The Federal Government has released an information pack outlining details of its Future of Financial Advice reforms, sparking widely differing responses from across the industry.

 

Three key elements of the reforms are:

  • a requirement for financial advisers to get clients to ‘opt-in' every two years if they wish to continue to receive ongoing advice;
  • banning all commissions on risk insurance inside superannuation; and
  • a broad ban on volume-based payments.

 

Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten, said the reforms were designed to restore trust in the system following the collapse of Storm, Trio, Westpoint and other financial service providers.

 

Other changes announced include:

  • A decision to ban all trailing and up-front commissions and like payments from 1 July 2013.
  • A broad ban on volume-based payments, targeted at removing payments that have similar conflicts to product provider-set remuneration, such as commissions. This includes those payments based on volume or sales targets from platform providers to financial advisory dealer groups.
  • A ban on any ‘soft-dollar' benefit that is $300 or more (per benefit) from 1 July 2012 (excluding professional development and IT administration services where set criteria are met).

 

In addition, the announcement provides further details on other elements of the reforms, including the best-interests duty, access to advice and the accountants' exemption.

 

The Joint Accounting Bodies (CPA Australia, Institute of Chartered Accountants in Australia, and National Institute of Accountants) have welcomed the announcement, saying the reforms represent “a significant and positive next step forward in the provision and delivery of high quality financial advisory services.”

 

“The removal of conflicted remuneration structures including commissions and volume-based payments is a vital step towards eradicating conflicts of interest within the industry, and will strengthen consumers’ confidence in the financial advice they receive,” the Joint Accounting Bodies said.

 

The JAB also stated that the two-year ‘opt-in’ requirement and an annual disclosure notice would “ensure that the relationship between a financial planner and client remains transparent and importantly, encourages consumers to take an active role in their financial future”.

 

In contrast, the Association of Financial Advisers have attacked the package, saying the reforms will  “impose higher costs on consumers, impede their access to advice, tie them up in red tape and create even greater confusion”.

 

“While we believe the original intent of FOFA was commendable, the execution is not,” AFA CEO, Richard Klipin said. “The FOFA rhetoric has not been matched with strategy and consumers have been hung out to dry.”

 

Mr Klipin said that the AFA is concerned that the real needs of consumers have fallen on deaf ears. “While only two in 10 Australians currently get advice, we know from our consumer research that good advice gives people choices and leads to higher levels of savings, appropriate levels of insurance and greater control of their future,” he said. “Under the announced reforms the number of people able to access advice is in danger of dropping to even fewer than two in 10.”

 

Mr Klipin said the AFA believes the FOFA agenda has been hijacked by the superannuation lobby movement at the expense of everyday Australians. “While it might be a victory for large superannuation funds and the superannuation lobby cheer squad, it is a dark day indeed for ordinary Australians and their ability to access affordable advice,” he said.

 

Mr Klipin said the Government’s intention to ban commissions on risk products within superannuation means consumers will have to fund the cost of advice upfront, out of their own pockets.

 

“As our Risking Everything research revealed, a ban on commissions will mean people won’t access advice,” he said. “We have said it before and we will say it again: it is not advisers who object to charging fees, it is consumers who have a problem paying them.”

 

Mr Klipin also said the Government is well aware that the more tinkering that goes on with the superannuation system, the less confidence the community has in the future of super. “Forcing people to pay fees for insurance advice inside super will mean even fewer will have adequate levels of insurance,” he said. “In a country that is already grossly-underinsured and under-saved these changes will ultimately put a greater drain on the public purse.”

 

On the issue of opt-in, Mr Klipin said that while a two-year period is a minor victory for common sense, the devil is in the detail. “If you read between the lines the two years becomes one year by stealth. But whatever the period, we believe opt-in is bad policy. It devalues the long term nature of the relationships consumers have with their advisers and increases the adviser workload which, again, pushes up the cost of advice.”

 

Mr Klipin also argued that it is not the role of Government to dictate how consumers engage in their advice relationships. “We do not need a return to the Nanny State – Australians are too smart for that.”

 

 “What the Government has failed to realise is that many of the financial losses suffered by consumers in the past were the result of product rather than advice failures. None of the reforms put forward today address this,” said AFA President, Mr Brad Fox.

 

The Coalition has indicated it will oppose elements of the reforms, including compulsory two-year contracts and the abolition of commissions on superannuation risk insurance.

 

The Future of Financial Advice document is at http://assistant.treasurer.gov.au/Ministers/brs/Content/pressreleases/2011/attachments/064/064.pdf