Assistant Treasurer Bill Shorten has tabled the second tranche of the Future of Financial Advice (FOFA 2) draft legislation, spurring industry response over the keenly awaited best-interest duty component of the reforms.
Shorten gave a first and second reading in Parliament yesterday of the second part of the reforms.
FOFA 2 would enshrine in law a ban on most product-related commissions and would clarify the legal definition of best interest duty, a legal requirement that advisers act in clients’ best interest and put the clients’ wellbeing ahead of their own.
While the commission ban, or conflicted remuneration, component of the reforms has been widely telegraphed, the industry has been awaiting legal clarification of the best interest duty.
“For the majority of advisers, this merely codifies how they already go about their business in dealing with clients,” Shorten told Parliament yesterday.
“For those advisers that have not always put their clients’ interests first, this reform will no doubt require them to make changes to the way that they do business. This can only be a good thing, both for the client, and for the advice industry generally.”
Many in the industry regard best interest as the centrepiece of efforts to restore trust in financial planners and advisers and have spent hours on consulting and negotiating to get it right. At issue is whether best interest should be largely based on ethics or compliance.
Shorten effectively said the best interest duty did both, providing conduct guidelines and clarifying steps required for compliance.
“It is true that this will ultimately lead to better advice in many cases, but first and foremost it is about regulating conflicts, not the intrinsic quality of the advice provided,” he said.
Shorten said the best interest duty did not require advisers give the best advice nor did it invoke punishment if, with the benefit of hindsight, the advice did not prove to be perfect. It was not about guaranteeing clients the best investment returns on products, he said.
“In being able to satisfy the duty, the Bill strikes a balance between certainty and flexibility for the adviser. The duty requires the provider of the advice to take steps that would be reasonably regarded as being in the best interests of the client, given the client’s relevant circumstances,” he said.
Both the Association of Financial Advisers and the FPA broadly supported the measure. However, the Financial Services Council (FSC) said the best interest duty as set out yesterday was confusing and costly.
FSC chief executive John Brogden said the body’s legal advisers had said the measure was unworkable in practice and would give rise to significant unintended consequences if not amended.
“This duty undermines a core objective of the FOFA reforms – to increase the availability and accessibility of advice,” FSC chief executive John Brogden said.
“The Financial Services Council supports a best interest duty. However, the legislation announced today will create unprecedented uncertainty for consumers and advisers.
“Our legal advice tells us this legislation would be very difficult to work with from the point of view of understanding what it means and how it would apply in practice.”
He said the Best Interest Duty is the foundation of the entire reform package and without a clear and objective measure to test whether an adviser has acted in the best interests of their client, advisers will be exposed to significant risk and the cost of advice will go up.
“To make matters worse, no reputable financial services provider will be able to offer scalable advice under this particular duty – this will be to the detriment of millions of Australians,” Brogden said.
Meanwhile, industry bodies were putting the finishing touches on submissions to the Parliamentary Joint Committee, due today, on FOFA tranche one.
No debate is scheduled for FOFA as Parliament winds down for 2011 and FPA general manager of policy and government relations Dante De Gori said the reforms would not be debated until March.
