AFA pushes back on ‘independence’ rules

The rules around the use of the term “independent” by financial planners remains too restrictive, according to the Association of Financial Advisers (AFA).

Reacting to statements issued by the Australian Securities and Investments Commission (ASIC) following the receipt of legal advice on the terms contained in Section 923A of the Corporations Act, AFA chief executive, Phil Kewin said he was not surprised by the regulator’s announcement.

“ASIC’s position reflects the tight restriction of the terms contained in Section 923A,” he said.

“We support the view expressed on asset-based fees, which correctly classifies asset-based fees as a fee model, rather than a factor influencing independence. We also welcome the clarification with respect to approved product lists (APLs) and the facilitative compliance period.”

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However, Kewin said the AFA’s view was that Section 923A of the legislation was unnecessarily restrictive as, in practice, there were very few licensees and financial advisers in Australia who would qualify under this strict definition. 

“This is a very restrictive definition that includes a range of factors that in our view do not impact upon what we consider to be independence in the delivery of advice,” he said. “It is our view that the test of independence should be in the eyes of the consumer and not influenced by structural considerations that are included in the current legislation.” 

Kewin said the AFA believed that an authorised representative of a licensee that would have been considered “non-aligned” with a broad APL (and a non-approved product process), could still be genuinely independent in their product selection even if they received commissions for their life insurance advice. 

“If, as is currently the case, every insurer offers commissions at a broadly similar level, which will shortly be restricted by the Life Insurance Framework (LIF), then how does the existence of commissions influence the independence of the selection of a product?” he asked.

“Equally, if a licensee receives volume bonuses, from a range of investment and superannuation product providers for existing pre-FOFA business, then how does this influence the independence of advice provided by the advisers to new clients? And, in many cases these volume bonus payments are not passed on to the advisers.”

Kewin said the AFA believed it was important that clients understood who was independent, impartial and unbiased.

“Many advisers have gone to great lengths to establish themselves and their businesses as ‘independent’ and ‘non-aligned’, often at great expense, yet only a few would now qualify under the current strict definition of ‘independent’,” he said. “It is obvious that these words cannot be used in the institutionally-owned space, however we do believe that they should be available for more than the current legislation allows.”

Kewin said the AFA would like to see legislative change to address this issue, to more appropriately restrict the use of these terms.