There's more to financial services reform than FOFA

Rather that focusing exclusively on the Future of Financial Advice reforms, the Government needs to clear up all the outstanding policy issues in financial services, writes Mike Taylor.

It should be obvious by now to any objective observer of the Government’s efforts around the Future of Financial Advice (FOFA) reforms that it is dealing with much more than the issues originally outlined.

While commissions, volume rebates, opt-in arrangements and the interpretation of fiduciary duty have all captured the headlines, it is clear that the changes are much more broad-ranging and will require substantial amendments to a number of crucial acts — the Tax Act, the Financial Services Reform Act and the Corporations Act.

Indeed, the longer discussions of options around FOFA go, the more obvious it becomes that there exists a need for the Assistant Treasurer and Minister for Financial Services, Bill Shorten, to be much more frank about the ultimate outcome.

What financial planners and other industry practitioners need to understand is that the changes flowing from FOFA will require amendments to regulations attaching to the Tax Act with respect to the treatment of legacy products and amendments to the Corporations Act with respect to the definition of ‘retail’, ‘wholesale’ and ‘sophisticated’ investors.

Then too, there are the amendments to the Financial Services Reform Act that must flow from the imposition of a fiduciary duty and other requirements around the status of volume rebates.

While many people who have been part of the discussion process with the Federal Treasury believe that the fallout from FOFA will be reasonably narrow and limited, the evidence appears to be pointing to the contrary.

Much will depend on how the legislative draftsmen construct the changes, but it would seem virtually impossible for the Government to grandfather legacy trailing commissions in circumstances where financial planning clients are going to be given the opportunity to ‘opt-in’ and, by definition, review precisely where their money is invested and what they are paying.

Equally, if clients are to review the status of their investments, it is entirely likely such a review will impact legacy products and it would seem incumbent upon the Government to ensure no disadvantage by finally addressing the tax issues surrounding those products.

The release last week of an options paper dealing with the definition of ‘retail’ and ‘wholesale’ investors has raised a separate set of issues that also begs to be addressed.

All in all, while Shorten might want to focus purely on the FOFA reforms, it is clear that the job of tidying up financial services anomalies is much broader than that. It is time to start clearing up all the outstanding issues and to start considering all the consequences.