Financial planners hampered by FOFA doubts

The Future of Financial Advice regime will become law from 1 July, but as the Financial Services Council’s Cecilia Storniolo points out, many questions vital to the financial planning community remain unanswered. 

The date 1 July 2013 does not mark the beginning of a new world order for Australians generally. But for the financial services industry and for financial advisers in particular, it does. 

From 1 July, all advice providers – not just those who may be legally able to use the term – will enter a new era with the mandatory start of the Future of Financial Advice (FOFA) regime, and possibly the Tax Agent Services Act (closely followed by MySuper). 

Together, these reforms are the most significant ever in financial services in Australia. Yet, with only weeks to go, they are yet to be finalised.  

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So what’s outstanding? The following is a list of known legislation and regulations yet to be finalised. 

FOFA regulations 

There are at least five FOFA regulations to be enacted. These include: 

1. Removal of a licensing exemption for accountants who provide financial advice:  This measure was announced by Minister Bowen in his 26 April 2010 FOFA policy announcement. It aims to provide a level playing field between accountants and financial advisers who give (for example) SMSF advice, by requiring that accountants only provide financial advice under an Australian Financial Services (AFS) licence.  
2. Grandfathering of benefits paid by platform and non-platform providers: This will repeal the platform provider grandfathering regulation enacted in late 2012. 
3. Provision of a legislative basis for performance pay for employees (think balance scorecard). 
4. Exemption of intra-fund advice from the FOFA opt-in measure; and, 
5. Provision for stockbroking activity exemptions from the conflicted remuneration provisions.  

Once enacted, any regulations which impact the Australian Securities and Investments Commission’s (ASIC’s) guidance, such as those affecting remuneration, will likely result in a re-issue of the applicable ASIC Regulatory Guide – such as RG246 on Conflicted Remuneration.  

Enshrinement 

Enshrinement was not an original FOFA measure. It was announced by Minister Shorten in his 28 April 2011 FOFA policy information pack. 

The enshrinement measure seeks to limit those who can use the titles of ‘financial planner’ and ‘financial adviser’ to AFSL personal advice providers.

Once it is passed into law (and from 1 July 2013), it is important that AFSL employees who do not fit within the definition of a ‘financial planner’ or ‘financial adviser’ do not use these exact or similar terms.  

The measure is contained within the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013 which has now passed the House of Representatives and awaits Senate approval in late June.  

Tax Agent Services Act (TASA)  

The Tax Laws Amendment (2013 Measures) Bill 2013 hit Parliament late May/early June and was ultimately referred to a Parliamentary Joint Committee for review.

The bill will require advice providers – not just ‘financial planners’ and ‘financial advisers’ – who provide tax advice in the context of financial planning to become registered tax (financial) advice agents from 1 July 2013. 

It is important to note that even general advice providers may need to come within the regime as the test under TASA is: 

• Does the advice recipient relay on the tax information/advice?; 
• Has the recipient paid for the information/advice?;  
• Was there any interpretation of the tax law in providing the advice? 

Having a little more time to consider TASA, we note that the regime operates generally at an individual level but does introduce the concept of licensee registration under a supervisory model.

Therefore, it only requires a ‘significant’ number of applicants within a licensee to register with the Tax Board. 

This supervisory model is a novel concept for AFSLs. Whilst we remain uncertain how this measure will work in practice, the concept is welcomed in principle as it affords the industry a potentially cost-saving measure for licensees and ultimately, for Australian consumers of these financial services. 

However, the concern is this measure will not enable advice providers to comply with their FOFA ‘best interest’ duty.

Under the best interest duty, the individual advice provider is required to have the expertise to provide advice on the relevant subject matter. If they do not have the expertise, then they must not provide the advice. 

To address this conflict between the two regimes, the industry has sought an urgent meeting with ASIC to understand how ASIC will interpret the best interest duty in light of TASA.  

There will also be a three-year transition time for industry participants to enter the new regime.

However, it will be important that those needing registration from 1 July 2016 ensure they have obtained all requisite formal education and experience and have the Tax Board confirm their  (re)registration before 1 July 2016.  

Given the truncated nature of the development of this reform for financial services, critical requirements – such as what formal education and  ‘relevant experience’ will need to be attained – are yet to be finalised by the Tax Board. 

If you haven’t looked into these reform measures or commenced your compliance plans, it’s time to do so now. 

While we understand that both of the regulators will be facilitative in their approach to compliance in the months post-1 July 2013, neither is likely to be sympathetic to anyone who simply ignores or avoids their new legal obligations.  

Cecilia Storniolo is the senior policy manager at the Financial Services Council.