FOFA - signed, sealed ... delivered?

After three eventful years with extensive consultation and lobbying from all sides, the financial services industry finally has a clearer picture on what the future holds. The journey hasn’t been easy, writes Chris Kennedy.

FOFA

After several years in regulatory limbo the financial services industry finally has a clearer glimpse of its future, with the heavily amended Future of Financial Advice (FOFA) reforms having passed a parliamentary vote on 22 March 2012.

Following seemingly endless consultations, multiple tranches and dozens of amendments, the industry now has a confirmed state date and an indication of what it will need to be prepared for come 1 July 2013.

Related: Removing the accountants' exemption

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However, the devil in the detail is yet to be revealed as the industry now begins to move from a lobbying phase to an implementation phase.

Consultation will continue on many of the specifics, with the industry still awaiting clarity on several key areas, including how scaled advice provisions will work in practice and how these will fit with the best interest test. Professional bodies will also be keen to see what kind of a view the Australian Securities and Investments Commission (ASIC) will take to professional code of conduct requirements.

The process

The Parliamentary Joint Committee on Corporations and Financial Services – colloquially known as the Ripoll Inquiry – was prompted largely by several major and costly advice and product failures such as Storm Financial, Opes Prime and agribusiness managed investment scheme providers, including Timbercorp and Great Southern.

The findings were handed down in November 2009, with recommendations including the introduction of a statutory best interest duty for financial advisers, a banning of payments from product manufacturers to advisers, and increasing the powers of ASIC to ban industry participants.

Following the Ripoll Inquiry, then-Minister for Financial Services, Superannuation and Corporate Law Chris Bowen announced an overhaul of financial advice in April 2010 that incorporated major Ripoll recommendations such as a best interests duty, a ban on conflicted remuneration structures and increased ASIC powers.

It also included provisions to increase the availability of low-cost ‘simple advice’ or ‘intra-fund advice’ within a superannuation context, the prohibition of percentage-based fees on geared products, the removal of the accountants’ licensing exemption permitting accountants to advise on the establishment and closing of self-managed super funds (SMSFs) without an Australian Financial Services Licence and implementing simplified product disclosure statements.

The initial paper also proposed an investigation conducted by Richard St John on the need for a statutory compensation scheme and a review of the appropriateness of the existing method of classifying unsophisticated and sophisticated investors, or retail and wholesale clients (with unsophisticated or retail clients deemed to require a higher threshold of investor protection).

Consultation on the reforms began the following month on 17 May 2010. In September, the financial services portfolio changed hands, being taken over by Bill Shorten who in November 2010 unveiled a 16-member advisory panel for financial advice and professional standards.

The panel, chaired by ASIC’s Greg Medcraft and featuring representatives from the Association of Financial Advisers (AFA) and Financial Planning Association (FPA) as well as other representative bodies, large planning organisations, industry funds and others commenced sitting in December 2010.

Throughout a heavy consultative period that stretched close to two years, a large number of stakeholders submitted recommendations, including in response to four consultation papers.

An options paper examining whether there should be a distinction made between wholesale and retail clients was announced on 24 January 2011 and closed on 25 February 2011. It received 45 submissions, 31 of which were public.

A review of compensation arrangements for consumers of financial services who lose their money through the misconduct of a financial service provider was announced on 20 April 2011 and closed on 1 June 2011. It received 28 submissions, 23 of which were public.

Then, on 26 April 2011 the exposure draft and explanatory memorandum (EM) for the first iteration of FOFA legislation was released for consultation.

It featured a stepped up proposal to ban all trailing and up-front commissions and like payments from 1 July 2013 and a broad ban on volume-based payments.

It also proposed a ban on all soft dollar payments greater than $300 and a limited carve-out for basic products from the ban on certain conflicted remuneration structures and best interests duty.

The announcement also included one of the most controversial and disputed aspects of the entire FOFA process: a prospective requirement for advisers to get clients to opt-in (or renew) their advice agreement every two years from 1 July 2012 – a proposal that was not included in any form in the Ripoll Inquiry.

The Government also indicated it would consult on whether to extend the ban on conflicted remuneration to risk insurance and consider a legal restriction on the use of the term financial planner/adviser.

Over almost five months of consultation until the closing date of 16 September 2011 the legislation received 47 submissions, 44 of which were made public.

The first tranche of draft legislation was released on 29 August 2011, covering key components including opt-in, the best interest duty and the increase in ASIC’s powers.

It referenced a study from actuarial firm Rice Warner, the findings – which were hotly disputed by several major industry participants including the Financial Services Council (FSC), FPA and AFA – that the cost to industry of opt-in would be $11 per client.

The first tranche also modified the ban on risk insurance commissions, such that the ban would only 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.

It also clarified that the ban on conflicted remuneration (including the ban on commissions) would not apply to the existing contractual rights of an adviser to receive ongoing product commissions – in other words, existing contracts would be grandfathered.

This tranche was tabled in parliament on 13 October 2011, including an eleventh hour change to include a retrospective annual disclosure requirement, believed to have been included at the behest of the Industry Super Network (ISN).

It sparked immediate objections from the AFA and FPA, who each claimed the complexity of the requirements would drive up administrative costs.

On 28 September 2011, the second FOFA tranche was released, clarifying a ban on volume-based shelf-space fees and asset-based fees on geared funds.

The second tranche also limited the ability of dealer groups to conduct offshore conferences and introduced a requirement for 75 per cent of conference time to be spent on professional development.

A further bill was introduced to parliament on 24 November 2011, which clarified the ban on conflicted remuneration and allowed for a continuation of volume-based payments in circumstances where the party accepting the payment is able to demonstrate the payment is not conflicted.

The industry was largely supportive of a crackdown on soft dollar benefits and a ban on conflicted remuneration. 

Several frenetic months of campaigning followed, with the industry focusing particularly on independent MPs Andrew Wilkie and Rob Oakeshott in its attempts to get some of the more controversial aspects of the legislation such as opt-in and increased disclosure requirements removed or altered.

The industry was also vocal in its attempts to negotiate a delayed start date to the reforms. As 2011 came to a close and the legislation was still nowhere to be seen, it seemed impossible that the industry could be expected to implement a raft of as yet unknown changes by 1 July 2012 – yet still, the announcement finally confirming the only possible outcome did not come until 14 March 2012.

By this time, several industry participants including ANZ and IOOF indicated they had already spent considerable time and money attempting to prepare their systems as best they could in the event the Government still attempted to hold on to a 1 July 2012 start date.

Despite the lateness of the announcement, the extra year transition time was welcomed by many stakeholders, including the FPA, FSC, AFA, ISN, Association of Superannuation Funds of Australia (ASFA), Self-Managed Super Fund Professionals' Association (SPAA) and institutions such as ANZ, AMP, MLC and BT.

Then, a week later on 22 March 2012, several hours before the legislation was voted on in the House of Representatives, Shorten announced further amendments to the bill.

The changes notably included a watering down of the hotly contested opt-in proposal – such that planners who are members of a professional association and bound by an ASIC-approved code of conduct that would obviate the need for an opt-in measure would be exempt from opt-in requirements from 1 July 2015.

Shorten also indicated he would move to enshrine the term ‘financial planner/adviser’ in law – a move for which the FPA has campaigned around 20 years.

The changes attracted particular attention because they closely matched suggestions contained in a joint proposal between the FPA and ISN that was leaked to Money Management.

It has not subsequently been made clear whether the proposal arose as an initiative between the two industry bodies or whether the dialogue was initiated by Shorten in an attempt to find a compromise to the disputed opt-in legislation with independent MPs to ensure the passage of the legislation.

What does seem clear, is that a compromise was needed between the Government and the Independents regarding the disputed opt-in aspects of FOFA if the legislation was to pass.

FPA chief executive Mark Rantall told Money Management that the FPA had spoken to many stakeholders including the ISN, independent MPs and the Government in a frenetic last week of negotiations, adding that the Government and the Independents were the only entities with the power to strike a deal.

ISN chief executive David Whiteley told Money Management that the ISN and FPA had attempted to find some common ground and that ultimately the amendments were developed through the Government’s negotiations with the Independents “in an effort to deliver a workable solution that would both deliver on the objectives of the reforms and gain the support of the Independents”.

“The industry is often criticised for engaging in too little dialogue, so we believe discussions between the various stakeholders should be recognised as a constructive and positive step,” he said.

The FPA remains and has always been opposed to opt-in in any form, while Whitely says the ISN supports the amended version as it provides the industry with an alternative, so long as the code of conduct is not viewed as a “get out of jail free card”.

However, Whitely says he would have preferred opt-in apply to existing contracts to allow existing clients to review conflicted payments.

The result was the passage of the amended legislation through the House of Representatives late that evening with the support of independent MPs, including Rob Oakeshott.

A series of 30 amendments proposed by Joe Hockey – including the complete abolition of any opt-in measurements within the legislation and a delayed start date for compliance with the legislation to 1 July 2013 – were voted in the negative by the House.

A series of 18 amendments put forth by Shorten, predominantly technical changes to time frames around fee disclosure statements as well as the code of conduct alternative to the opt-in requirement, but not including a deferral of the start date, was voted on in the positive.

Shorten has since indicated another amendment deferring the start date of hard compliance with the reforms to 1 July 2013 will be passed in the winter sitting of parliament.

What next?

The industry now moves from a lobbying phase to an implementation phase – consulting and working with ASIC and Treasury to get the details right.

“A lot of the legislation has been passed, but a lot of detail around the ‘how’ is missing because it is subject to an explanatory memorandum or ASIC regulation guidelines, so there is still a lot of work to be done,” says the FPA’s Rantall.

There is a question mark over what will be included in the code of conduct that will enable it to obviate the need for opt-in.

ANZ's general manager advice and distribution, Paul Barrett, questioned whether the code would be required to place a ban on asset-based fees – and if it did, planners may prefer to deal with a biannual opt-in rather than overhaul their business model.

Rantall says that with asset-based fees not dealt with in the legislation, he did not anticipate ASIC then looking to force a ban on them. It will be important to ensure the bar is set at an appropriate level to ensure professionalism, but where advisers will still want to participate, Barrett says.

FSC chief executive John Brogden says the current definition of best interest duty is too wide and contains contradictory clauses, and he would like to see an amendment to scaled advice provisions such that a client can instruct the adviser as to the scope of the advice they are seeking.

For the provision to work, it is critical that the scope of adviser is clearly outlined, he says. Rantall says the biggest question mark here is whether the legislation will adequately provide for the provision of scaled advice.

Rantall was pleased by the removal of prospective additional disclosure requirements, and said the FPA never supported additional disclosure because it added to the burden of planners without providing any additional consumer protection.

We are yet to see an EM dealing with additional disclosure, but Rantall remained hopeful the measures would not be applied to existing clients.

Although the move to enshrine the term “financial planner/adviser” in law is technically no closer to being legislated (other than the public commitment from Shorten), it is warmly welcomed by the FPA and AFA.

Rantall described it as a great consumer protection mechanism and a legitimisation of the profession of financial planning.

AFA chief executive Richard Klipin said it was a positive move that would help the industry move towards being a profession.

The Coalition – and in particular, Shadow Treasurer Joe Hockey and Shadow Assistant Treasurer Mathias Cormann – has been very vocal in their opposition of opt-in measures, and Cormann has made the unusual move of publicly declaring a pre-election promise to remove opt-in provisions should the Coalition be returned at the next Federal election.

The statement was welcomed by Klipin, who said the AFA supported the Coalition’s proposed amendments to the legislation.

The major associations universally welcomed the open and inclusive approach taken by Treasury, and ASIC thus far in dealing with the reforms.

Stronger Super

The Government’s Stronger Super reforms are a response to the Super System Review chaired by Jeremy Cooper, which was commissioned in May 2009 and handed down its final report in June 2010.

The Government announced its response to the review in December 2010 with the initial Stronger Super release in principle supporting 139 of Cooper’s 177 recommendations.

It said it was mindful of three key issues identified in the review: high fees, a lack of competition delivered by choice of fund, and that there was too much tinkering in superannuation.

The three main areas of focus for the reforms were the introduction of a new low cost and simple default superannuation product called ‘MySuper’, heightened duties for superannuation trustees, and a streamlining of super fund administration via Cooper’s SuperStream proposals.

On 1 February 2011 Minister for Financial Services and Superannuation Bill Shorten announced a peak consultative group to be chaired by Paul Costello, featuring the heads of industry bodies including the FSC, ISN, ASFA, Australian Institute of Superannuation Trustees (AIST), SPAA, as well as legal, consumer group, university and union representatives.

In September 2011 the Government announced its final response to the Cooper Review, introducing a set fee requirement for MySuper products, a MySuper transition timeline for default members, an auto-consolidation requirement for inactive member accounts with balances under $1,000 and increased employer contribution reporting requirements.

In March this year, laws were passed in parliament approving an increase in the superannuation guarantee to 12 per cent and the introduction of the Low Income Super Contribution.

SuperStream

Possibly the most unanimously supported proposal among all the regulatory changes across financial services in the past few years – SuperStream – aims to reduce the reliance on paper forms with increased use of web-based applications and the use of member tax file numbers as the primary locator of member accounts.

There will be a phased timeline for the introduction of improved data standards, while funds will be required to automatically consolidate inactive accounts from January 2013.

The resultant streamlining of super fund administration should benefit members by reducing both costs and the amount of time member funds spend uninvested.

The initiative has been strongly supported by stakeholders including the FSC, ASFA, AIST, ISN and major super funds. FSC chief executive John Brogden says the biggest savings to be derived from Stronger Super will come from SuperStream, and it is critical to ensure the measure is delivered on time.

ISN chief executive David Whitely says the effectiveness of the initiative will depend heavily on the co-operation of small to medium sized employers adopting proposed data standards.

MySuper

Cooper’s MySuper proposals were far more contentious, which Brogden said the FSC never supported but would work with the Government to improve.

The legislation is yet to go through parliament, but as it stands funds will be able to offer a MySuper product from 

1 July 2013, and from 1 October 2013 employers must make contributions for employees who have not made a choice of fund to a fund that offers a MySuper product in order to satisfy superannuation guarantee requirements.

There have been questions raised over the timeliness of the reforms, with ASFA’s general manager of policy and industry practice Margaret Stewart saying it would be difficult for some trustees to ensure they are ready to receive MySuper contributions by 1 October 2012, given upcoming SuperStream changes, while the Australian Prudential Regulation Authority (APRA) is also due to release new draft prudential standards shortly.

The Productivity Commission is also conducting a review of the processes by which default funds are nominated in awards to assess whether the processes are sufficiently open and competitive.

Brogden says it would be absurd for the Government to commoditise super as it has in MySuper then prohibit some players from participating in the award structure.

The sentiment was echoed by FPA chief Mark Rantall and AFA chief Richard Klipin, who each called for an end to the current “uncompetitive” arrangements.

SMSFs

The Government has said it will adopt many of Cooper’s recommendations with regards to SMSFs, including amending the registration and rollover processes to crack down on the illegal release of funds, introducing proof of identity checks, and increasing the standards required of auditors.

A recommendation to ban SMSFs investing in collectibles and personal use assets has not been adopted.

Governance

The Government will also consult in relation to proposals to increase the regulatory oversight of APRA, and to increase the governance obligations of fund trustees.