Planning policy - the complexity continues
The financial planning policy debate is far from settled and, as Mike Taylor reports, there are at least four factors in play likely to impact planners and the way they do business.
Financial planners have plenty of reasons to keep closely monitoring the policy developments capable of impacting their businesses.
Right now, in late June 2015, there are no fewer than four events in place capable of changing the way they do business or, indeed, their desire to keep doing business.
What are those events/factors?
1. The recommendations from the Financial Systems Inquiry (FSI).
2. The recommendations from the Parliamentary Joint Committee (PJC).
3. The negotiations flowing from the Trowbridge life/risk recommendations.
4. The continuing discussions between the Government and Opposition around the Future of Financial Advice (FOFA).
But when it comes to one, single event capable of determining whether some planners stay or go from the industry, then it is the discussion around the Trowbridge recommendations and the manner in which they will almost inevitably impact the profitability of life/risk advisers.
At the time of writing, the major stakeholders — the Association of Financial Advisers (AFA), the Financial Services Council (FSC) and the Financial Planning Association (FPA) — were still trashing out the terms of a joint position capable of being taken to the Assistant Treasurer, Josh Frydenberg, for sign-off.
What life/risk advisers must already know, however, is that the days of 120 per cent up-front commissions on the sale of life insurance policies to clients are over.
The chairman of the Life Insurance and Advice Working Group, John Trowbridge, recommended the removal of large, up-front commissions and, given the position indicated by the minister, that is something which has also been adopted by the industry.
Even before the FSC, AFA and FPA began trying to hammer out a mutually agreeable position around the Trowbridge recommendations, a number of the most significant licensees had moved to implement their own variations of a hybrid remuneration model.
The almost unilateral adoption of the hybrid remuneration models by the major licensees placed that model right at the heart of the agreement to be taken to the minister, but the issue then became the dimensions of the hybrid — whether 80/20, 70/30 or something decidedly less generous.
Also at issue, was whether the Government would allow a three to five year pause after the implementation of an appropriate hybrid model together with other changes to determine whether the new regime could be made to work.
While many life/risk advisers have signalled their unhappiness with the developments flowing out of the Trowbridge recommendations, they would likely be even more unwilling to accommodate the level commissions originally canvassed within the FSI recommendations.
Ringing in the ears of those seeking to hammer out a viable industry position around life/risk remuneration are the Assistant Treasurer's admonition that failure to arrive at a viable consensus will likely generate Government intervention.
Frydenberg used a newspaper column to write: "While Murray's Financial System Inquiry and the Trowbridge report provide the government with a number of options for reform, the extent to which government intervention is required will depend ultimately on the industry's own actions. It is up to the industry now to restore public confidence before time for industry leadership runs out."
At the same time, the Australian Securities and Investments Commission (ASIC) has declared that life/risk advice remains a live issue notwithstanding the Trowbridge recommendations and the changes undertaken by the industry itself.
The PJC and co-regulation
While life/risk advisers have been highly focused on the Trowbridge Report and its aftermath, the broader planning industry has been mulling over the recommendations of the PJC on Corporations and Financial Services.
While the financial planning industry has been struggling to throw off the negative perceptions generated by the enforceable undertakings imposed against the likes of Commonwealth Financial Planning and Macquarie and the allegations levelled at NAB Wealth, the PJC Report, released in the closing days of 2014, looks to a highly professional future, rather than to a shabby past.
Indeed, it was a measure of the direction indicated by the PJC report that FPA immediate past chairman, Matthew Rowe, wrote in Money Management in February that the report might actually prove seminal in helping the financial planning industry become a profession.
Rowe's general admiration for the direction taken by the PJC might also have been owed to the fact that it largely endorsed many of the arguments put forward by the FPA and other key industry organisations on the centrality of higher education qualifications, membership of professional associations and a co-regulatory approach.
Little wonder, then, that SMSF Association chief executive, Andrea Slattery, as recently as last week issued a public statement endorsing the PJC's approach to co-regulation.
"Our Association is firm in the view that this approach is the most effective way to foster a profession instead of a compliance-based approach to financial advisor education and ethical standards," she said.
"Those criticising the PJC report's push for greater co-regulation in financial advice are missing the main point — the importance of creating a profession in financial advice as the most effective way to lift professional standards.
"Building a professional model should improve consumer confidence in financial advice as consumers can trust that they have attained the necessary education and competency requirements, are members of professional associations, are bound by professional and ethical conduct rules, and, most importantly, are continually looking to improve their skill set."
Slattery said the role of professional associations is critical to this process. "In other professions, such as medicine, law and accounting, their professional associations play a critical role in educating their members, promoting ethical behaviours and protecting consumers.
"It patently works in those professions and should be no different for financial advice."
FOFA, disallowance and the consequences
When Labor's Senate tyro, Senator Sam Dastayari, late last year orchestrated the disallowance of the Government's FoFA regulatory changes, there were many in the financial planning community who believed that the Government would try again. It will not.
The Assistant Treasurer, Josh Frydenberg made abundantly clear in May that the Government would not be returning to the fray on the FoFA regulatory changes, no matter how important they might be to the Coalition's significant constituency in the financial services industry.
While Murray's Financial System Inquiry and the Trowbridge report provide the government with a number of options for reform, the extent to which government intervention is required will depend ultimately on the industry's own actions.
He said the only significant changes now likely to be delivered to FOFA would be bipartisan refinements to the retail/wholesale client definitions under the Corporations Act.
Indeed, the Assistant Treasurer said the Government would not intend to "re-litigate past debates".
"However, we are working on a bipartisan basis to progress a handful of technical refinements, which will ensure FoFA operates as intended," he said.
"While I am not yet in a position to announce our proposed refinements, in respect of the application of the retail/wholesale client test, I am aware of the difficulties posed by the lack of alignment across the Corporations Act. It was never intended that there be different tests across different parts of the Corporations Act."
"The Government is looking to make time-critical refinements by 1 July 2015. Once this bipartisan effort is settled, FoFA will be given time to work," Frydenberg said.
One of the corollaries of the minister's announcement was the Commonwealth Bank's decision to earlier this month notify its planners that they were facing changes to grandfathering arrangements as a result of the new dynamic created by the FoFA regulatory disallowance.
The bank had carried out a review of the prevailing regulatory environment and concluded that its FirstChoice Super product did not meet the grandfathering requirements with respect of transfers from super to pensions.
Commonwealth Bank aligned planners were then told they would not be receiving grandfathered payments on super to pension transfers related to FirstChoice after 1 July.
However, the same issue did not apply to the bank's Colonial First State FirstWrap product, and payments to planners would retain their grandfathered status.
It was expected that, based on the Commonwealth Bank's analysis of the status of grandfathering with respect to FirstChoice, platforms owned by other banks and financial institutions would be similarly affected.
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