied by a cost of labour, or ‘purchase cost savings’, which are purchases that the firm would no longer be required to make as a result of the « amendments » to FOFA.   For each amendment, firms provided labour cost savings data on: the number of employees affected, if any; the amount of time that would be saved per employee; « and » the cost of labour for the affected employee(s).   For purchase cost savings, firms provided an estimate of the cost savings that would arise under each of the proposed « amendments » .

5.70               A bottom-up approach was used to estimate industry savings.  The inputs provided from each industry segment were averaged—on a per firm basis—then multiplied by the number of firms in the industry to generate a cost savings estimate for that segment.  These segment estimates were added to arrive at a total industry cost savings estimate.

5.71               A detailed breakdown of the cost estimate inputs cannot be publicly released as some of the data was provided on an in-confidence basis.  That said, a summary table of average inputs is provided in Table 4.  As shown, the majority of cost savings are derived from labour cost savings, with relatively small savings from purchase costs.

5.72               As an example, the removal of the ‘catch-all’ provision within the best interests duty is estimated to save $33.3 million per year.  This calculation is based on an average labour cost per person of approximately $62 per hour, « and » an estimated average time saving of just over 14 hours per firm, per week.

5.73               The average labour cost varies across « amendments » due to the different wage rates of employees performing different functions.   For example, the scaled advice provision has the highest labour cost because this amendment directly affects the time of financial advisers, who are typically on higher wage rates than « other » staff members in the organisation.   By contrast, the opt-in amendment has the lowest labour cost because this function is able to be performed by staff on lower wages: mainly administrative or clerical staff.

5.74               The estimated cost savings, which were calculated using data provided by industry, are based on the assumptions « and » methodology set out above.   It should be noted that industry cannot perfectly foresee the impact of the « amendments » on their cost structures; therefore, actual cost savings may differ from those estimated in this document: these figures are estimates only.

Table 5.4 :  Summary of cost savings inputs

FOFA amendment [51]

Number of hours per firm (per week) [52]

Average labour cost ($ per hour) [53]

Total labour cost savings ($M per year) [54]

Total purchase cost savings ($M per year) [55]

Total cost savings ($M per year) [56]

Fee disclosure statement requirements

20.0

$60.5

$46.1M

$0.3M

$46.4M

Removal of opt-in

18.4

$54.1

$37.9M

$2.3M

$40.2M

Removal of the catch all provision

14.2

$61.9

$33.3M

Nil

$33.3M

Explicit provision of scaled advice

14.3

$63.2

$34.1M

Nil

$34.1M

Exempt ‘general advice’ from ‘conflicted remuneration’ under certain circumstances

17.9

$59.5

$36.3M

Nil

$36.3M

Limitations

5.75                Whilst it is anticipated that some of the cost savings to industry will be passed through to consumers, it is difficult to quantify the extent to which this will occur.  Cost savings could flow through to consumers either through a reduction in the cost of advice, or through the avoidance of (an otherwise necessary) price increase.  It is anticipated that, in any case, the cost of advice under the proposed « amendments » will be lower than if the « amendments » were not implemented.

5.76               It is important to note that the Business Cost Calculator only calculates the direct cost savings of the proposed « amendments » , « and » does not consider indirect or ‘second-round’ savings or opportunity cost savings.   Whilst some of the « amendments » , such as those designed to provide clarity to industry, may not result in direct « and » quantifiable cost savings, second-round or indirect cost savings are likely to arise.

5.77               For example, if an adviser attends a training course to increase their understating of the best interests duty, the cost of that training course would be included in the Business Cost Calculator as it represents a direct cost related to compliance.  By contrast, if the adviser were to forego giving advice for a few hours in order to research their best interests duty obligations (that is, at no external cost), the foregone revenue from the advice that could otherwise have been earned is not included as it is an opportunity cost.

5.78               Similarly, the cost savings to consumers is not included in the calculations, as it is a ‘second-round’ saving; the ‘first-round’ saving occurs to firms.  The impact of the « amendments » on consumers is discussed in more detail throughout this section.

Stakeholder feedback on estimates

5.79               Treasury’s initial impact analysis « and » cost savings estimates were published in the options-stage RIS, « and » provided an opportunity for stakeholders to engage with the Government on the impact of the proposed changes.   Stakeholders were also provided an opportunity to comment on the RIS during consultations on the draft « amendments » ; these consultations were conducted during February 2014.

5.80               Key industry bodies broadly agreed with the qualitative impact analysis presented in the options-stage RIS.   They reiterated their belief that the proposed « amendments » will reduce the regulatory burden on industry « and » increase the affordability of financial advice for consumers, whilst also ensuring appropriate protections are in place for investors.   They consider that the « amendments » are necessary to provide certainty to all stakeholders « and » reduce the unnecessary complexity « and » burden that is inhibiting their ability to provide cost-effective advice to consumers.

5.81               Industry bodies also agreed with the quantitative analysis of the cost savings presented in the options-stage RIS.  No key industry bodies or industry participants brought forward new data or amended their previously provided data for the details-stage RIS.

5.82               Whilst some industry stakeholders indicated that the published numbers appeared conservative, there was insufficient substantive new information to warrant increasing the cost savings estimates for the details-stage RIS.

5.83               Consumer groups did not raise any specific concerns with cost savings estimates calculated except to indicate that the cost savings to consumers should be considered in addition to the cost savings to industry.

5.84               As noted above, whilst this RIS quantifies the direct cost impacts to the industry, there are not expected to be any direct or ‘first round’ compliance cost impacts for consumers.  Instead, a qualitative explanation of the costs to consumers will be provided in the measure-by-measure analysis below.

5.85               Following feedback from industry « and » consumer groups, no changes were made to the cost savings as calculated in the options-stage RIS.   However, an adjustment has been made to the cost saving estimate for the general advice exemption; this adjustment reflects the revised exemption (see detailed analysis below for further details).

Detailed analysis on Dissenting Report « amendments »

5.86               As mentioned above, feedback was received on the options-stage RIS as part of the consultations on the proposed FOFA « amendments » .   The primary theme that emerged was that the options-stage discussion of the impacts of each of the proposed « amendments » was overly technical, « and » primarily focused on the benefits to industry; many stakeholders felt that the options-stage RIS contained insufficient consideration of the costs to consumers, or that the impact of some of the « amendments » on consumers was understated.

5.87               This details-stage RIS has attempted to address these concerns.  For the purposes of this RIS, the proceeding section presents, for each of the proposed « amendments » : a technical description of the change; a description of the industry impacts; a description of the consumer impacts; a critical analysis of these impacts « and » conclusion as to the net impact for each amendment.   Any conclusion as to the net impact of the proposed « amendments » is an ‘on balance’ assessment.   

Remove opt-in requirements

5.88               This amendment removes the requirement for advisers to obtain their client’s approval, at least every two years, to continue an ongoing fee arrangement; the opt-in provisions only relate to clients who enter into an ongoing fee arrangement from 1 July 2013.  Whilst FOFA became mandatory on 1 July 2013, the effective start date for opt-in is 1 July 2015 as clients only need to opt-in every two years.

5.89               The opt-in requirement was introduced to enable customers to assess the quality of service they receive for the fees they pay.  Currently, if a client does not opt-in within 30 days of receiving an opt-in notice, their ongoing arrangement is terminated (termination occurs 60 days after receiving the opt-in notice).  Under the proposed amendment, clients will no longer be required to opt-in, « and » will maintain their existing right to opt-out of their ongoing fee arrangements.

5.90               Industry stakeholders have been largely supportive of this proposed change, although the reasons have varied.  Many stakeholders have cited the high implementation « and » ongoing costs of the opt-in system, which are likely to be passed through to the consumer, as a strong motivation for removing the requirement.   These costs relate to implementing « and » maintaining systems, additional staff involvement, « other » administrative overheads, « and » are closely linked to the number of customers; as such, these costs are anticipated to increase over time as client numbers increase.

5.91               « Other » industry stakeholders have argued that firms in the financial services industry, particularly those who are members of a professional industry association, should be actively promoting client engagement independent of statutory requirements.   The argument is that these firms should be engaging with their clients to earn their trust « and » prove their ‘value add’.   These stakeholders, therefore, argue that opt-in, of some form or another, is already occurring in many instances, « and » that the driver of this consumer engagement should come from industry rather than be mandated by government.

5.92               One final, albeit related, argument is that the opt-in provisions impose too high a standard on financial advisers.  Whilst these stakeholders laud government attempts to improve consumer engagement, they argue that the provisions that apply to financial advisers are out-of-sync with the rest of the financial services industry: nowhere else is an opt-in requirement mandated.  As such, the argument is that the opt-in provisions should be removed « and » only reinstated as part of a much broader, systemic attempt to ensure greater consumer engagement.

5.93               Consumer groups have argued that opt-in is important to promote client engagement « and » transparency of fees charged.   An ASIC report found that only 33 per cent of clients serviced by the top 20 licensees were considered active, [57] which suggests that the majority of clients are inactive or disengaged.  For such consumers, the opt-in requirement provides an opportunity to assess whether they wish to continue their arrangement(s) with their adviser, a decision that is aided by the fee disclosure statement—see discussion on fee disclosure statements below.

5.94               Client engagement is considered important in ensuring that clients actively monitor their financial position « and » are aware of any changes to their account(s).   Consumer groups have argued that removing the opt-in requirement will drive up the cost of advice, as advisers will earn revenue from disengaged or ‘passive’ clients without providing any advice to them.  It is argued that if these clients were more engaged, they would be in a better position to weigh up their options « and » consider switching into a lower cost (possibly fee-for-service) product.  

5.95               Some stakeholders have argued that the opt-in requirements are necessary as FOFA has allowed ongoing percentage-based fees to continue to be charged: under FOFA, asset-based fees—which are calculated based on the value of the assets invested with the adviser—are able to be deducted from a client’s account on a regular basis, « and » for an indefinite period of time, as long as the client initially consents to the charges.   These stakeholders have argued that these asset-based fees have exactly the same effect as sales commissions, « and » that, with the removal of opt-in, there will be no mechanism to ensure that ongoing fees are only being charged where ongoing advice, or at least ongoing communication, is being received.

5.96               According to these stakeholders, removing the opt-in requirements will be at a heavy cost to consumers.  One submission argued that a 0.5 per cent ongoing fee would equate to a $46,000 reduction in the super balance of an average superannuation member over their working life.  Given that, according to these stakeholders, around two million super fund members were paying ongoing fees but were not receiving any financial advice, the removal of opt-in has far reaching consequences.

5.97               The consumer benefits of the opt-in requirements cannot be denied.  The opt-in requirements were, « and » are, a paradigm shift in the battle to increase client engagement.   By requiring advisers to seek client approval to continue arrangements, opt-in nudges clients into actively considering whether they are receiving service commensurate to the fees that they have paid « and » thereby raises the service levels of the industry.

5.98               That said, the opt-in requirement places a disproportionately large burden on financial advisers; a burden not replicated in « other » areas of, or even outside of, the financial services industry.   Whilst there is no doubt that the removal of the opt-in requirement is likely to reduce client engagement, there are a range of « other » measures within the legislation that are intended to promote client engagement; for example: statements from superannuation trustees, product manufacturers, « and » fee disclosure statements will provide consumers with information on the fees « and » charges they are incurring.   Furthermore, consumers will continue to be able to opt-out at any time.

5.99               The opt-in requirement was not recommended by the Ripoll Inquiry.  The Dissenting Report comments:

The Ripoll Inquiry, having comprehensively considered the state of Australian financial products « and » services back in 2009, made no recommendation to force Australians to re-sign contracts with their financial advisers on a regular basis. [58]

There is no precedent for this sort of government red tape in the context of financial services « and » advice relationships anywhere in the world. [59]

5.100           Notwithstanding the consumer benefits that arise from opt-in, the disproportionate treatment of financial advisers relative to the rest of the financial services industry, « and » the significant ongoing « and » implementation costs to achieve these measures, indicate that the cost savings to industry outweigh the consumer benefits from the removal of the opt-in provisions.

Limit the annual fee disclosure requirements to be for prospective clients only

5.101           This amendment removes the requirement for advisers to provide a fee disclosure statement to clients who entered into their advice arrangement prior to 1 July 2013.  Advisers will still need to provide an annual fee disclosure statement to post-1 July 2013 clients.  Fee disclosure statements provide customers with a single statement that shows, for the previous 12 months, the fees paid by the client, the services the client received, « and » the services the client was entitled to receive.

5.102           Industry has strongly supported the removal of the fee disclosure statement requirements for pre-1 July 2013 clients.  Industry stakeholders have argued that it costs significantly more to produce a fee disclosure statement for a pre-1 July 2013 client than for a post-1 July 2013 client. [60]   These stakeholders have indicated that these costs will be passed onto the client « and » will reduce the accessibility « and » affordability of financial advice.   They have also argued that collecting the information for fee disclosure statements can be a convoluted process, as the information needs to flow from (often multiple) product manufacturers to licensees, « and » are then passed onto the relevant adviser(s) before the statement can be created « and » sent to the client.   It is argued that this process can involve a significant investment of time « and » resources, especially for pre-1 July 2013 clients.

5.103           Consultations have suggested that the higher costs for old clients are primarily driven by the age of systems, which struggle to provide accurate fee information for pre-1 July 2013 clients.  As a result, to ensure that fee disclosure statements to pre-1 July 2013 clients are accurate, a significant amount of adviser time is required to quality assure the disclosure statements.  The annual cost saving for this proposed amendment is estimated to decrease over time as a greater portion of clients receive fee disclosure statements.

5.104           Consumer groups have argued that the fee disclosure statement is an important source of information, particularly for consumers who may not have the time or skills to collate « and » fully understand the fees they are paying.   It is argued that this amendment adversely affects pre-1 July 2013 clients, who may continue to be placed in ongoing, expensive fee arrangements—even if there are better alternatives available—as they will not have a simple source of information to prompt them to compare their arrangements to others.  It is therefore argued that, due to information asymmetry, this amendment would affect the bargaining power of clients when negotiating fee arrangements with their adviser.

5.105           In the absence of fee disclosure statements, pre-1 July 2013 clients will be required to piece together the fee details from multiple statements, often with different cut-off dates, to calculate an annual fee; such an exercise would be beyond the capabilities of many advice clients.  Whilst advisers may help their clients complete such a task, it would most likely be at a substantial cost to the client.

5.106           Notwithstanding the benefits to pre-1 July 2013 clients from receiving a single statement outlining the fees they have paid, most of these clients are currently paying conflicted remuneration (in the form of grandfathered commissions) to their advisers rather than a ‘fee for service’ charge.  Conflicted remuneration is not included in the fee disclosure statements, so there may be little additional information obtained by the statements for the pre-1 July 2013 clients.  Both pre- « and » post-1 July 2013 clients will continue to receive « other » reports that identify the fees paid to an adviser; for example: superannuation « and » product statements.   This, in conjunction with the « other » client engagement mechanisms, both in the legislation « and » through the professional conduct standards promoted through professional bodies, should ensure that clients remain engaged « and » are able to monitor « and » change their investments when necessary.

5.107           Fee disclosure statements were not included as part of the recommendations from the Ripoll Inquiry.  The Dissenting Report comments:

The Ripoll Inquiry made no recommendation to introduce an additional annual fee disclosure statement over « and » above the current regular statements provided by financial service product providers to their clients already. [61]

5.108           In addition, when the requirement to provide fee disclosure statements was first announced, it was only intended to apply prospectively, that is, to post-1 July 2013 clients.   The Dissenting Report comments:

…the Committee received strong evidence that based on the various FOFA consultations sessions, it was the industry’s clear understanding that the government’s proposal to impose an additional annual fee disclosure statement would be prospective—that is, only apply to new « and » not existing clients. [62]

5.109           The rationale was that any ‘new’, post-1 July 2013 clients, would come under the FOFA compliant products « and » systems; these products « and » systems would be specifically designed to facilitate the provision of the fee disclosure statements.

5.110           However, « and » as indicated by many industry stakeholders, the retrospective application of fee disclosure statements appears overly onerous.   When considered in conjunction with the questionable value of the fee disclosure statements for pre-1 July 2013 clients, which do not report conflicted remuneration, it would appear—on balance—that the cost savings to industry outweigh the consumer benefits.

Removal of the ‘catch all’ provision in the best interests duty

5.111           This amendment removes paragraph 961B(2)(g), which is known as the ‘catch all’ provision, from the best interests duty.  Subsection 961B(1) imposes a requirement on advisers to act in the best interests of the client in relation to the advice provided.  Subsection 961B(2) then provides a series of steps that an adviser can follow to prove that they have discharged their duty to their client.  Paragraph 961B(2)(g) is the last of the steps « and » states that an adviser must prove that they have ‘taken any « other » step [in addition to the six preceding ones] that … would reasonably be regarded as being in the best interest of the client’.   The intention behind the catch all provision was to make the best interests duty flexible « and » principles-based, thereby avoiding legislation becoming overly prescriptive.   Subsection 961B(2) is often called a ‘safe harbour’ as it provides protection for advisers looking for certainty in satisfying their duty.

5.112           The proposed removal of paragraph (g) has been supported by industry, which has expressed concerns that the current provision is unclear due to its open-ended nature « and » has created significant legal uncertainty on how advisers can actually satisfy the best interests duty.   Industry has noted that the current drafting of the best interests duty has led to advisers spending more time than otherwise necessary documenting the advice they have provided to their clients to demonstrate compliance with the best interests duty.  As such, industry stakeholders claim that the catch all provision renders the safe harbour protection of subsection 961B(2) unworkable.  They believe that removing paragraph 961B(2)(g) will ensure that section 961B(2) functions as a true safe harbour, as the remaining six steps are more objective.

5.113           By contrast, some stakeholders have likened removing paragraph (g) to a repeal of the best interests duty.  Consumer groups have argued that the catch all provision is the most important part of the best interests duty, as it makes the duty flexible « and » principles-based.   They argue that removing the catch all provision could lead to consumers receiving lower quality advice as it weakens the best interests duty by reducing it to a ‘tick-a-box’ exercise for advisers.  Consumer groups have argued that, under a modified best interests duty, an adviser could satisfy the remaining six steps of the best interests duty but still not provide advice that is in the best interests of their client.

5.114           Some stakeholders have also raised concerns that this amendment, which they argue is likely to lead to an increase in the prevalence of poor advice, will result in an increased risk of financial scandals resulting in consumer losses.

5.115           At the time the original FOFA legislation was being drafted, many stakeholders indicated that, in introducing a best interests duty, only subsection 961B(1) was required.  However, concerns were expressed that, without any additional guidance, subsection 961B(1) alone would cause confusion, « and » it would be left to the courts to provide guidance on how advisers could satisfy their best interests duty.

5.116           In response to this uncertainty, subsection 961B(2) was inserted.  This subsection was never intended to be a safe harbour; rather, it was included to provide the guidance advisers were seeking on how they could satisfy their best interests duty.  Because this subsection was not intended to be an exhaustive list, paragraph (g) was inserted to ensure the subsection remained flexible.  However, over time, perception of this provision has changed, « and » it is now commonly accepted to be a safe harbour; even ASIC, in its regulatory guides, refers to subsection 961B(2) as a safe harbour. [63]

5.117           The proposal to remove the catch-all provision is intended to properly implement the recommendations from the Ripoll Inquiry.   The original Ripoll recommendation was to include a fiduciary duty for financial advisers to place their client’s interests ahead of their own; there was no requirement that this duty be open ended.  As such, subsection 961B(2) without paragraph (g) achieves this aim.  The Dissenting Report comments:

The best interests duty is an important « and » central part of the FOFA changes.   Coalition Committee members support the introduction of a statutory best interests duty for financial advisers into the « Corporations » Act. [64]

However, we are concerned that the ‘catch all’ provision contained in section 961B(2)(g) would create uncertainty for both clients « and » their advisers « and » leave the legislation subject to potentially protracted legal arguments.   We therefore recommend that this clause be removed. [65]

5.118           Whilst a best interests duty without paragraph (g) will lower the standard required of advisers, the concerns expressed by consumer groups appears to be disproportionate to the change.  The remaining steps in subsection 961B(2) still set a high standard, it just does not require an unending set of actions.  When considered in conjunction with « other » measures—the requirement that advice be appropriate for the client, that advisers must place their client’s interests ahead of their own, « and » the duty to warn clients if information is based on incomplete or inaccurate information—the amended best interests duty will still ensure that clients continue to receive advice that is in their best interests.

5.119           As such, the cost savings to industry appear to outweigh the consumer impacts.

Explicit provision of scaled advice

5.120           This amendment allows clients « and » advisers to explicitly agree on the scope of any scaled advice provided, whilst still ensuring the advice is appropriate for the client.

5.121           Whilst scaled advice is not specifically defined in the « Corporations » Act, it is usually referred to in the industry as a targeted form of « personal » advice; « personal » advice is advice that considers the financial objectives, situation, « and » needs of a person.   All « personal » advice is ‘scaled’ or ‘limited in scope’ to some extent: advice is either less or more comprehensive in scope along a continuous spectrum.   For example, scaled advice may cover a specific area of a client’s needs such as insurance or superannuation, « and » can be contrasted to holistic advice that usually considers all of the client’s financial needs.

5.122           The limited scope of scaled advice usually makes it much cheaper than more fulsome « personal » advice.   This is due to the fact that an adviser needs to consider fewer of the client’s circumstances, needs « and » objectives to provide the advice.   As holistic « personal » advice can often be expensive, scaled advice is an affordable avenue for many consumers seeking « personal » advice.

5.123           This amendment has been welcomed by industry, which has argued that the best interests duty does not give them confidence that scaled advice can be provided.  This uncertainty has led to advisers performing more work than necessary to ensure compliance with the best interests duty.  In particular, it has resulted in advisers considering all of their client’s circumstances when providing scaled advice, rather than only considering their relevant circumstances; this has had the effect of making scaled advice more expensive than otherwise necessary.  Industry has indicated that advisers, in some instances, have not been providing scaled advice at all.

5.124           Consumer groups have raised concerns that this amendment could allow advisers to avoid certain obligations imposed by the best interests duty thereby affecting the quality of advice provided to consumers.  These stakeholders are particularly concerned that customers could be left vulnerable to poor quality advice, as the amendment could allow an adviser to agree a scope of the advice that may not be in the best interests of their client.  This concern is particularly salient for clients who: have low levels of financial literacy, place a great deal of trust in the knowledge « and » experience of an adviser, « and » are likely to agree to suggestions from an adviser on the scope of the advice they are to receive without appreciating the implications of what they have agreed to.

5.125           For example, a client may go to an adviser seeking information about their finances.  Due to the prohibitive cost of a holistic financial plan, a client may agree—perhaps at the advisers suggestion—to limit the scope of the advice to a particular area, « and » only consider the products offered by the adviser’s employer.

5.126           The concern some stakeholders have with the example above is that the client may need urgent advice on one particular area, but may not actually receive this advice as it has been scoped out.  If the client is not told about this « other » advice area, then the client may not fully appreciate that they are missing out on advice that may be better for them.   Furthermore, by limiting the advice to products offered by the adviser’s employer, the client may not be informed about alternate investments that may actually be more suitable for their particular circumstances.

5.127           Concerns have also been expressed that this amendment could reduce the number of products offered in the industry, as advisers become incentivised to offer scaled advice on more costly, « and » hence lucrative, financial products.

5.128           As with the changes to the best interests duty, the proposal to allow clients « and » advisers to explicitly agree on the scope of scaled advice is intended to properly implement the recommendations from the Ripoll Inquiry, « and » is closely linked to change to the best interests duty.   The Dissenting Report comments:

•        One way of ensuring that clients are able to access affordable « and » appropriate financial advice would be to allow advisers « and » their clients to limit the scope of the advice to a series of discreet areas identified by the client rather than to mandate a full financial plan in every case.

•        This concept of focusing advice to areas specifically identified by a client has become widely known as ‘scalable advice’.

•        Numerous submissions to the Committee expressed concern that the wording of the best interests provisions in the proposed legislation does not allow for scaled advice to be provided. [66]

5.129           There is some debate within industry as to whether the current legislation actually permits scaled advice to be provided.  Whilst there is currently no explicit provision that allows the client « and » adviser to agree a scope of advice, a number of advisers are already providing scaled advice « and » have not incurred the problems expressed by industry stakeholders.   As such, whilst the concerns raised about advisers inappropriately agreeing a scope of advice is possible under the proposed amendment, it may already be possible under the current arrangements.

5.130           It is doubtful whether the dire outcomes indicated by consumer groups will eventuate.  The FOFA provisions relating to the appropriateness of advice, « and » requiring an adviser to place their client’s interests ahead of their own, will ensure that, even if the adviser agrees a scope that is inappropriate to the client, they will not be able to provide advice that is inappropriate.

5.131           As such, the cost savings to industry outweigh the consumer benefits.

Commissions on life (risk) insurance provided within superannuation

5.132           The Government originally proposed « amendments » to expand the range of circumstances under which commissions may be paid on life (risk) insurance products provided within superannuation to include circumstances where « personal » advice has been provided on these products.

5.133           Through consultation on the proposed « amendments » « and » broader industry engagement, the Government has become aware that, whilst the life insurance industry as a whole remains well capitalised « and » profitable, in relation to certain business lines there are grounds for concern regarding the long term sustainability of some current industry practices, including in relation to remuneration.

5.134           In light of these concerns, the Government intends to undertake a separate process to engage with the life insurance industry on these issues.  In order to ensure that the industry’s regulatory environment is not subject to further change while this process is underway, the Government does not propose to progress « amendments » to the treatment of life (risk) insurance at this time.  

Exempt ‘general advice’ from ‘conflicted remuneration’

5.135           This amendment exempts general advice from conflicted remuneration under certain circumstances.  Currently, the conflicted remuneration provisions capture both general « and » « personal » advice; conflicted remuneration cannot be paid on either type of advice.   This amendment will allow conflicted remuneration to be paid on general advice under certain circumstances; conflicted remuneration on « personal » advice will continue to be banned.

5.136           The Government originally proposed to exempt all general advice from the definition of conflicted remuneration.  This approach was outlined in the options-stage RIS published by the OBPR in January 2014.  Feedback on this proposal was received as part of consultation on the draft « amendments » .

5.137           Many industry stakeholders support the originally proposed amendment as they believe the current ban on conflicted remuneration captures activities that were not the primary focus of FOFA—the ban currently captures employees such as website designers or general information seminar providers who are not in product sales related areas.  Industry argue that they are currently required to maintain complex systems when providing general advice to ensure compliance with the existing conflicted remuneration provisions.  These systems are costly to implement « and » maintain.

5.138           Industry stakeholders have also argued that allowing benefits to be paid on general advice will ensure the provision of more general advice.  These stakeholders believe this is a positive outcome for society as general advice often serves to inform « and » educate, « and » is a way for consumers to receive financial advice they might otherwise not have access to.

5.139           By contrast, consumer groups believe that exempting general advice from the definition of conflicted remuneration may have a significant negative impact on consumers, « and » the financial advice industry as a whole.

5.140           These stakeholders agree that excluding general advice from the definition of conflicted remuneration will ensure the provision of more general advice.  However, they suggest that it will also result in the industry moving towards general advice models, « and » may lead to an overprovision of general advice relative to « personal » advice as advisers would be incentivised to earn conflicted remuneration through general advice based sales.

5.141           These stakeholders argue that there is a significant consumer detriment involved as many consumers do not understand the distinction between « personal » « and » general advice.   As a result, they may make financial decisions that are not appropriate for them if they mistakenly rely « and » act on general advice thinking it to be « personal » advice.

5.142           Stakeholders also argue that the « amendments » may adversely affect the reputation of the industry by effectively allowing commissions to be re-introduced « and » could lead to doubt in the minds of consumers as to whether the advice they have received—whether « personal » or general—is conflicted.

5.143           General advice is one of two forms of financial product advice; the « other » is « personal » advice.   Financial product advice is defined as a: ‘recommendation or opinion that influences a person into making a decision on a financial product’ [67] (emphasis added).  Whilst general advice, unlike « personal » advice, does not consider the financial objectives, situation « and » needs of a person, it still influences a person’s decisions.   It was for this reason that both general « and » « personal » advice were included in the ban of conflicted remuneration.

5.144           The argument that general advice is provided to inform « and » educate, rather than to persuade « and » influence, is problematic for two reasons. Firstly, as defined, general advice does influence (or could reasonably be expected to influence) a person’s choice.  If the advice were truly factual, « and » couldn’t reasonably influence a person’s choice, then it wouldn’t be financial product advice « and » thus payments in relation to it would not be conflicted remuneration.   However, all general advice, no matter how informative, is—at some level—designed to influence a decision, usually to acquire a product or service from the provider of the general advice; if not, there would be no incentive for the provision of the general advice.

5.145           Secondly, there are many instances where general advice, « and » only general advice, is used to market « and » influence sales.   Evidence suggests that complex products, such as exchange-traded options strategies—which have high returns but also high risks—are exclusively sold through general advice channels. 

5.146           Further, general advice is often misunderstood « and » confused with « personal » advice.   Whilst general advice does not consider the « personal » circumstances of the client, « and » whilst a general advice warning is required to be provided—which states that the advice given does not consider the « personal » circumstances of the client—many people ignore the warning « and » mistake general advice for « personal » advice.   This is particularly the case where face-to-face contact is involved.  A person attending a seminar who speaks to the presenter « and » tells them about their financial position could easily be confused into thinking that any answer to questions may have taken into account the « personal » circumstances disclosed when it has not.  

5.147           In response to consumer « and » stakeholder concerns that the original amendment was too broad, the government has decided to restrict the operation of the carve-out.   The revised general advice exemption will exempt benefits from the definition of conflicted remuneration if the following conditions are satisfied:

•        general advice is provided by an employee;

•        the employee has not given « personal » advice to the person receiving the general advice in the past 12 months; « and »

•        general advice is in relation to a product issued or sold by the employer.

5.148           The imposed conditions will restrict the general advice exemption to employees who have not provided « personal » advice to the person receiving the general advice in the past 12 months.

5.149           This amendment alleviates the unintended consequences of the original general advice ban without providing too broad an exemption.  Website designers, people giving seminars, « and » « other » employees who are involved in the preparation of general advice, but who do not provide « personal » advice, will now be able to utilise the general advice exemption.   However, advisers who provide « personal » advice as well as general advice will not be able to utilise the exemption.   As such, this amendment removes the unintended consequences whilst still allowing consumers who receive « personal » advice to remain confident that their advice is in no way influenced by conflicted remuneration.

5.150           Further, this amendment discourages a move into a general advice model.  Given that the exemption does not apply if both general « and » « personal » advice has been provided, « and » given the significant upfront « and » ongoing training costs advisers incur to skill themselves to provide « personal » advice, it is unlikely that advisers who currently provide « personal » advice would move to a general-advice-only model.

5.151           To address concerns over sales of complex products, the Government has asked ASIC to monitor the use of the conflicted remuneration provisions as they relate to general advice on complex products.  ASIC will provide a report to the Government in the next 12-18 months.

5.152           The revised general advice exemption is more restricted than originally proposed; accordingly, the consumer impacts are reduced, although not entirely mitigated.  Given the narrower application of the exemption, « and » given the ongoing monitoring of the use of the provisions in relation to complex products, it would appear—on balance—that the cost savings to industry outweigh the consumer impacts.

5.153           A note on the cost impacts : consultations with stakeholders indicate that the restrictions on the general advice exemption will affect some of the firms in the small « and » medium segments but none of the large firms.   Estimates of the extent to which the small « and » medium segments would be affected varied; as such, a conservative approach has been adopted when calculating the adjustment to the cost savings.

5.154           The restrictions in the exemption means that, where employees provide general advice only, separate systems no longer need to be maintained to ensure compliance with the conflicted remuneration provisions.  As large firms separate advice streams — that is, employees who provide « personal » advice do not concurrently provide general advice — these large firms will be able to realise all of the cost savings estimated from the originally proposed « amendments » .

5.155           Whilst many of the small « and » medium firms have, similarly, separated their advice streams, not all of these firms have done so.   Consequently, some of these firms will not qualify for the general advice exemption with the new restrictions.  As such, these firms will be required to maintain systems to ensure compliance with the ban on general advice; these firms have been excluded from the cost savings estimates.  The cost savings estimates in Table 3 have been updated accordingly.

5.156           The restriction on the general advice exemption has resulted in a reduction in the ongoing cost savings estimates of approximately $1.6 million per year; the consumer protections achieved by the restrictions are, therefore, large relative to the reduction in cost savings.  The design of the restrictions, which addresses the unintended consequences created by the current conflicted remuneration provisions but avoids the pitfalls from providing too broad an exemption, means that most businesses do not need to incur additional compliance costs.  As such, the consumer consequences of the original proposal can be minimised at negligible incremental cost to business.

Clarify the exemption from the ban for execution-only services

5.157           This amendment broadens the existing execution-only exemption from conflicted remuneration.  The current exemption permits conflicted remuneration on execution-only services where no advice has been provided to a client by a licensee, or representative of that licensee, in the previous 12 months.  This amendment will permit conflicted remuneration if no advice has been provided by the individual receiving the benefit for the execution service (as opposed to the licensee or representative employing the individual).  Linking the provision of advice to an individual rather than a licensee or representative (usually a group entity) provides a more direct link between the provision of advice « and » the execution service.

5.158           Industry has supported this amendment as it enables benefits to be earned on legitimate execution-only services.  Industry groups have argued that the drafting of the provision makes it complex « and » difficult « and » costly to comply with.   They believe that execution-only transactions are not accompanied by any advice, « and » hence are typically at the request of the client.   As such, they believe that there are benefits associated with allowing conflicted remuneration on these transactions.  This amendment provides clarity to advisers; the current legislation has had the unintended consequence of rendering advisers unable to receive conflicted remuneration despite there being no conflict of interest.

5.159           Some stakeholders have expressed concerns that financial advice firms will be able to give advice in one part of the business, « and » then execute the transaction in another part of the business so that conflicted remuneration can be earned.   They have argued that this would result in extra charges for clients, whose investment returns would suffer as a result. 

5.160           This situation is unlikely to occur given the anti-avoidance provisions within the « Corporations » Act 2001 , which prohibit firms from restructuring their business models purely to circumvent the application of certain parts of the legislation.   As such, the benefits to industry outweigh the consumer impact.

Training exemption

5.161           This amendment broadens the training exemption in relation to non-monetary benefits to cover all training relevant to conducting a financial services business.  Currently, the exemption states that only training relevant to the provision of financial product advice is excluded from conflicted remuneration. 

5.162           Industry has supported this amendment, as it allows them to use the training exemption for a wider range of activities, including administrative, dealing or trading activities.  It is argued that the amendment will assist businesses in improving their productivity, « and » should raise the standard of advice being provided to consumers.

5.163           This amendment is not expected to have any material impact on consumers.

« Amendments » to volume-based shelf-space fees

5.164           This amendment clarifies the drafting of the ban on volume-based shelf-space fees to clearly define the benefits the ban intends to capture.   In particular, it clarifies that incentive payments between fund managers « and » platform operators to give preferential treatment to certain products on the platform ‘shelf’—which could potentially influence advice provided to the client—are prohibited.

5.165           Industry has supported this amendment.  They have argued that the current drafting of the legislation has unintended consequences that adversely affect firms in the industry, « and » that the amendment would clarify the operation of the law.  

5.166           Consumer groups have argued that this amendment could result in advisers being influenced in their provision of advice. For example, advisers could place their clients in more costly products in order to earn a volume-based bonus through the platform.  They believe that this would reduce the quality of advice provided to consumers « and » also be detrimental to their investment returns, as the volume-based fees are ‘built in’ to the cost of their financial product(s).

5.167           This amendment simply clarifies the benefits the ban intends to capture.  It does not change the existing law, « other » than to make it clearer to understand.   As such, this amendment is not expected to have any material impact on consumers.

Clarify the definition of intra-fund advice

5.168           Intra-fund advice is defined in the Superannuation Industry (Supervision) Act 1993 (SIS Act) but is not specifically mentioned in FOFA.  This amendment cross-references the definition of intra-fund advice from the SIS Act in the FOFA legislation.  Intra-fund advice is a type of scaled advice provided by both retail « and » industry superannuation funds to their members.   The advice is simple in nature « and » solely related to the member’s superannuation products.  

5.169           This amendment clarifies the operation of the law « and » does not have any direct impact on consumers.

« Other » changes

Grandfathering existing remuneration from the ban on conflicted remuneration

5.170           This amendment broadens the circumstances under which conflicted remuneration can continue to be paid (that is, grandfathered).   As long as a client maintains their interest in a financial product, the proposed amendment will allow advisers to move licensees « and » continue to access grandfathered benefits; currently, any move after 1 July 2013 causes grandfathering to cease.

5.171           Industry has supported this amendment.  It is argued that the amendment promotes greater competition between licensees « and » allows advisers to move between firms more freely.   Most industry stakeholders argue that the current grandfathering provisions have reduced adviser movements in the industry « and » have effectively ‘frozen’ the market; few advisers are willing to move licensees at all due to the loss of grandfathered benefits.   Whilst the « amendments » allows grandfathered benefits to continue for a longer period of time, it is anticipated that industry will transition to a fee-for-service model as advisers cannot receive conflicted remuneration on arrangements entered into with new clients, « and » existing clients are likely to be transferred into new products/arrangements over time.

5.172           Some stakeholders are concerned that the grandfathering provisions will lock clients indefinitely into products that pay conflicted remuneration.  They say that advisers will have no incentive to move their clients out of these products, because they would lose their benefit payments if they did so.  These stakeholders believe that these clients will be adversely affected as conflicted benefits erode their investment returns over time, whereas these clients would have the opportunity to consider better alternatives if the grandfathering arrangements were not in place.

5.173           Despite these concerns, advisers will still be bound by the best interests duty, which will force them to consider whether their client’s investment options are best suited to their financial needs, objectives « and » circumstances.   The « amendments » to grandfathering will help the industry transition to a fee-for-service model « and » relieve the problems associated with the labour market ‘freeze’ which is currently discouraging advisers from moving between licensees.

5.174           There are also technical « amendments » to clarify that:

•        when a financial planning business or client book is sold, the rights to the grandfathered benefits can be transferred to the purchaser, who will then receive the ongoing benefit;

•        when an employed adviser becomes a self-employed authorised representative within the same licensing group, the adviser can continue to receive grandfathered benefits; « and »

•        when a client switches from a superannuation product to a pension product, « and » both are offered under a multi-product offering, grandfathering will not cease in relation to that client’s investment.

5.175           These minor technical « amendments » provide certainty « and » clarity to industry.

Explicitly recognise that a ‘balanced’ remuneration structure is not conflicted

5.176           This amendment clarifies that benefits paid under a ‘balanced scorecard’ arrangement are not conflicted remuneration.  Balanced scorecard benefits are calculated by reference to both volume-based « and » non-volume-based factors.   When FOFA was introduced, it was envisaged that payments made under a balanced scorecard approach would be able to rebut the presumption that volume-based benefits were conflicted.

5.177           Some industry groups have supported this amendment as it provides certainty for employers when paying bonuses under these arrangements.  They argue that allowing a ‘low’ benefit to be paid to employees is consistent with the intent of the legislation, as it will not influence advice in a way which is detrimental to consumers.

5.178           Some consumer groups do not support this arrangement, as they believe that the bonus payments will influence the advice provided by advisers.  It has also been argued that this amendment will favour larger firms, providing an incentive for employees to work for large firms, « and » that this will drive further consolidation in the industry.

5.179           This amendment clarifies that benefits that are already being paid—benefits that are currently allowed under FOFA—are permitted.  As such, this amendment is not expected to have any material impacts on consumers.

Include consumer credit insurance in the basic banking carve-out

5.180           This amendment broadens the existing basic banking exemption to include consumer credit insurance.  The exemption covers front-line bank employees who typically provide advice on basic banking « and » general insurance products; these employees were not the target of FOFA.

5.181           Consumer groups believe there to be a risk that conflicted basic products will be packaged with exempt products in a way that maximises the benefits being paid to the adviser.

5.182           This minor amendment clarifies the operation of FOFA.  Consumers generally understand that these are basic financial products, so this amendment is not expected to have a material impact on consumers.

Allow bonuses to be paid in relation to revenue that is permissible under FOFA

5.183           This amendment permits payment of performance bonuses that are calculated by reference to remuneration that is exempt from the ban on conflicted remuneration.  For example, an employer will be allowed to pay an adviser a bonus calculated by reference to the fee-for-service revenue the adviser generates in a given period.  Currently, such a bonus may be banned as it is volume-based, even though the fee-for-service revenue it is based upon is not banned.

5.184           Industry has supported this amendment.  It is argued that this amendment will assist industry in shifting to a fee-for-service model—one of the objectives of FOFA— « and » removes an inconsistency between earning permissible revenue « and » receiving a bonus on permissible revenue.

5.185           Consumer groups have argued that any bonus payments paid in relation to permissible revenue would like to influence the advice provided by advisers.

5.186           Whilst there is a likelihood that prices may rise as a result of bonus payments, the fact that this amendment will assist industry in shifting to a fee for service model outweighs any consumer concerns.

« Amendments » to the FOFA stockbroking exemptions

5.187           This amendment clarifies the existing stockbroking-related carve-outs under FOFA, including providing for the application of the brokerage fee exemption to products traded on the ASX24 (the ASX24 is a 24-hour platform for derivatives trading run by the ASX) « and » the broadening of the stamping fee exemption for initial public offering (IPO) arrangements.  

5.188           These « amendments » are minor « and » clarify the operation of the legislation - stockbroking was not the intended target of FOFA « and » stockbroking-related activities have been largely carved-out of the reforms.

5.189           Consumers will not be materially impacted by this change. 

« Other » minor technical « amendments »

5.190           The « other » minor « amendments » are:

•        « amendments » to ensure that the wholesale « and » retail client distinction that currently exists in « other » parts of the Act also applies to the FOFA provisions; « and »

•        « amendments » to clarify that the client-pays exemption operates to allow clients to direct product issuers—such as superannuation trustees or responsible entities of managed investment schemes—to deduct payments from the client’s funds, or funds the client is beneficially entitled to.

5.191           These proposed changes are purely consequential « and » provide clarity to the operation of the law.

Specific impact on small businesses

5.192           As a result of these deregulatory « amendments » , small businesses are likely to be able to spend more time on their core business of providing financial advice to consumers « and » less time on compliance-related activities.   This should result in both cost savings « and » revenue growth opportunities, both of which should increase the competitiveness of small businesses in the industry.

5.193           As noted earlier, the market is broken into small, medium « and » large firms.   Small businesses, for the purposes of this analysis, are considered to employ fewer than 60 advisers.  For the smallest firms, compliance requirements typically come with significant opportunity costs: small businesses have fewer staff available to dedicate to administration « and » compliance, « and » any time spent on compliance is time not spent providing advice, « and » hence earning fees.

Impact on Government

5.194           The impact on Government will be relatively small « and » non-ongoing.   In the short-term, implementation costs will be incurred to draft the legislation for the proposed « amendments » , « and » to make changes to the regulations.   ASIC’s role as the industry regulator will continue, albeit under the new rules « and » regulations.  

Consultation

5.195           Since the Ripoll Inquiry was initially commissioned in February 2009, extensive consultation has occurred with key stakeholders through submissions, consultation groups, public information sessions, consultation papers « and » meetings with stakeholders.   Further consultations occurred in 2012 when the FOFA Bills were referred to the Parliamentary Joint Committee for « Corporations » « and » Financial Services (PJC) for inquiry « and » report.  

5.196           In developing the proposed package of « amendments » , the Government conducted targeted consultations with a number of stakeholders, including the Association of Financial Advisers, the Association of Independently Owned Financial Professionals, the Australian Bankers’ Association, Choice, the Financial Planning Association, Financial Services Council, Industry Super Australia, the « Property » Council of Australia « and » the major wealth management companies.  

5.197           On 29 January 2014, the Government released, for a three-week consultation period, draft regulations « and » legislation to enact its proposed reforms to FOFA.   Around 50 submissions were received as part of this process, from a range of stakeholders including industry associations, consumer groups, financial planning practices, consultants « and » individuals.   A wide range of views were expressed in the submissions, which provided comment on the « amendments » , the options-stage RIS « and » « other » related issues outside the scope of the « amendments » .   For the large industry associations « and » consumer groups, submissions were consistent with previously expressed views.   The submissions also yielded a number of technical suggestions to ensure that the legislation « and » regulations achieve the desired policy outcome.  

5.198           Treasury also conducted additional stakeholder consultations as part of the consultation period on the draft « amendments » .   Many of the concerns « and » comments canvassed throughout the consultation period have been considered « and » incorporated into the final « amendments » .   In particular, this consultation drove the decision not to proceed with the proposed « amendments » to commissions for life (risk) insurance « and » the changes to the exemption for general advice from the definition of conflicted remuneration.   The information received through these consultations has also been considered in the preparation of this document.

5.199           With regard to the options-stage RIS, Treasury has fully complied with the RIS requirements.

Conclusion

5.200           The proposed « amendments » to FOFA are deregulatory « and » are anticipated to result in savings of approximately $90 million in implementation costs « and » an average of approximately $190 million in ongoing costs per year.   These savings are expected to flow through to consumers « and » increase the affordability of financial advice.  

5.201           As discussed in this document, there are risks involved with these « amendments » .   In particular, some stakeholders consider that the « amendments » compromise consumer protections, « and » will undermine the goals of FOFA.   The Government, however, is committed to maintaining the important consumer protections introduced by FOFA, « and » these « amendments » reflect that commitment.   The « amendments » will result in substantial cost savings « and » increased certainty for industry whilst maintaining the high standards expected by financial advisers, so that consumers of financial products « and » services remain protected against poor quality advice.   On balance, the « amendments » will be beneficial for stakeholders of the financial services industry « and » promote the facilitation of high quality « and » affordable financial advice.

Implementation « and » review

5.202           The package of « amendments » will be implemented through legislation as well as regulations.   To ensure the « amendments » are processed as soon as practicable, interim regulations will be made where legally possible; these interim regulations will be subsequently amended through legislation, « and » will be repealed once the legislative « amendments » have been passed.   Those « amendments » best addressed through regulations will remain in place.

5.203           The Government anticipates that the legislation will be introduced into Parliament in the 2014 autumn sitting period, for passage in the winter sitting period. 

5.204           Regulations are anticipated to be made by the end of March 2014.  As with all regulations, there is a risk that the regulations will be disallowed.  If this were to occur, the law would revert to the existing requirements « and » may cause regulatory uncertainty for industry.

5.205           A post-implementation review will commence within five years of these « amendments » being implemented.

Appendix A:  Regulatory Burden « and » Cost Offset Estimate Table

Average Annual Change in Compliance Costs (from BAU)

Sector/Cost Categories

Business

Not-for-profit

Individuals

Total by cost category

Administrative Costs

( $198,442,592.58 ) [68]

$0

$0

( $198,442,592.58 )

Substantive Compliance Costs

$0

$0

$0

$0

Delay Costs

$0

$0

$0

$0

Total by Sector

($189,668,692.58)

$0

$0

($189,668,692.58)

Average Annual Change in Compliance Costs (from BAU)

Sector/Cost Categories

Business

Not-for-profit

Individuals

Total by cost category

Administrative Costs

($198,442,592.58)

$0

$0

($198,442,592.58)

Substantive Compliance Costs

$0

$0

$0

$0

Delay Costs

$0

$0

$0

$0

Total by Sector

($198,442,592.58)

$0

$0

($198,442,592.58)

Annual Cost Offset

Agency

Within portfolio

Outside portfolio

Total

Business

$0

$0

$0

$0

Not-for-profit

$0

$0

$0

$0

Individuals

$0

$0

$0

$0

Total

$0

$0

$0

$0

Proposal is cost neutral?        No

Proposal is deregulatory       Yes

Balance of cost offsets = ( $198,442,592.58 )

 




[1]    ASIC 13-355MR

[2]    « Corporations » Amendment (Future of Financial Advice) « Bill » 2011 « and » the « Corporations » Amendment (Further Future of Financial Advice Measures) « Bill » 2011.

[3]    ABS - 5204.0 - Australian System of National Accounts, 2012-13.

[4]    ABS - 5206.0 - Australian National Accounts: National Income, Expenditure « and » Product, June 2013.

[5]    ASIC Report 224: Access to financial advice in Australia, 2010, p30.

[6]    Ibid.

[7]    IBISWorld Industry Report K6419b Financial planning « and » investment advice in Australia, August 2013.

[8]    Ibid, note 4, p14.

[9]    Ibid, note 6.

[10] ASIC Report 362: Review of financial advice industry practice: Phase 2, 2013, p7.

[11] Ibid, note 6.

[12] Ibid.

[13] AMP Investor Report: Full Year 2013, AMP, 2014, available from: http://shareholdercentre.amp.com.au/phoenix.zhtml?c=142072&p=irol-reports, p27, 39.

[14] Annual Report 2013, Commonwealth Bank, 2013, available from: https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-reports/2013_CBA_Annual_Report_19_August_2013.pdf, p15.

[15] Ibid, note 6.

[16] Ibid, note 9, p13.

[17] Ibid, p27.

[18] Ibid, p28.

[19] Section 961B(2)(e) of the « Corporations » Act 2001 (Cth).  

[20] Regulatory Guide 79: Research report providers: Improving the quality of investment research, ASIC, December 2012, available from: http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/rg79-published-10-December-2012.pdf/$file/rg79-published-10-December-2012.pdf, p1.

[21] ASIC Report 251: Review of financial advice industry practice, 2011, p7.

[22] Ibid, note 9, p13.

[23] Annual Review 2011, NAB, 2011, available from: http://cr.nab.com.au/docs/2011annualreview.pdf, p20.

[24] Ibid, note 20, p11.

[25] Ibid, note 20, p11.

[26] Ibid, note 20, p12.

[27] Ibid, note 9, p13.

[28] Kate Kachor, ‘AMP rules out commissions revival’, Financial Observor, 21 February 2014 (online), available from: http://www.financialobserver.com.au/articles/amp-rules-out-commissions-revival.

[29] Ibid, note 4, p43.

[30] Ibid, note 4, p42.

[31] Ibid, note 6.

[32] Ibid, note 4, p44.

[33] Ibid, note 6.

[34] PJC Inquiry into financial products « and » services in Australia, November 2009, p150.

[35] Dissenting Report, February 2012, p151.

[36] Ibid.

[37] The cost estimate was indicated to be $375 million by Mr John Brogden, CEO of the Financial Services Council, during PJC hearings.

[38] Ibid, note 34, p152-153.

[39] Ibid, p154.

[40] Ibid, p155.

[41] Ibid, p156.

[42] Much of the evidence in this RIS has been provided to the Treasury under commercial-in-confidence arrangements « and » cannot be directly quoted. Where this is the case, the evidence is paraphrased « and » no source is referenced.

[43] Australia to 2050: future challenges , the Treasury, 2010, available from: http://archive.treasury.gov.au/igr/igr2010/report/pdf/IGR_2010.pdf, p1.

[44] Mid-year Economic « and » Fiscal Outlook 2013-14 , Commonwealth of Australia, December 2013, available from: http://budget.gov.au/2013-14/content/myefo/download/2013_14_MYEFO.pdf,  p2. 

[45] The Coalition’s Policy to Boost Productivity « and » Reduce Regulation, July 2013, p26.

[46] Ibid.

[47] Assistant Treasurer, Keynote Address to the 2014 Insurance Council of Australia Regulatory Update Seminar, 28 February 2014, available from: http://axs.ministers.treasury.gov.au/speech/008-2014/.

[48] Ibid, note 36.

[49] The cost savings for this amendment differ from the savings published in the options-stage RIS as the general advice exemption has been modified (see detailed analysis for further explanation).  It is estimated that the modifications will affect some of the firms in the small « and » medium firm segments but none of the large firms.  

[50] Business Cost Calculator , the Office of Best Practice Regulation in the Department of the Prime Minister « and » Cabinet, available from: https://bcc.obpr.gov.au/.

[51] The total cost savings figures for the fee disclosure statement « and » opt-in « amendments » differ from the cost savings estimates provided in Table 3 of the RIS.   The figures presented in this table represent the savings achieved in the first year of the « amendments » , whereas the figures presented in Table 3 are average cost savings over ten years (presented as an average to comply with OBPR guidelines).

      The savings from the fee disclosure amendment is expected to decrease over time whereas the saving in relation to the opt-in amendment is expected to increase over time.

      Cost savings for the remaining three « amendments » are not expected to change over time, so are identical to the figures in Table 3.

[52] Number of hours per firm (per week) have been rounded to one decimal point.

[53] Average labour cost (per hour) have been rounded to one decimal point.

[54] Total labour cost savings have been rounded to the nearest $100,000.

[55] Total purchase cost savings have been rounded to the nearest $100,000.

[56] Total cost savings have been rounded to the nearest $100,000.

[57] Ibid, note 20.

[58] Ibid, note 34, p160-161.

[59] Ibid.

[60] Ibid, p165.

[61] Ibid, p163.

[62] Ibid, p163.

[63] ASIC Regulatory Guide 175: Licensing: Financial product advisers-conduct « and » disclosure, October 2013, available from: http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/rg175-published-3-October-2013.pdf/$file/rg175-published-3-October-2013.pdf, RG 175.238-175.249.

[64] Ibid, note 34, p166.

[65] Ibid, p168.

[66] Ibid, p168.

[67] Section 766B of the « Corporations » Act 2001 (Cth).

[68] In accordance with OBPR methodology, this figure includes both the average annual ongoing cost savings (of 189.7m) as well as the one-off implementation cost savings (of $87.7m).  For this purpose, the implementation costs savings have been annualised over a ten year period.  As such, the $198.4m reported in this table is the sum of $189.7m (average ongoing cost savings) « and » $8.8m (annualised one-off implementation cost savings).