In the opening of The Minister for Financial Services, Bill Shorten's, Future of Financial Advice (FOFA) reform summary, one line stood out more clearly than any other: "All Australians have a stake in the success of these reforms."
Shorten's sentence is of course a truism - all Australians do have a stake in the success of the reforms. Though what is perhaps more poignant is that for those Australians who happen to also be financial services participants the reform stake for them is much higher.
On Wednesday 27 April this year, the federal government made its long awaited final announcement on FOFA. Twelve months in the making, the announcement brought with it a number of key changes.
The new elements of the reforms now require financial advisers to sign clients to 'opt-in' every two years if they wish to continue to receive ongoing advice. It also has established a ban on up-front and trailing commissions and like payments for both individual and group risk within super (only) from 1 July 2013, a broad ban on volume based payments, and the introduction of 'best interests' duty.
The FOFA changes also included a ban on any soft-dollar benefit that is $300 or more, on each benefit, excluding professional development and IT administration services, from 1 July 2012. As well, the changes included the formation of a new form of advice in 'scaled advice', and a recommendation as to whether the term 'financial planner' or 'adviser' should be defined in the Corporations Act and its use restricted.
At a media conference last week, Shorten said there were some people in the industry who would label the changes as going too far, while others believed they would find loopholes to get around the reforms.
In response, Shorten was direct to the point: "I don't believe they are too much, I do believe they are overdue. I don't believe there are people who simply think they can find loopholes."
Opt-in Mark 2
According to the government's information memorandum paper, the decision to revise the opt-in policy "reflects the need" to ensure that advisers do not charge ongoing, open-ended fees where the client is receiving little or no service. It is the government's belief that the policy also empowers clients that are receiving ongoing service to reconsider whether they are getting value for money.
Therefore after much consideration, the government has decided to amend the opt-in policy so that retail clients will have to agree (by opting in) to ongoing advice fees every two years from 1 July 2012.
"This will be supplemented by an intervening annual disclosure notice to be provided to the client detailing fee and service information for the previous and forthcoming year, informing the client of their right to 'opt-out' at any point in time to an ongoing advice contract," the paper said.
The government said a benefit of the revised opt-in rule is that by extending the policy to a two-year opt-in means advisers are in regular contact with clients, but provide some flexibility regarding implementation. While the government will continue consulting the industry on the practical details of the policy, it said current bedded down features of the revised opt-in will include the following:
The adviser being required to send a prescribed renewal notice no less than 30 days prior to the relevant two year anniversary date.
The notice needs to outline the fee the client paid in the previous year and a description of the services they received, and fee and service information for the forthcoming year as well as a note to the client alerting them to the fact they can opt-out at any stage.
The government said the policy then states that if the client does not respond to the notice or opts out, the adviser must not continue to charge the client an ongoing advice fee. The client therefore can not expect the adviser will continue to manage their financial matters.
"If the client is unresponsive to the renewal notice, the adviser can continue charging the client for an additional 30 day 'grace period' after the anniversary date," the paper said.
To further clarify, the government said only those advisers who intend to charge ongoing advice fees to clients need to send the renewal notice.
"Opt-in will apply prospectively, however issues around grandfathering arrangements will still be subject to further consultation," the paper said.
"At this time, it is not automatically assumed that a penalty would apply where an adviser charges an ongoing fee without seeking a client's renewal, or where the client opts out. However, the government will consult with industry and stakeholders on the possible need for a penalty provision for a breach of the opt-in policy as part of the ongoing implementation process.
Shorten said the government will work with industry and regulators to work through an "appropriate penalty system".
"We do not think that it is a jailable offence if you write to someone 90 days before the expiry of the contract and you do not get a renewal on the day. So it's not going to see thousands of financial planners being marched off into the courts," Shorten said.
"At this time, it is not automatically assumed that a penalty would apply where an adviser charges an ongoing fee without seeking a client's renewal, or where the client opts out."
Cost of opt-in
The cost of opt-in has been brought into question with the Shadow Minister for Financial Services and Superannuation, Senator Mathias Cormann declaring Shorten and the Labor government's reforms as being intent on making "Australia the world champions in red tape when it comes to financial advice".
"Clearly consumers across Australia should not be required to pay for financial advice that they don't need. It's important for fees that are charged to be transparent and for consumers across Australia to have the opportunity to opt-out out of any contractual arrangements with any financial advisers at any time or to go seek advice from another adviser," Cormann says.
"However to take it to the next step, and to force people by government mandate to re-sign contracts with their financial advisers every two years, provides too much red tape, unnecessary red tape and imposes significant additional costs," Cormann says. He says Treasury confirmed during recent Senate Estimates that opt-in would increase costs for the average small business financial advisory firm by about $50,000 per annum.
"These are costs that would be passed on to consumers. These costs will make financial advice less available, less accessible and less affordable for people across Australia who need it," Cormann says.
FPA (Financial Planning Association) chief executive Mark Rantall also believes opt-in will create cost pressures for industry participants.
"All of these [reforms] require changes to business models and operational models therefore I don't think anyone is arguing that there is not going to be some sort of cost [involved]," Rantall says.
"As for what that might be, we're looking to see the detail of the legislation as it comes into draft format to see how onerous these applications are. There is no doubt there will be some cost pressures to financial planning practices and many of those costs may be passed on to clients."
Rantall agrees with Cormann's sentiment that the introduction of opt-in and other FOFA reforms would be an administrative burden on the industry.
"I think the imposition of an opt-in certificate is going to cause administrative issues for financial planners and confusion for clients particularly when it's every second year," he says. "I think on the basis of banning commissions on investments and introducing a best interest responsibility I think the opt-in provisions are redundant and could well be removed as I think they will add to unnecessary red tape," Rantall says.
Count Financial chief executive Andrew Gale says the new two-year opt-in for financial planning arrangements had the potential to increase costs for consumers but it represented an improvement on the original one-year timeline.
Infocus Money Management director Darren Steinhardt has mixed views on opt-in.
"Good financial planning businesses already provide services that have a similar effect, of an annual renewal. But mandating it every two years is going to impose a cost on every financial planning business which they don't have now, ultimately driving up the costs of doing business," Steinhardt says.
"With Infocus I would imagine we would need to add one more staff member for each office to deal with opt-in and the cost of that would be around $50,000 each office," he adds.
Businesses could either bear additional costs if their margins are large enough, or pass it onto clients, Steinhardt says. "Given we are still coming out of the global financial crisis and the industry has had a margin squeeze in the last few years I can only see costs being passed onto consumers," Steinhardt says.
Financial advisory group, Yellow Brick Road agrees with the FOFA reforms on a broad level, including recommendations around opt-in.
"Opt-in provisions are entirely consistent with the hallmarks of a profession and a fee-for-service environment," Yellow Brick Road head of financial planning Scott Walters says.
MLC & NAB Wealth group executive Steve Tucker says with the introduction of a fiduciary duty for advisers, removal of commissions and ban on volume related payments, the company believes that an opt-in arrangement is redundant. Risk insurance ban
Since the former Minister for Superannuation and Corporate Law, Chris Bowen, announced the FOFA reform proposals last year there has been much speculation as to whether the government would extend its commissions ban to also include the risk insurance sector. In March this year, a number of industry leaders revealed their predictions on the direction in which a ban would head.
At the time, Financial Services Council chief executive John Brogden said:
"If I had to make a call right now I would say that the commission relationship on directly advised life insurance will stay untouched by and large and commissions on group insurance will be banned. Although there will be other forms of remuneration of course."
Brogden said part of the reason the government could not ban commissions on life insurance was because there were "only two ways to go" with no middle ground.
"You either leave them alone or you get rid of them altogether; there is no middle ground. You can't be saying no commissions on superannuation, no commission on investments, but we are going to allow an up to 50 per cent commission on life insurance," Brogden said. That's just too inconsistent for them [the government]. So it's either all in or all out and we think they are heading towards the all in approach, but they [the government] are differentiating very strongly between group and individual," he added.
A month later, the government has announced a ban on upfront and trailing commissions for both individual and group risk within superannuation from 1 July 2013. However, the government has decided not to extend the ban on conflicted remuneration to risk insurance outside of superannuation.
The government said the benefits of such a ban would improve the quality of advice, consumers will have the freedom to pay for insurance advice but won't be charged for services they don't receive.
"Accessing insurance through superannuation will remain attractive as preferential tax arrangements will remain. Those consumers who want alternative payment arrangements have the choice and flexibility of doing so outside the superannuation environment," the government's paper said.
"The government considers that other aspects of the FOFA reforms such as the introduction of a best interests duty, will ensure that clients are only advised to switch policies when it is in their best interests. However, 'churn' and the broader impact of the ban on commissions within superannuation are areas that the government will continue to monitor closely into the future," the paper said.
The Opposition's Cormann describes the Labor government's ban on commissions on risk insurance as a "very bad proposition".
"There is no objective reason for the government to treat commissions on insurance inside super differently from commissions on insurance outside super," Cormann says. "At present, very clearly the whole concept of banning commissions on risk insurance is a bad idea, it is something that was explored in the United Kingdom and they reversed a similar proposal before they even implemented it because they realised it was a bad idea," Cormann says.
Best interest test
As part of the FOFA reforms, the government said it would introduce a statutory best interests duty for financial advisers.
In it's decision to follow through with the duty, the government has recognised that the focus of the duty should be on how a person has acted in providing advice, rather than the outcome of that action. The government's paper said the duty should also not be interpreted as imposing trustee-style obligations on financial advisers, given the difference in roles between a trustee and a financial adviser.
"The legislation will provide that a person providing personal advice cannot contract out of this duty. Any ability to contract out of the duty would severely impair the ability of the duty to appropriately protect consumers," the government's paper said.
It said if a person considered that they could not provide advice that was in the best interests of the client in accordance with the duty, they must refuse to provide the advice. Financial liability for any breach of the duty will rest with the relevant providing entity, the paper said.
Volume payments/rebate ban
In April last year, the government's FOFA announcement proposed a ban on conflicted remuneration including volume-related payments. At the time, the proposed reform was focusing on the removal of payments that had similar conflicts to product provider set remuneration such as commissions.
Over the course of the government's industry consultation period, many participants pushed for a narrower view on this ban to allow volume bonuses to be paid from platform providers to dealer groups in select situations.
After considering the views of the industry, the government made the decision that if "structural reform" in the industry is to be achieved, all conflicted remuneration, including volume rebates from platforms to dealer groups, must end.
In line with this, the government amended its proposed volume rebate ban to include a broad comprehensive ban involving a "prohibition" of any form of payment relating to volume or sales targets from financial services business to dealer groups, authorised representatives or advisers.
Commenting on the government's volume rebate stance, a PricewaterhouseCoopers spokesperson says the government's announcements provided a sounder platform for all players to articulate a position on the "big strategic questions".
"Confirmation of the abolition of volume rebate payments from platforms to dealer groups will necessitate prompt action by those players dependent on these arrangements. Uncertainty remains on how the government will address 'white-label' and alternative platform ownership arrangements which could be used by affected dealer groups to address the proposed ban on volume rebates (these measures remain under consideration)," the Price Waterhouse spokesperson says.
The government expects to release draft legislation for public comment around July, with legislation to be introduced to Parliament before the end of the year.
