Historic financial advice reforms a win for Australian consumers

The passing of the Future of Financial Advice Bill in the House of Representatives last week is set to significantly improve the retirement outcomes of industry super fund members.

In an historic move for Australian consumers, the Future of Financial Advice (FoFA) Bills passed through the House of Representatives last week.

These reforms will significantly improve the retirement outcomes of industry super fund members, and consumers more broadly, and ensure that they can receive high quality professional financial advice that is in their best interests.

Robbie Campo, Manager Strategy, said that while the reforms are moderate, they represent a comprehensive set of measures that will substantially deliver on the Government’s policy objectives to improve the quality of financial advice in Australia, strengthen investor protection, promote trust and confidence in the system, and encourage more people to seek financial advice.

“For the first time, financial planners will be required by legislation to act in the best interests of their clients, and sales commissions and other forms of conflicted remuneration will be prohibited,” commented Robbie.

“Importantly, the biennial ‘opt in’ requirement will ensure ongoing asset-based fees do not simply replicate trail commissions and unnecessarily reduce super savings.”

ISN supports the final proposal which will enshrine ‘opt-in’ in the law, but with the flexibility for financial planners and licensees to gain relief from ASIC if they sign up to an approved code of conduct.

“ASIC will provide relief to licensees and financial planners who are bound by an approved code of conduct, which obviates the need for the opt-in requirements,” said Robbie.

“This dual approach delivers protection for consumers and the opportunity for the financial planning industry to realise their objective to be regarded as a respected profession, an objective which is supported by industry super funds.”

Key aspects of the reforms

Best interests duty – requires advisers to act in the best interests of their clients. The duty provides some details around how an adviser can prove that they have acted in the client’s best interests by following a number of reasonable steps.

Opt-in measure – requires advisers to get consent from clients every two years to continue to charge ongoing fees for financial advice. Clients must be provided with fee disclosure in the intervening year. However, ASIC can exempt by class order relief any provider bound by an ASIC Approved Code of Conduct, which obviates the need for the legislative measure.

Annual disclosure – requires advisers to provide clients with an annual disclosure notice that provides information on  fees and services for the previous year, and also notifies them of their right to ‘opt-out’ of an ongoing advice contract.

Enhanced regulator powers – the Australian Securities and Investments Commission (ASIC) will have increased powers over the licensing and banning of financial planners with the capacity to refuse, suspend or ban a licence if an individual is deemed to have contravened or likely to contravene the obligations.

Ban on conflicted remuneration and commissions – under the new legislation, a range of conflicted payments will be banned, including commissions on investment products, commissions on risk insurance in MySuper and group risk products, soft dollar benefits and volume payments to employees and dealer groups.

Financial advice reforms a win for consumers and industry

New reforms to the financial advice industry are set to double the number of Australians accessing financial advice and increase private national savings to $130 billion.

A new report by Rice Warner Actuaries shows that the Future of Financial Advice reforms will boost the provision of financial advice in Australia by more than 100 per cent and increase the superannuation and other savings of individuals by an estimated $130 billion by 2026.

The report, commissioned by the Industry Super Network in December 2011, also shows that financial adviser numbers will remain broadly stable and that incomes for financial planners will continue to rise following the reforms.

The report indicates that the reforms will result in numerous benefits to consumers, the financial planning industry and national savings:

• The provision of financial advice will increase from 831,000 pieces of advice being delivered to 1.77 million pieces of advice in 2026 – an increase of more than 100 per cent. This will be driven by an increase in the provision of scaled advice by more than six-fold – from 169,000 to 1.1 million pieces of advice in 2026.
• Superannuation and other savings by individuals are estimated to increase by around $130 billion by 2026. This will flow from an increase in contributions (under advice) and the redirection of fees into savings.
• The cost of financial advice is anticipated to reduce, with the weighted average cost falling by around 44 per cent, from $2,135 in 2011-12 to $1,188 in 2025-26. For the first time, many Australians will begin to access financial advice at a price they can afford.
• Adviser numbers will remain broadly stable, with the most significant change being the proportion providing full service and scaled advice. However, factors such as an expected growth of super assets by 9.6 per cent a year compounding, the predicted reduction in the cost of the advice, an ageing population and an increase in the planned superannuation guarantee contribution to 12 per cent, will generate strong growth in the financial planning industry.
• Average adviser incomes are expected to grow strongly in real terms, from $182,000 per annum to $260,000 in 2026 (after inflation and in today’s figures). Total financial adviser employment will remain stable.

Matt Linden, Chief Policy Advisor, Industry Super Network said that the research provides a useful counterweight to the alarmist claims being made by the financial planning industry.

“The Rice Warner report is the only credible research conducted to date that investigates the impact of these reforms on the financial services industry and consumers. Based on sound methodology, the report clearly demonstrates that consumers and the industry will benefit from these reforms.

“All the indicators point to a vibrant and innovative financial services industry in future, which will be driven in part by compulsory superannuation. The expected large increase in scaled advice will also challenge the best and brightest in the industry to forge new business opportunities.”

For a copy of the full report, please click here.

Media Release: Financial advice reforms a win for consumers and financial services industry

Media release from ISN says new reforms to the financial advice industry are set to double the number of Australians accessing financial advice and increase private savings by $130 billion, according to a new report by Rice Warner Actuaries. The report also shows that financial adviser numbers will remain broadly stable.

To view the Rice Warner  report click here.

Financial advice reforms a win for consumers and financial services industry

Media release from ISN says new reforms to the financial advice industry are set to double the number of Australians accessing financial advice and increase private savings by $130 billion, according to a new report by Rice Warner Actuaries. The report also shows that financial adviser numbers will remain broadly stable.

To view the Rice Warner  report click here.

The Future of Financial Advice reforms rest on the best interests obligation

Robbie Campo, Manager – Strategy, ISN, asks whether it is really possible for any financial institution to argue against the introduction of a best interests test for financial advisers. 

The best interests duty is considered by many to be the cornerstone of the Government’s Future of Financial Advice (FoFA) reforms introduced into Parliament last week. It is a long overdue measure that will assist the industry in transitioning to a credible and trustworthy profession.  But while there is a high degree of agreement that the Government has presented to Parliament a balanced yet effective best interests duty, banks and large insurers are largely unhappy.

The Financial Services Council (FSC), which represents banks and insurance companies, contends that the duty is unworkable. As banks and insurance companies are major employers of financial advisers (around 85 per cent of financial planners are employed by product providers) and have traditionally used planners as their primary distribution channel, it is no surprise that they are objecting.

The best interests obligation, which will require a client’s interests to be given priority over all other interests, will impact on the sales function that banks and retail funds have traditionally assigned to planners. Yet if the best interests obligation and other FoFA reforms fail to free financial planners from being sales agents, then we will have failed one of the key policy objectives of this reform process.

The FSC, on behalf of major banks and insurers which run retail super funds, has raised concerns that the best interests duty is unworkable because it is not completely defined by a step-by-step process. However, an effective best interests test cannot be condensed to a finite number of steps. It requires astute and professional judgement based on an adviser’s knowledge and experience, rather than just imposing a ‘tick-a-box’ approach.

Initially, stakeholders were divided as to how the obligation should be defined. Some stakeholders, including the Financial Planning Association, sought a principles-based approach, while others argued for a tight set of regulations. In the end, the Government struck a compromise between the two and provided a significant level of prescription by identifying a number of ‘reasonable steps’ an adviser could follow to prove that they have acted in their client’s best interests. This approach, however, does not exclude the need for an adviser to exercise some professional judgement.

The FSC is also arguing that the Bill fails to provide the requisite certainty to enable planners to offer basic advice on a single or limited subject matter. Interestingly, industry super funds, who are currently the major providers of single issue financial advice, do not share this concern.

The Bill and the Explanatory Memorandum make very clear that a planner can scope advice to a single subject matter, provided this is done in the client’s interests. However, this has not gone far enough to appease the big banks and insurance companies. So what modifications to the duty do they seek?

The FSC’s submission to Treasury on the draft legislation argued that a client and adviser should be able to “agree” on the scope of the advice, to give the provider certainty regarding the extent of their liability. However, typical Australians are vastly less knowledgeable and experienced in financial matters than their planner and often do not provide clear instructions. Is it to be seriously contended that the capacity for ‘contracting out’ should be built into the best interests obligation, given the gap in financial knowledge that exists between most clients and their financial planner?

Properly identifying the scope of advice in the client’s interests is fundamental to any professional obligation – for instance, a doctor does not always just look at the immediate symptoms of which a patient complains. A doctor will often question a patient to consider whether further investigation/tests are warranted. However, a doctor would not contemplate getting a patient to ‘agree’ to the scope of the diagnosis or treatment. In any normal professional engagement, it is incumbent on the professional to direct or advise their client, not the other way around.

The Government has delivered a best interests duty that offers some compromise between the choice of a principles-based obligation or a qualified set of steps which enables a planner to demonstrate compliance with the duty. 

The Government has undertaken over a year’s intensive consultation in an effort to address all legitimate issues raised by industry stakeholders. The current form of the duty sets a professional standard for financial advice, which is why it is supported by a number of key stakeholders including Choice and the Financial Planning Association.

Any further compromise would simply return financial advice to sales.

For further information on the FoFA reforms, contact Robbie Campo on rcampo@industrysuper.com