Chapter 2
FOFA reforms—objectives
2.1
The original FOFA reforms were welcomed by both consumers and industry
as a significant step forward in the financial services sector. CPA Australia
and the Institute of Chartered Accountants Australia encapsulated the positive
reception that the reforms received:
The passage of the FoFA reforms was the result of extensive,
wide spread consultation over many years. Its introduction marked a milestone
opportunity for the sector to take a greater responsibility and refocus its
efforts on providing and promoting quality financial advice in the best
interests of the client, free from conflict and in a transparent manner.[1]
2.2
FOFA sought to strike a balance by 'introducing further consumer protections
while simultaneously requiring financial advisers to meet higher standards of
care and skill'.[2]
Australia's financial services industry
2.3
The proposed legislation recognises the importance of the financial
services industry in the Australian economy, which currently employs over
400,000 people and, according to the regulation impact statement, is the
largest industry in Australia when measured by gross value added. The industry
is expected to grow as Australia's population ages and superannuation funds continue
to expand.[3]
2.4
In this environment, Australians are looking increasingly to financial
advisers for assistance. Financial products, however, are difficult to
understand even when they are called basic products and the cost of financial
advice is of major consideration for consumers.[4]
ASIC observed:
Today's consumers are being asked to make more financial
decisions than ever before and the environment in which they are making those
decisions is becoming increasingly complex.[5]
Financial advice
2.5
The Financial Services Council (FSC) commissioned research from KPMG
Econtech, which showed:
...individuals with a financial adviser saved an additional
$1,590 each year (after the cost of the initial advice) when compared to a
similar individual without a financial adviser. These savings alone equated to
an additional $91,000 upon retirement for a 30 year old Australian. The KPMG Econtech
research also found that if an additional five per cent of Australians received
financial advice, national savings would increase by $4.2 billion (or 0.3 per
cent of GDP) by 2016–17.[6]
2.6
Even so, ASIC found that, while many consumers were ill-equipped to make
sound financial decisions and would benefit from better access to financial
advice, fewer than 40 per cent of the Australian adult population have ever
used a financial planner.[7]
It highlighted the value of obtaining financial advice:
Most people could benefit from access to quality personal or
general advice and factual information, especially at the time of key life
events or transitions (e.g. starting a family, preparing for retirement or
managing an unexpected redundancy). Industry studies have shown that consumers
who access financial advice benefit financially as a result of the advice, even
after the cost of the advice is taken into account. The financial benefits of
advice can include increased savings, less interest expense through faster debt
reduction or higher investment returns.[8]
2.7
ASIC's review of investment trends research revealed 'a significant
disconnect between the amount consumers are willing to pay for financial advice
and the typical costs to licensees of providing financial advice'. It found
that on average, consumers believed that initial advice should cost $301 and
ongoing advice should cost $298 per annum. Twenty-two per cent of consumers
believed that the initial advice consultation should be free.[9]
The regulation impact statement recorded further that the cost of providing
comprehensive financial advice to a client actually ranges between $2,500 and
$3,500.[10]
Thus cost was a major consideration, as ASIC observed:
The relatively low amounts consumers are prepared to pay for
financial advice, and the sizeable proportion of people who are not willing to
pay anything at all, suggests that many consumers do not fairly value professional
financial advice.[11]
2.8
Consistent with the ASIC findings, the Financial Services Council quoted
from Roy Morgan research which suggested that Australian consumers perceive the
cost of a personalised financial plan to cost less than $1000 (76%). The research
found:
The most frequently reported price expectation was $200–$499
(36%). Only 2% of consumers expected a personal financial plan to cost more
than $2000 (even though 20% of consumers have an adviser and 20% have had an
adviser in the past). If faced with the need for a comprehensive personalised
financial plan, 84% would not pay for the advice. Instead 69% of those surveyed
who could not afford the comprehensive personalised financial plan would seek
advice from their friends and family, 61% would source advice from the internet
and 27% would access financial blogs.[12]
2.9
Importantly, ASIC also made the point that improving access to advice 'is
not about providing inferior quality advice to consumers or assisting financial
services licensees to simply sell more products to consumers'.[13]
2.10
The main purpose of this bill is to reduce compliance burdens while
maintaining consumer protection: to align incentives, improve transparency and
improve the basis on which financial advice is provided to consumers.[14]
The Explanatory Memorandum states that:
The proposed amendments to FOFA seek to navigate the fine
line between ensuring that unnecessary and burdensome regulations that drive up
the cost of business are removed, whilst ensuring that the consumer protections
of FOFA are maintained.[15]
2.11
Thus, one of the key challenges for the FOFA reforms is to find the
right balance between providing consumer protection and ensuring that consumers
have access to affordable and competent financial advice. As Mr Brad Fox,
Association of Financial Advisers, noted:
Every day, Australians face life-defining moments that
require financial decision making. Every day, they turn to financial advisers
to support them through these challenges.
2.12
In his view, the FOFA amendments were designed to help people gain
access to financial advice and increase the probability that those going
through life-defining financial challenges would be able to get affordable,
quality financial advice.[16]
2.13
Taken as a whole, submitters agreed that it was imperative to achieve
the right balance between acting in the best interests of consumers and
reducing regulatory obligations. They appreciated that the original twin
objectives of FOFA were to rebuild trust and confidence in the industry and to
expand the affordability and accessibility of financial advice. Submitters also
recognised the importance for Australians to receive the right financial
advice. For example, Mr Paul Drum,
CPA Australia, stated that it was:
...critical to bear in mind the continued low levels of financial
literacy within the community and, more generally, the low levels of engagement
that consumers have with their finances, including superannuation...not every
consumer needs a holistic financial plan or to be recommended a financial
product. Many Australians will not have complex financial situations or
positions. Rather, all they want is the ability to speak or work with a highly
competent professional adviser that they can trust.[17]
2.14
Mr Richard Batten, Minter Ellison Lawyers, reinforced the message that Australians
need access to competent professional advice. He acknowledged that:
...it is important that consumer protection is achieved without
imposing an undue burden on industry. Regulation should not unnecessarily
increase costs or reduce the availability of services for consumers, because
good and timely financial advice is an integral part of future wealth creation.
We therefore believe the committee has an important job to do to ensure that
the government's FoFA amendment bill enhances the accessibility and
availability of good quality financial advice.[18]
2.15
While there was general and keen support for the objectives of the FOFA
reforms, submitters differed in their views on whether the proposed reforms
would either enhance or detract from these objectives. The Governance Institute
of Australia noted the continuing commentary about 'whether or not the right
balance has been struck'. It observed that the current round of reforms was
'aimed at redistributing the balance with a view to ensuring that financial
advisers are not burdened with unnecessary compliance requirements'.[19]
2.16
Some submitters were of the view that the balance that the bill sought
to achieve leant too far in favour of industry and not toward consumer
protection. They sought to highlight the enormous gap in knowledge and
experience between the providers of financial services and the retail
consumers. For example, National Seniors Australia described the financial
services sector as a classic uneven market, where the participants were 'grossly
mismatched':
You have huge corporations, heavily vertically integrated,
selling complex products, and financial advisers, who historically have lacked
professional standards and education...On the other side, you have consumers, who
generally lack understanding or appreciation of the complexity of products and,
to a significant extent, lack the financial literacy to deal with them. In such
a market, it is proposed to reduce consumer protection, and that is the
foundation for our concern.[20]
2.17
In general, those opposing the proposed changes shared the view that the
proposed amendments would undermine the consumer protections embedded in the
current legislation. Ms Robbie Campo, Industry Super Australia, was concerned
that the measures proposed in the bill would significantly dilute key consumer
protections in financial advice law and therefore increase the likelihood and
impact of future financial advice scandals.[21]
2.18
Similarly, Ms Josephine Root, Council of the Ageing (COTA), feared that
the cumulative effect of the changes would seriously weaken the reforms, thereby
'giving less consumer protections and ultimately undermining confidence in the
financial advice sector'. She stated that COTA was concerned that people would 'opt
out of getting financial advice and, therefore, not get the maximum benefits
that they could'.[22]
COTA believed that, if implemented, the proposed amendments would wind back the
provisions of FOFA significantly, result in considerable consumer detriment,
and undermine consumer trust and confidence in the financial advice industry.[23]
2.19
Initially, CHOICE was unhappy with the compromise reached when FOFA was
first enacted, which it believed could have been stronger in consumer
protection. It regarded the proposed amendments as tilting 'the balance further
away from consumers'. In its view, the process to justify the bill had failed
to assess thoroughly the cost of proposals to consumers.[24]
Mr Alan Kirkland explained that CHOICE did not regard FOFA as 'the gold
standard in consumer protection'. Although, it was a significant step forward,
CHOICE believed that FOFA could have been even better. Mr Kirkland then observed:
So to imagine further compromises as a result of some of the
current proposals is something that concerns us greatly and is of great concern
to the consumers who have contact with us.[25]
2.20
Dr Marina Nehme, Faculty of Law, University of New South Wales, was of
the view that the balance between the protection of consumers and the
protection of business appeared to have 'shifted toward the interest of
businesses'.[26]
2.21
Other submitters had a different interpretation and were concerned that
insufficient weight had been given to the costs and practicalities of
implementing the FOFA reforms. Those supporting the proposed changes were of
the view that readjustments were needed to remove inefficient, unnecessary or
ineffective provisions that either would make access to financial advice more
expensive through compliance costs or were in practicable ways unworkable. For
example, while Minter Ellison Lawyers supported the objectives of the FOFA
legislation to promote a professional financial advice sector, they were
concerned about certain aspects of the current legislation. In their opinion
parts of FOFA were inconsistent with the goal of ensuring 'an efficient, fair
and innovative financial sector'. According to Minter Ellison Lawyers:
Another critical but often overlooked goal of FOFA was 'to
provide access to and [expand] affordability of financial advice'.[27]
2.22
They were of the view that the proposed reforms would help ensure that
the FOFA legislation realised these goals. The FSC also recognised the need for
further reforms to FOFA. It believed that the proposed changes would achieve
that right balance by ensuring that consumers would 'be able to access
affordable quality financial advice while at the same time maintaining a strong
level of consumer protection'.[28]
2.23
The Association of Independent Owned Financial Professionals also
supported the original objectives of FOFA to eliminate conflicts of interest
and provide greater protection for consumers. It contended, however, that the
previous government went too far with some aspects and endorsed changes
including: removing the opt-in requirements; removing the annual fee disclosure
requirements for pre-1 July 2013 clients; removing the 'catch-all' provision
from the best interests duty; explicitly allowing for the provision of scaled
advice; exempting general advice from the ban on conflicted remuneration; and broadening
the existing grandfathering provisions for the ban on conflicted remuneration.[29]
In its view:
...these changes will not only simplify the industry for its
stakeholders but deliver considerable cost savings to all participants
including consumers.
2.24
The Australian Bankers' Association on behalf of the banking industry was
'seeking amendments to make sure the law operates as intended and does not
adversely impact on retail banking and to make sure bank customers can continue
to conduct their banking in ways they want and expect'.[30]
2.25
It should be noted that the submitters, who tended to support the bill
in broad terms, did not necessarily agree with all the changes.
Conclusion
2.26
The committee is cognisant of the need, when considering the proposed
changes, to strike the right balance between protecting consumers and relieving
the burden imposed on the financial service sector, thereby ensuring the
availability, accessibility and affordability of high-quality financial advice.[31]
In the following chapters the committee examines the main changes proposed to
FOFA in this context of finding the right balance between amending existing
provisions and ensuring that the new ones are in the consumers' best interests
and deliver positive results for the industry. The committee's focus is not
only on the immediate costs and benefits to consumers and providers alike but on
the long-terms gains for both. It is particularly concerned with ensuring that
the changes result in Australian retail clients having access to good quality
information and affordable advice about financial products.
Navigation: Previous Page | Contents | Next Page