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Future of Financial Advice reforms - draft legislation
Assistant Treasurer and
Minister for Financial Services and Superannuation
29 August 2011 No. 127
FUTURE OF FINANCIAL ADVICE REFORMS - DRAFT LEGISLATION
More Australians will seek financial advice following the announcement of the draft legislation to implement the Gillard Government's Future of Financial Advice reforms.
The Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten, today released the first tranche of draft legislation of the Future of Financial Advice (FOFA) reforms for public consultation.
"It is a concern that only one in five Australians access financial advice. These reforms will restore trust and confidence in the sector following collapses such as Storm, Westpoint and Trio. They also remove the red tape that has prevented low-cost, good quality advice being delivered to millions of Australians."
"These reforms are in fact a growth strategy for the financial planning industry," Mr Shorten said
The first tranche of the draft Bill covers a number of key components of the FOFA reforms, including opt-in, the best interest duty and the increase in ASIC's powers to enforce the new elements of these reforms.
"The second tranche, which I expect to release for public consultation shortly, will include the ban on conflicted remuneration (covering commissions and volume payments), the ban on 'soft dollar' benefits, the ban on asset-based fees (where there is gearing), and the definition of intra-fund advice. I will also be announcing at that time my decision on the replacement of the accountants' exemption," Mr Shorten said.
"The Coalition's Financial Services Reform Act in 2001 failed to deliver on its promise to consumers because, unlike the Gillard Government, they didn't make the tough decisions on commissions or soft dollar."
The best interest duty requires financial planners and advisers to act in the best interests of the client, and to give priority to the interests of the client in the event of conflict between the interests of the client and the interests of the individual providing the advice, or their employer.
The 'opt-in' measure requires a financial adviser or planner to send a renewal ('opt-in') notice every two years to new clients, as well as an annual fee disclosure statement to all clients. There will be significant flexibility in terms of how advisers are able to discharge the opt-in obligation.
Rice Warner have estimated the cost of opt-in to be around $11 per client. This includes set-up costs and the cost of chasing up clients who are charged on-going fees but who advisers may not be in regular contact with.
"Opt-in won't create a significant new impost for advisers who are in regular contact with their clients," Mr Shorten said
The extension of ASIC's powers will give the regulator the capacity to act at an earlier stage if it has concerns about individuals or a licensee. For example, it enables the Commission to ban a person who is not of good fame and character or not adequately trained or competent to provide financial services (in essence they are not a fit and proper person).
The ban on risk insurance commissions will apply to commissions on group life insurance in all superannuation products, and to commissions on any life insurance policies in a default or MySuper product from 1 July 2013.
"These reforms will mean that MySuper will be commission-free," Mr Shorten said.
The exposure draft and explanatory memorandum is available on the Treasury website today. Interested parties are invited to make written submissions on the draft legislation by Friday 16 September 2011.
"With broad agreement among stakeholders that the ban on soft dollar benefits should include life insurance outside superannuation I have decided to extend the ban in order to provide increased consumer protection and certainty for business," he said.
The Government has also clarified that the reforms will not unfairly impact the stockbroking industry, with Minister Shorten today confirming that traditional remuneration models in the stockbroking industry will not be unduly impacted as a result of the reforms. For example, stamping fees or similar payments relating to capital raising will be permitted in order to preserve an important channel for companies to continue accessing the retail investor market in order to raise capital.
"Where brokers undertake financial planning activities, the ban on product commissions will of course still apply, ensuring there is no gap in protection for consumers."
The ban on conflicted remuneration (including the ban on commissions) will not apply to existing contractual rights of an adviser to receive ongoing product commissions.
This means that, in relation to trail commissions on individual products or accounts, any existing contract where the adviser has a right to receive a trail commission will continue after 1 July 2012, or in the case of certain risk insurance policies in superannuation, 1 July 2013.
Treasury will release a public consultation paper by the end of the year on restricting the term 'financial planner' in the Corporations Act 2001 (Corporations Act).
"The ongoing consultation around these reforms has been difficult and robust and, as Minister, I thank everyone involved for their time, efforts and patience," Mr Shorten said.
29 August 2011
Measures contained in the draft Bill
Best interest obligation
The draft Bill proposes to require a person when providing personal advice to a retail client to act in the best interests of the client, and to give priority to the interests of the client in the event of conflict between the interests of the client and the interests of the individual providing the advice, the licensee and the authorised representative (where different).
The principle guiding the application of the best interests obligations is that the objectives, financial situation and needs of the client must be the paramount consideration when providing advice. The duty includes steps that advisers must follow in acting in the best interests of the client. The penalty for breaches of the obligations will rest with the authorised representative or licensee with a maximum penalty of $250,000 for individuals and $1 million of corporate entities.
Amendments are also made to the existing requirements in the Corporations Act to have a reasonable basis for advice and to warn clients in particular situations. These amendments are necessary to make these existing requirements consistent with the proposed best interest obligations. The amendments include de-criminalising these requirements, so they have the same penalty as the best interest obligations.
The draft Bill also includes an obligation on licensees to take reasonable steps to ensure their representatives' compliance with the best interests obligations. Further, there is an exemption created for authorised representatives, so they do not breach the obligations in situations where the breach resulted from reasonable reliance by the authorised representative on information or material provided by the licensee.
Under the final formulation of the compulsory renewal requirement, if an adviser is to charge an ongoing fee to a retail client, the adviser must provide a renewal ('opt-in') notice every two years to the client, as well as an annual fee disclosure statement including the dollar amount of fees. The opt-in will apply to new clients from 1 July 2012.
There will be significant flexibility in terms of how advisers are able to discharge the opt-in obligation. One way for an adviser to renew their services, would be to raise the matter in a face to face meetings. Many advice practices already use this method.
Those advisers who charge on-going fees but do not have regular face to face meetings with their clients can use electronic channels such as phone or internet and could potentially use a record of advice to record the renewal. For example, the client could fill a short form online and clicking a "send" button (that sends the email).
If the client does not renew the adviser's services by 'opting in' to the renewal notice, they are assumed to have opted out and an ongoing advice fee can no longer be charged. The client is also entitled to recoup any ongoing fees that are charged in the event that the adviser fails to send either a fee disclosure or renewal notice. Only those advisers intending to charge ongoing advice fees to retail clients need to provide the notices.
There will also be flexibility in how advisers construct the disclosure and renewal notices, and the method by which clients can opt-in. For example, the fee disclosure statement is not intended to be complex or lengthy and could be as simple as one page.
Where an adviser continues to charge an ongoing fee after a fee arrangement terminates as a result of the renewal notice obligation (either after a client chooses not to renew, or does not respond to the renewal notice), they will be subject to a civil penalty. Because a breach of opt-in is likely to be relatively less serious than, for example, a breach of the best interests duty, it is subject to a lower maximum penalty ($50,000 for an individual and $250,000 for a body corporate) and would be proportionate (to the extent any action is taken at all). ASIC would have the ability to look at the gravity of the breach.
Enhancements to ASIC's powers
The draft Bill contains provisions to enhance the ability of the Australian Securities and Investments Commission (ASIC) to supervise the financial services industry through changes to its licensing and banning powers. These amendments include:
â¢ A change to the licensing threshold so that ASIC can refuse or
cancel/suspend a licence where a person is likely to contravene its obligations.
This sets a higher standard than the current threshold which is that ASIC can
refuse or cancel/suspend a licence where a person will not comply with its
â¢ An extension to the statutory tests so that ASIC can ban a person who is not
of good fame and character or not adequately trained or competent to provide
financial services (in essence they are not a fit and proper person);
â¢ A change to the banning threshold so that ASIC can ban a person if they are
likely to contravene a financial services law. This sets a higher standard than
the current threshold which is that ASIC can ban a person if they will not
comply with a financial services law; and
â¢ Clarification that ASIC can ban a person who is involved, or is likely to be
involved, in a contravention of obligations by another person.
Clarification of other FOFA elements
Treatment of insurance commissions
In April this year, Minister Shorten announced the Government would ban up-front and trailing commissions and like payments for both individual and group risk (life) insurance within superannuation from 1 July 2013. The ban would not extend to risk insurance outside of superannuation.
Following extensive consultation and feedback from industry since this announcement, the Government has decided to modify the final position such that the ban will apply to commissions on group life insurance in all superannuation products (including both Default/MySuper products and Choice products) and to commissions on any life insurance policies in a Default/MySuper product from 1 July 2013.
This means that commissions on individual life insurance policies within superannuation would only be allowable on Self Managed Superannuation Funds and Choice products.
By 1 July 2013 the industry will be required to unbundle disclosure so the dollar and percentage value of commissions are disclosed for all new and renewed policies. This will enable customers to see the impact of commissions on their premiums.
A claw-back provision enables life insurance companies to recover some or all of the commission paid if a policy turns over early. The Government will work with industry and consumer groups to introduce uniform "claw-back" provisions to remove the incentive for some advisers to shop around for the most generous claw-back arrangements.
High upfront commissions have the potential to increase churn. Level commissions on replacement polices are an effective way of addressing this issue. The Government will work with industry and consumer groups on the most effective way of implementing this reform.
Conflicted remuneration, including the treatment of life insurance commissions, will be covered in the second tranche of FOFA legislation.
Extension of ban on soft dollar benefits
Advisers should not accept benefits that have the potential to influence their advice, including overseas trips or expensive business equipment.
Today the Government announces an extension of the ban on soft dollar benefits to include non investment linked life insurance outside of superannuation (but not general insurance).
The April 2011 announcement stated that the ban would apply to the same products as the broader ban on conflicted remuneration. This meant the ban would apply to retail investment financial products and life insurance within superannuation, but did not apply to risk insurance outside of superannuation (including both life and general insurance).
Following further consultation, the Government has decided the ban on soft dollar benefits will apply more broadly to include non investment linked life insurance outside of superannuation (but not general insurance). This would mean that an adviser could not accept a soft dollar benefit unless it explicitly relates to a general
insurance product, or is otherwise permissible according to legislation and/or regulations.
The bans on conflicted remuneration, including the ban on soft dollar benefits, are expected to be covered in the second tranche of FOFA legislation.
Application of the reforms to stockbrokers
The core activities of the stockbroking industry will not be unduly impacted by the FOFA reforms.
The Assistant Treasurer today clarified that there will be a carve-out to allow "stamping fees" or similar payments relating to capital raising in order to preserve an important channel for companies to continue accessing the retail investor market in order to raise capital.
The remuneration of brokers employed by broking firms will not be unfairly impacted so that employee brokers can continue to be remunerated on the brokerage they generate, including where their remuneration is set as a percentage share of the firm's income from broking fees.
The Future of Financial Advice reforms were announced by the Government on 26 April 2010 in response to a Parliamentary Joint Committee report which was commissioned in the wake of the collapse of Storm Financial and Opes Prime. While the final report made recommendations in relation to financial advice, none of these related specifically to stockbroking.
The Assistant Treasurer confirmed that other aspects of the reforms, including the obligation to act in the best interests of clients, would have full application to brokers where they provide financial advice to retail clients.
Grandfathering of existing arrangements
Following legal advice from the Australian Government Solicitor, the Government has determined that the ban on conflicted remuneration (including the ban on commissions) will not apply to existing contractual rights of an adviser to receive ongoing product commissions.
This means that, in relation to trail commissions on individual products or accounts, any existing contract where the adviser has a right to receive a trail commission will continue after 1 July 2012, or in the case of certain risk insurance policies in superannuation, 1 July 2013. This means that trail commissions will continue to be paid in these circumstances.
However, it is proposed that the ban on conflicted remuneration (including volume payments) would have some application to existing trail arrangements from platform operators to licensees or dealer groups. The reforms will prohibit future payments to licensees (or their representatives) in respect of new investments through a platform, but will grandfather future payments to licensees (or their representatives) in respect of investments in a platform accumulated prior to 1 July 2012. In short, this means that the level of volume payments from platform providers to dealer groups will 'crystallise', and should not increase in size after the commencement of the reforms on 1 July 2012.
In relation to the ongoing fee (or 'opt-in') arrangements, this measure will apply prospectively to new arrangements with new clients entered into after 1 July 2012. This means that opt-in will not apply at all to existing clients.
The best interest duty will have full application to anyone providing personal financial advice to retail clients from 1 July 2012.
Restriction of use of the term 'financial planner'
Treasury will release a public consultation paper by the end of the year on restricting the term 'financial planner'. This is consistent with Minister Shorten's announcement in April this year that Treasury will provide the Government with a recommendation as to whether the term 'financial planner/adviser' should be defined in the Corporations Act and its use restricted.