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Chapter 4

The Future of Financial Advice reforms

Background

4.1        In 2009, the committee's inquiry into financial products and services led to the introduction and passing of legislation last year to reform the financial services industry in Australia. In the Future of Financial Advice (FOFA) legislation, the government adopted five of the committee's recommendations directly, with four recommendations supported in principle and only two not supported.[1] In February 2012, the committee reported on the provisions of the bills to implement the FOFA reforms and made 15 recommendations.[2] In May this year, the committee reported into proposed amendments to the Corporations Act 2001 to restrict use of the terms 'financial adviser' and 'financial planner'.[3]

Consulting on the reforms

4.2        The committee's previous oversight report, tabled in February 2013, detailed the Australian Securities and Investments Commission's (ASIC) consultative process in developing guidance on the FOFA reforms. This process took the form of workshops in the Australian capital cities, explaining what the key provisions are and how they would be applied to the financial advice sector.

4.3        The committee took the opportunity at the March 2013 oversight hearing to enquire into how these workshops had progressed. Commissioner Peter Kell replied:

 I think we have been pleasantly surprised at the crowds we have had. They have been bigger than we expected and the level of engagement has been very high. They have been very productive sessions. We have had a lot of good feedback. We have run those workshops in such a way that at the conclusion of the workshop there have been a range of ASIC staff available in all those locations to deal directly with participants, to answer their individual questions. There has been a lot of positive feedback about the five regulatory guides that ASIC has now issued on various aspects of FOFA.[4]

4.4        ASIC told the committee that these workshops were part of the wider consultation process on the FOFA reforms. Additionally, ASIC has convened 15 roundtables on the conflicted remuneration provisions alone, as well as a range of meetings 'on codes and other matters'. As Mr Kell reflected: '[T]here has been a lot of engagement with industries, with individual firms and with the associations—and there is more of it to come'.[5]

4.5        Following these consultations, ASIC's Regulatory Guides on FOFA have now been finalised and published. There are five key documents:

• on 4 March 2013, ASIC issued Regulatory Guide 246 into the 'conflicted remuneration provisions' in Divisions 4 and 5 of Part 7.7A of the Corporations Act 2001;
• on 25 January 2013, ASIC issued its guide on the disclosure provisions in the FOFA reforms in Regulatory Guide 245;
• in March 2013, ASIC issued Regulatory Guide 183 titled 'Approval of financial services sector codes of conduct' which, among other matters, clarifies exemptions from the 'opt-in' requirement;
• on 12 December 2012, ASIC issued its final guidance on the two other key aspects of the FOFA reforms: the 'best interests' duty and scaled advice. The guidance on the best interests duty updated Regulatory Guide 175 relating to the licensing of financial product advisers. The guidance on scaled advice is in Regulatory Guide 244 titled: Giving information, general advice and scaled advice.

4.6        As noted in the previous oversight report, the committee welcomes the progress that ASIC has made in releasing and finalising guidance material on the key aspects on the FOFA reforms. It commends the Commission for its thorough consultative process on the reforms and anticipates that this interaction will continue as the FOFA reforms are embedded in 2013–14.

A 'facilitative approach'

4.7        The FOFA provisions will come into force on 1 July 2013, although ASIC advised that in the first 12 months it will be 'taking a facilitative approach to compliance'. It described this approach in the following terms:

We have provided formal no action positions on several issues to help firms implement FOFA in that early period. Where there are systems issues—we realise there is a lot of work that needs to be done to get FOFA into place—or where there are inadvertent or technical breaches, it is not in ASIC's interests to go in hard. We will engage constructively with the industry. On the other hand, if we see problematic conduct or firms that are making no attempt to comply we will obviously take a stronger approach. But we very much emphasised that facilitative approach to ensure that we have as smooth a transition as possible in the first 12 months.[6]

Exemptions from the opt-in requirement

4.8        The FOFA reforms strengthen the disclosure obligations for financial advisers where an ongoing relationship exists between a retail client and a financial adviser, and the client is paying an ongoing fee for advice. The disclosure obligations in the FOFA legislation have two elements:

(i) a fee disclosure notice—the financial adviser will need to issue an annual fee disclosure statement outlining all fees and charges if a retail client will receive advice for a period longer than 12 months. These notices will need to outline all ongoing fees paid by the client for the previous 12 months and the forthcoming 12 months.

(ii) a renewal notice—if a client is paying ongoing fees for a period longer than 24 months, the financial adviser must provide both an annual fee disclosure notice and a renewal notice every two years. If a client does not renew, or 'opt-in', within a 30 day period, the agreement between the client and the adviser is terminated.

4.9        The committee's 2012 inquiry into the FOFA bills revealed significant stakeholder concern in relation to the practicalities of the opt-in requirement. However, some providers of financial advice will be exempt from the opt-in requirement if they face sufficient requirements under their existing Code of Conduct. In part, this is the subject of ASIC's Regulatory Guide 183.

4.10        The committee asked ASIC about the reference in RG183 to an exemption if the relevant code achieves substantially the same policy outcomes that section 962K of the Corporations Act is intended to achieve. By way of explanation, ASIC drew the committee's attention to the code approval checklist which covers:

(a) entering into an ongoing fee arrangement with a client;

(b) delivering services under the arrangement; and

(c) how the arrangement is renewed over time.

4.11        ASIC explained that this checklist had been well received by the industry. It added that while the items in the list are what ASIC would expect to see, the checklist is flexible. For example:

If a code proponent—someone who is putting together a code—wants to come to us and set out an alternative way of meeting these objectives or an alternative way of dealing with the issues that we have outlined in that checklist, they are very welcome to do so. We have already had some discussions with some industry associations about that. That is where there is more detail about the actual provisions that would deal with the opt-in issue.[7]

Committee view

4.12        The committee is satisfied that ASIC has released timely and comprehensive information on the new requirements that will face the financial advice industry from 1 July 2013. It believes that ASIC's proposed facilitative approach to enforcement in the 12 months to 1 July 2014 is both reasonable and prudent.

4.13        The committee does reiterate its February 2012 recommendation for an independent review of the application of the FOFA legislation. The review should focus on stakeholders' compliance, ASIC's approach to enforcement and how well the new measures are meeting the broader policy objectives the legislation intended to achieve. The review should be given to government by the end of 2014.[8]

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