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CLIENT UPDATE 10 May 2011

Future of Financial Advice Reforms Background On 28 April 2011, the Government released its Information Pack titled ‘Future of Financial Advice 2011’ (FOFA Reforms). FOFA Reforms sets out the Government’s response to the Inquiry of the Parliamentary Joint Committee on Corporations and Financial Services into financial products and services. It takes into account the consultation process undertaken by the Government in the preparation of its response. FOFA Reforms contains a number of reforms which the Government will implement in seeking to improve the quality of financial advice, expand the availability of more affordable forms of advice and enhance retail investor protection. In this Client Update, we provide a summary of each of the reforms set out in the FOFA Reforms and the proposed timing for the introduction of each. Please note that consultation on many of the FOFA Reforms is continuing. The Government expects release draft legislation on the FOFA Reforms for public comment after the middle of 2001. Legislation giving effect to the FOFA Reforms is expected to be introduced into Parliament before the end of 2011.

Summary Of FOFA Reforms 1. Ban on conflicted remuneration to risk insurance provided through superannuation Summary of reform Up-front and trailing commissions (and like payments) for both individual and group risk within superannuation will be banned. However, the ban does not apply to conflicted remuneration to risk insurance outside of superannuation. Date effective 1 July 2013.

2. Opt-in arrangements to ongoing advice fees Summary of reform A compulsory 2-yearly renewal opt-in requirement will apply where an ongoing advice fee is to be charged to a retail client. An annual disclosure notice will be required to be given to the retail client setting out fee and service information for the previous and the next year and informing the retail client of the right to opt-out at any time of an ongoing advice contract.

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Date effective 1 July 2012

3. Ban on volume payments Summary of reform There will be a ban on any form of payment relating to volume or sales targets from any financial services business to dealer groups, authorised representatives or advisers. Anti-avoidance provisions are also likely to be enacted. The ban will not apply in relation to pure risk insurance or where employees are only advising on or selling their ADI employer’s basic banking products (see 8 below). Date effective 1 July 2012.

4. Ban on soft dollar benefits Summary of reform There will be a ban on soft dollar benefits, where a benefit is $300 or more (per benefit). For these purposes, a soft dollar benefit is ‘any benefit received by a financial planning firm, its representatives or associates, other than basic monetary commissions or direct client advice fees.’ A benefit which does not exceed $300 will be allowed, subject to a test to ensure that the soft dollar ban is not circumvented by small similar benefits given on a repeated basis. The ban will not apply to a benefit provided for the purposes of professional development and administrative IT services (provided certain criteria are met). Date effective 1 July 2012.

5. Best interests duty Summary of reform A person providing personal advice to a retail client will be required to act in the best interests of the retail client. If there is a conflict between the interests of the retail client and the interests of the person providing the personal advice or the providing entity, the retail client’s interests must be given priority.

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Advisers will only be required to take reasonable steps to discharge the duty. The duty cannot be contracted out. Date effective 1 July 2012.

6. Scaled advice Summary of reform The Government will amend the Corporations Act to introduce scaled advice. Scaled advice is advice about one aspect of a retail client’s needs (eg insurance) or about a limited range of issues, as opposed to holistic advice where advice is provided to the client on all aspects of their financial circumstances in a full financial plan. There will also be further consultation on whether intra-fund advice should be extended to facilitate simple, single issue personal advice on topics such as transition to retirement, intra-pension advice, nomination of beneficiaries, superannuation and Centrelink and retirement planning generally. Intra-fund advice will be carved out of the FOFA adviser charging regime. Date effective 1 July 2012.

7. Requirement for accountants to hold an AFS licence Status of reform The existing exemption permitting accountants to provide advice on the establishment and closing of self-managed superannuation funds without holding an Australian Financial Services Licence (AFSL) will be removed. Appropriate licensing measures are still under consideration. Date effective To be advised.

8. Carve-out from the ban on volume payments and best interests duty Status of reform There will be a limited carve-out from the ban on volume payments and the best interests duty for basic banking products where employees of an Australian Deposit-taking Institution (ADI) are advising on and selling their employer’s ADI basic banking products. The carve-out will not apply where an employee of an ADI provides advice on a combination of basic banking products and other more complex financial products.

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Date effective To be advised.

9. Use of the term ‘financial planner/adviser’ Summary of reform Treasury is considering whether the term ‘financial planner/adviser’ should be defined in the Corporations Act and its use restricted. Date effective To be advised.

10. Distinction between wholesale and retail clients Status of reform The Government is currently considering submissions in relation to the classification of clients as retail or wholesale. Date effective To be advised.

11. Simplified FSGs Status of reform The Government is currently consulting in relation to the improvement of Financial Service Guides (FSGs) so that they better disclose material restrictions on advice, any potential conflicts of interest and remuneration structures. Date effective Regulations to support simplified FSGs will be in place by 1 July 2012.

12. ASIC’s powers Status of reform ASIC in relation to the licensing and banning of individuals from the financial services industry will be strengthened. The changes will be included in the legislation implementing the FOFA Reforms. Date effective To be advised.

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13. Compensation arrangements Status of reform The Government has commissioned a review of the need for, and costs and benefits of, a statutory compensation scheme for financial services. A consultation paper entitled Review of compensation arrangements for consumers of financial services was released on 20 April 2011 seeking submissions by 1 June 2011. Date effective To be advised.

14. Asset-based fees on geared investments Status of reform Percentage-based fees will only be able to be charged on ungeared products or investment amounts. Consultation is ongoing. Date effective To be advised.

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For more information, please contact: Paul Cleary Partner

T: 02 8257 5760 M: 0407 052 170 paul.cleary@turkslegal.com.au

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Future of Financial Advice Reforms