As the Federal Treasury reaches the final stages of its consultation process around the Future of Financial Advice reforms, Mike Taylor writes that the debate has seemed closed to the very people it is likely to most affect, financial planners.
How much input have financial planners had into discussions around the Government’s Future of Financial Advice (FOFA) reforms?
Furthermore, will the changes to the financial planning industry resulting from the FOFA proposals be fully tested by debate in the Federal Parliament or will many of them be implemented via regulation?
The problem for the financial planning industry as it closes out 2010 is that there is the very real prospect that the FOFA reforms will proceed through the Parliament with very little critical scrutiny in circumstances where the Federal Opposition has not indicated it has any significant concerns about the direction of the legislation.
That apparent absence of publicly stated concern on the part of the Opposition parties is despite the fact that it has been previously animated in opposing the agenda of the industry superannuation funds, particularly with respect to the implications of the Cooper Review.
It is not clear to what degree the financial planning industry has briefed the Opposition on its concerns about the FOFA reforms or how that concern will be manifested when the issues are ultimately debated in the Parliament.
Over the closing months of 2010 the Federal Treasury conducted extensive discussions around the proposed FOFA changes involving a range of parties and stakeholders including the Financial Services Council (FSC), the Financial Planning Association (FPA), the Association of Financial Advisers (AFA) and the Industry Super Network. However, individual planners have been denied a voice since the closing months of 2009.
The FOFA reforms grew out of the recommendations of the Parliamentary Joint Committee on Financial Services (the Ripoll Inquiry), and when that Parliamentary committee stopped taking submissions, the opportunity for individual planners to voice their opinion ended.
The most likely outcome of the FOFA reforms would be:
- a ban on commissions;
- a ban on volume rebates or, at least, key limitations;
- a requirement for planner clients to opt-in (possibly every three years); and
- the imposition of a fiduciary duty requiring planners to act in clients’ best interests.
As things currently stand, the question for the financial planning industry is not whether these changes will be introduced (they will), it is the manner in which they are implemented in circumstances where volume-based payments may still be allowed in some circumstances, where the opt-in arrangements might be every three or five years and where the legislative definition of ‘fiduciary duty’ may not be unduly draconian.
Still unclear is whether the Government will move to ban commissions with respect to the sale of insurance products — something that is unspecified in the FOFA reforms but specifically recommended in the final recommendations of the Cooper Review panel.
The Government wants the legislation and regulations evolving from its FOFA reforms to become applicable from 1 July, 2012.
That means that the time for discussion around the changes is rapidly drawing to a close in circumstances where it can take upwards of nine months to complete the logistical exercise of turning policy into legislation and then having the resultant Bill enacted in the Parliament.
And a factor which must be worrying many planners is that on all the available evidence, the FOFA reforms will serve to reinforce the dominance of the major banks and institutions.
An analysts report issued by UBS Investment Research last week made the position abundantly clear: It will be the smaller financial planning practices that struggle most to adapt to the changed environment.
“With the larger retail players already charging on a fee-for-service basis and adequately resourced to cope with additional compliance burdens, the FOFA reforms could be a net positive given the stress they may place on smaller groups,” the UBS analysis said.
This is a sentiment that has been endorsed by a number of senior executives who have been a part of discussions between the Treasury and groups such as the FSC and the FPA.
They have noted that “an unintended consequence” of FOFA may be that smaller planning groups are forced into the arms of their larger competitors by the demands of the new regime.
The reasons for this are simple, with the UBS analysis encapsulating the issue by pointing to the fallout from effectively banning volume rebates and enforcing annual, bi-annual or tri-annual opt-in arrangements for financial planning clients.
“From a planner perspective, a blanket volume-based payment ban is likely to marginalise certain planner models,” the UBS analysis said.
“Some retail players (mainly wrap providers) would be required to make extensive changes to payment methods and incentive structures.”
In circumstances where the Treasury has nearly finished its consultative processes with industry organisations and other major stakeholders, the next step in the process is likely to be a virtual exposure draft of the proposed legislation.
If financial planners want to use every opportunity to make their voices heard, for many, the first opportunity will be to lobby their local Parliamentarians in the context of the exposure draft.
