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24 Nov 11
FOFA reforms update - a stay of execution?

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Controversial Government reform of the financial services industry has stalled with proposed legislation referred to Parliamentary and Senate Committees for review. Partner at McCullough Robertson, Tim Wiedman and lawyer, Tehani Goonetilleke, outline the implications for financial advisers of this latest development.

The Government’s controversial ‘Future of Financial Advice’ (FOFA) reform package reached its first major milestone last month with the release of the Corporations Amendment (Future of Financial Advice) Bill 2011 (Bill). However, just as quickly as it reached its first major hurdle, the Bill has stalled due to its referral to both the Parliamentary Joint Committee on Corporations and Financial Services (PJC) and the Senate Economics Legislation Committee (SELC) for inquiry and report.

The Bill contains the legislative framework for the following FOFA reforms:

  • requiring financial advisers to provide regular disclosure of ongoing fees and to obtain client agreement to the continued charging of ongoing fees, and
  • enhancing ASIC’s power to refuse to grant, and to suspend or cancel, an Australian Financial Services Licence and to ban financial advisers.

The referral of the Bill to the PJC and SELC appears to have dampened the Government’s enthusiasm for its FOFA reform program as the bills dealing with the remainder of the FOFA reforms have not yet been released, despite the Government previously stating they would published shortly.

Bill

Tight time frame

At this stage the Bill has been introduced into Parliament, but its passage through to enactment in its current form has been stalled by the recent announcement that the Government will conduct two further inquiries into the provisions of the Bill. As mentioned above, the Bill has been referred to the PJC and the SELC for inquiry and report.

Neither inquiry has released its terms of references. However, it is anticipated that the scope of the SELC’s inquiries will be to ascertain the economic cost and financial impact faced by businesses in incorporating the new requirements proposed. Both inquiries are seeking submissions from interested parties.

Submissions for the PJC inquiry close on 25 November 2011, with the reporting date set for 29 February 2012. Submissions for the SELC inquiry close on 6 February 2012, with the report expected by the committee on 14 March 2012.

Any recommendations made by these inquiries may result in further amendments to the Bill.

As the Bill has been referred to the PJC and SELC, the bills for the remaining FOFA reforms and the supporting amendments to the Corporations Regulations 2001 (Cth) (Regulations) have not been released, and any legislation will still need to be passed by both houses of Parliament, we believe the Government’s target commencement date of 1 July 2012 will be deferred. Further, the likelihood of the FOFA reforms proceeding in their current form is, in our view, is highly unlikely. In short, the latest developments represent a stay of execution for the financial planning industry which could potentially become a full pardon.

What’s covered and what’s missing

Following on from the consultation process in September 2011, it was expected that the Bill would appear in much the same form as the first tranche of draft legislation proposed by the Government as summarised by McCullough Robertson in an earlier article dated 7 September 2011. However, there are some notable changes.

Best interest duty

The corresponding exposure draft contained the proposed statutory-based obligations to act in the client’s best interest and give priority to the client’s interest. These obligations have been excluded from the Bill. The Government has indicated that the statutory obligations will be included in a subsequent bill.

Ongoing fee arrangements

The Bill clarifies that ongoing fee arrangements to which the disclosure and consent requirements will (as summarised in our article dated 7 September 2011):

  • apply to personal advice and not general advice
  • not be restricted to fees related to advice, and
  • apply to fees paid during a period of 12 months or more.

Exceptions

Though the Bill does not appear to resonate with the submissions made during the Government’s short consultation period, there is a small win for the industry. As noted in our previous article dated 7 September 2011, a consequence of the wide definition of ‘ongoing fee arrangement’ means that contribution and management fees charged by responsible entities may potentially be caught.

The Government appears to have embraced the concerns raised in our submission and has included ‘product fees’ as an exemption to an ‘ongoing fee arrangement’. However, the Bill provides that the concept of ‘product fees’ will be defined in the Regulations, which have not been drafted. We expect the Regulations, once drafted, will define product fees to cover contribution, management and other fees charged by a responsible entity and payable from scheme assets, but this is an issue to be monitored.

The Government has also included a new exception to the ongoing fee arrangement for fees paid by instalment. Fees payable by instalment must be fixed (for example, a specific monthly amount payable for six months is fixed, whereas a fee payable monthly for as long as person holds the product is not) and clients must not have the option to ‘opt-out’ at any time. This exception will only operate in a situation where the advice was given before the fee arrangement was entered into and is otherwise very restrictive.

In addition to the product fees and instalment fees being excluded, the Bill also carves out insurance premiums from the definition of ‘ongoing fee arrangements’.

Grandfathering

In a surprising move by the Government and contrary to the exposure draft, ongoing fee arrangements in place before 1 July 2012 have not escaped the new provisions. The Bill requires a fee disclosure statement to be given annually to retail clients for ongoing fee arrangements entered into prior to 1 July 2012. Under the exposure draft, the requirement to give clients a fee disclosure statement did not apply to pre-1 July 2012 fee arrangements. However, the requirement to obtain the client’s consent, at least every two years, to charge ongoing fees will still not apply to ongoing fee arrangements existing prior to 1 July 2012. 

This represents a significant issue for the financial services industry as the fee disclosure statement essentially requires advisers to disclose what services they are providing to clients to justify the ongoing receipt of fees. If this proposal becomes law, we expect a number of advisers will be more proactive in contacting clients and explaining what services they provide to clients.

Regrettably, the move by the Government to extend the fee disclosure statement requirements to ‘grandfathered’ ongoing fee arrangements  without it being included in the exposure draft, means that industry initially missed out on the opportunity to highlight the impact that this requirement will have on their business. However, the two new inquiries announced by the Government will enable more vigorous scrutiny of the appropriateness of this new requirement.

Refund

In another win for industry, under the Bill, licensees who charge an ongoing fee to a client after termination of the ongoing fee arrangement will not automatically be required to repay such fees to the client. This requirement was included in the exposure draft. However, the Bill entitles clients who have been charged an ongoing fee post-termination of the ongoing fee arrangement to apply to court for a refund.  

Practically, we expect court action will not be the most convenient avenue of redress for clients, and it is more likely that clients will generally go through the licensee’s internal and external dispute resolution processes to seek a refund where a breach has occurred. ASIC may also become involved in these circumstances to compel licensees to provide a refund or otherwise show cause why the refund should not be given.

Anti-avoidance

The Bill also includes an anti-avoidance provision for arrangements that appear to circumvent the best interest obligation and the ban on conflicted remuneration (as detailed in the second tranche of reforms, summarised in our article dated 30 September 2011).

The Government’s haste to include this provision in the first draft of the Bill is confusing, given that the anti-avoidance provision was included in the second tranche of the exposure draft, and the best interest obligation and ban on conflicted remuneration will be included in subsequent bills.

In any event, the anti-avoidance provisions are widely drafted and may catch arrangements that are currently in place even before the enactment of these new provisions. It will be interesting to note whether the Government will amend the anti-avoidance provisions in light of submissions received under the second tranche of reforms and how ASIC will enforce these new requirements to existing arrangements. 

Scaled advice - Consultation Paper 164

ASIC previously released Consultation Paper 164: Additional guidance about how to scale advice (CP 164) which provided some practical examples of how scaled advice could be provided to retail clients. Surprisingly ASIC’s decision to release CP 164 came moments before the first tranche of the FOFA reforms were announced, including the Government’s proposed implementation of the statutory based best interest duty. Consequently, there was a gaping absence of how the duty of best interest would be interpreted against the backdrop of ASIC’s proposals.

In a reversal announced recently, ASIC has bowed to the weight of submissions that the release of CP 164 was premature and has deferred its guidance until the Government has released the final form of the best interest duty.

ASIC has however commented that it proposes to release a new consultation paper on scaled advice in early 2012, which will include guidance on how to scale advice to comply with the best interest duty.

At this stage, the final regulatory guide on scaled advice is due to be published in April 2012. However, we believe this time frame appears equally doubtful given the current delay in the release of the bills, including the Government’s proposed formulation of the best interest duty.

Whether these developments represent a temporary reprieve or a complete reversal of policy, it’s still important to be aware of the proposed reforms and be prepared for these changes.

 

Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.

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