The recently implemented Future of Financial Advice (FoFA) legislation, which became mandatory in July last year, may have elements rolled back or modified.
The legislation, which was aimed at improving the trust and confidence of Australian retail investors in the financial services sector (including superannuation) and improving their access to advice, has come under fire for introducing too much red tape and being overly burdensome. The reforms were introduced in the aftermath of the Storm Financial collapse, which caused many investors to lose their life savings due to conflicting financial advice.
The government announced on the 30th of December last year that parts of the FoFA would be removed, in order to streamline and reduce costs to small business, financial advisers and consumers who access financial advice.
Consultation with industry bodies indicates the reforms may save up to $90 million in costs and reduce annual compliance burdens by about $190 million.
However a potential legal fight looms over the reforms. Industry Super Australia has indicated that it has recently received legal advice that the changes could be ruled invalid and are susceptible to a court challenge. David Whiteley is the Chief Executive of Industry Super Australia and recently gave an interview with ABC Radio that the changes bring the potential for a class action suit, and that any regulations that are passed will be operating in an environment of uncertainty, given the potential legal action.
Key elements of the proposed amendments include:
The Removal of the “Opt-In” Requirement
The opt-in arrangement required advisers to seek the continued agreement of their client every two years. Under the amendments financial advisers will no longer require to notify clients that they must opt-in to continue their arrangement.
Annual Fee Disclosure Modifications
Previously existing clients prior to the mandatory introduction of the FoFA in July 2013 were required to be provided with a fee disclosure statement. The proposed amendments will mean that only clients retained from the 1st of July 2013 are required to receive annual fee disclosure statements.
Removal of the “Catch-All” Provision
Advisers are required to act in the best interests of the client in relation to the advice that they provide. Legislations sets out a process by which they may safeguard themselves and ensure that they have acted in the best interests of their client. Currently a proclaimed “catch-all” exists in the legislation, providing that advisers must have taken all steps at the time of providing the advice that would be reasonably regarded as being in the best interests of the client, given their circumstances. The proposed amendments to FoFA would remove this “catch-all”.
Modification of the Ban on Conflicted Remuneration
Previously a ban existed in regards to providing life insurance inside superannuation where there is a benefit given to the adviser from a product provider. The proposed changes will modify this ban to only apply where there is no personal financial advice given about the product being provided, for example where there is automatic cover provided inside of a super fund.
The changes will be introduced to Parliament in the coming weeks.