Chapter 2
Views on the bill
2.1
As noted in the previous chapter, the bill has been amended since it was
last considered by the committee. Changes to the bill include:
-
an explicit provision confirming that the general advice
exemption from the ban on conflicted remuneration does not permit payments
commonly known as commissions;
-
amendments to the SOA provisions, consistent with an agreement
between the government, the Palmer United Party and the Australian Motoring
Enthusiast Party; and
-
an extension of the time period within which fee disclosure
statements must be provided to a client.
2.2
The views of submitters on these changes are discussed below. As noted
in the previous chapter, this report does not address issues covered in the
committee's report on the previous version of the bill.
Views on changes to the general advice exemption
2.3
The Financial Planning Association of Australia (FPA) welcomed the
amendments to the general advice exemption. In the FPA's view, the bill clearly
distinguishes between commission payments and ordinary forms of remuneration
'which pose a more manageable risk of conflicts of interest'.[1]
2.4
The Association of Financial Advisers (AFA) also wrote in support of the
changes made to the general advice exemption. These changes would, it argued,
help ensure that there was no return to conflicted remuneration for financial
advisers who provided personal advice on superannuation and investment products.
The AFA also noted that the changes ensured that what is payable on general
advice is not a commission and could not be directly linked to the sale of a
particular product:
This is an employee performance bonus mechanism, not a sales
commission. Where a benefit might be paid in connection with the provision of
general advice it will be clear to the consumer that this is with respect to a
product that is directly related to the employer of the general advice
provider. Accordingly there should be a reduced risk of the consumer assuming
that this was personal advice and that there was no connection between the
advice provider and the product.[2]
2.5
The AFA also noted that the general advice exemption had been greatly
modified since it was first proposed in January 2014. In light of these
modifications, the AFA indicated it was now confident that the exemption was
not available to its members, who provide personal advice rather than general
advice:
It is unfortunate, that much of the negative campaigning on
this issue was initially directed at financial advisers through an assertion of
a linkage between this exemption and financial advisers. We are pleased that
the final version of the Bill makes it particularly clear that this is not
relevant to financial advisers. In the meantime, much of the commentary has
wrongly questioned the integrity of financial advisers and their involvement in
seeking this exemption. It is extremely difficult to undo the damage that has
been done by the parties behind this campaign of misrepresentation of the
facts. The AFA is in no way seeking the re-introduction of commissions for
superannuation and investment products.[3]
2.6
The Australian Institute of Superannuation Trustees (AIST) emphasised
its opposition to the payments of commissions on advice, and argued that the
wording of the legislation was problematic in giving effect to the prohibition
on commissions. Specifically, the AIST took issue with the definition of one
type of commission as being 'a payment made solely because a financial product
of a class in relation to which the general advice was given has been issued or
sold to the client'.[4]
The use of the word 'solely', the AIST suggested, qualified the definition in a
way that could open the door to commission payments. The AIST noted that the
bill establishes that:
...the use of the word “solely” is used to allow commissions
paid where other performance measures are also allowed. This measure could
allow frivolous performance measures to be included in a “balanced scorecard”
arrangement in order to pay commissions.[5]
2.7
With regard to the AIST's concerns, it is worth noting the Revised
Explanatory Memorandum's point that:
...a payment structured in a manner that, prima facie, is not solely
because of the general advice may—still—not be permitted. For example, if the
payment were in relation to a performance target that would not be seen as
reasonable, the payment may be seen to have been made solely because of
the general advice and thus would not be permitted.[6]
Views on changes relating to Statements of Advice
2.8
As outlined in the previous chapter, as part of an agreement between the
government, the Palmer United Party and the Australian Motoring Enthusiast
Party, the bill includes amendments to the SOA provisions in the Corporations
Act. These amendments provide for additional disclosure and information in
SOAs, and require that SOAs are signed by both the advice provider and the
client. The changes would also ensure that any instructions for further or
varied advice from a client are documented in writing, signed by the client,
and acknowledged by the advice provider.
2.9
The new requirements elicited a mixed response from submitters. Some submitters,
for example, questioned the benefit of the changes for consumers. For example, while
the AIST was generally supportive of the SOA requirements as a means of
ensuring an SOA was provided to a client, it also suggested the explanatory
memorandum had not clearly established how the measures would protect
consumers.[7]
2.10
Similarly, the Governance Institute of Australia contended that the SOA
measures did not address its concerns about what it regarded as the weakening
of consumer protections by the bill.[8]
For its part, Industry Super Australia argued that while the SOA measures:
...represent a genuine attempt to redress the stripping of
important consumer protections contained in the original FoFA legislation, they
will offer only limited additional protection for consumers, not the least of
which because they fail to tackle the conflicted remuneration changes.[9]
2.11
Industry Super Australia expressed further concerns that because the new
SOA requirements did not apply to general advice, they would:
...further exacerbate the regulatory gap between personal and
general advice, providing perverse incentives for institutional advice
providers to sell complex products through general advice channels and steering
consumers away from advice which takes into account their personal
circumstances.[10]
2.12
More broadly, Industry Super Australia suggested that the SOA changes
were predicated on disclosure being an effective basis for consumer protection.
Industry Super Australia questioned this assumption, suggesting research and
experience demonstrate that 'disclosure alone is not effective to protect
consumers when conflicts of interest are allowed to exist in the financial
advice industry'.[11]
2.13
Submitter views on specific elements of the new requirements are
summarised below.
New SOA content requirements
2.14
The amendments include requirements for new content in SOAs, including a
statement that the provider of the advice genuinely believes that the advice
provided is in the best interests of the client, given the client's relevant
circumstances (as defined by section 961B of the Corporations Act).
2.15
The Financial Services Council (FSC) raised concerns about potential
confusion in relation to the 'genuinely believes' statement in SOAs.
Specifically, the FSC suggested that the Explanatory Memorandum should confirm
that the objective of including the phrase 'genuinely believes' is not to give
rise to a new test, but 'merely to advise the client that the advice provider
has met the best interest duty under s961B [of the] Corporations Act (2001)'.[12]
2.16
The Australian Bankers' Association (ABA) noted that there is little
guidance in the Corporations Act or general law as to what would constitute
evidence that the provider 'genuinely believes' that the advice is in the best
interests of the client. For clarity, the ABA proposed that the Explanatory
Memorandum sets out that:
...evidence that the financial adviser has complied with the
best interests duty safe harbour steps set out in s961B(2) should be sufficient
to prove that the financial adviser genuinely believes that the advice is in
the best interest of the client.[13]
2.17
In their joint submission, CPA Australia and Chartered Accountants
Australia and New Zealand questioned how effective the new content requirements
of the SOA would be:
Simply by adding a statement in the SOA that the financial
adviser is required to provide advice in the client’s best interests, that they
believe their advice meets this obligation and they have given priority to the
client’s interests does not mean this is actually the case.
In fact it may even lead to a false sense of comfort for a
client, as they may feel they have no need to review the statement of advice in
the belief that all recommendations are in fact appropriate for them.
If this measure is adopted, we believe that the required
disclosures must be made at the beginning of the SOA in a clear, concise and
effective manner to ensure it is both read and understood by the client.[14]
2.18
Industry Super Australia argued it might in fact prove counterproductive
to require clients to countersign an SOA which included a statement that the
advice provider 'genuinely believed' the advice provided was in the client's
best interest. Industry Super Australia reasoned that:
...clients who have received conflicted or poor quality advice
which results in loss may feel as though they are to blame. This ill-founded
sense of responsibility is likely to increase where advice providers can
produce a copy of the client’s SoA in which they have acknowledged receipt of
advice which purports to be in their best interests. Accordingly, wherever a
client signature is required on a SoA, it should be accompanied by a statement
that this is not evidence of the client verifying that the advice is in their
best interests.[15]
2.19
Arguing that the new SOA requirements 'add no meaningful protections for
consumers', CHOICE also raised concerns that some of the new SOA content
requirements would be misinterpreted by consumers:
For example, the statement that “the provider of the advice
genuinely believes that the advice given is in the best interests of the
client, given the client’s relevant circumstances (within the meaning of
section 961B)” could lead a reasonable consumer to conclude that an adviser
will act in their best interests. This simple conclusion is easy to reach
without a thorough understanding of how s961B restricts and adds loopholes to
the obligation for an adviser to act in a client’s best interest.[16]
2.20
The Stockbrokers Association of Australia was particularly critical of
the new SOA requirements, suggesting they would increase cost and complexity in
the service delivery of its members, for little benefit. The Stockbrokers
Association was particularly concerned about how the new requirements would
operate in relation to the provision by stockbrokers of time-critical market
and stock information and advice:
In stockbroking, in contrast to financial planning, much
business is transacted over the telephone. Clients want real-time market and
stock information and advice, and want to take action immediately, based on
that advice. In relation to Statements of Advice, the law already acknowledges
this, by permitting SOAs to be sent to clients up to 5 days after the service
is given, in time-critical situations. This allows shares to be bought or sold straight
away based on advice so as not to risk market movements during the time it
would otherwise take to produce and send the SOA to the client. The current
provision is sensible and facilitates timely advice to clients, with no loss of
consumer protection. If clients need to sign and return all SOAs prior to
trading, it may be contrary to the client’s best interests. Moreover, such
restrictions could significantly reduce trading volumes in a market whose
volumes are already low.[17]
2.21
More broadly, the Stockbrokers Association suggested that the
requirements to have SOAs and changes in instructions signed-off by clients
would 'not increase consumer protection, but will detract from retail clients
receiving affordable, high quality financial advice, and will create unnecessary
and costly red tape'.[18]
2.22
In contrast, the AFA argued that the additional content to be included
in an SOA would 'reinforce the obligations of the financial adviser and act to
ensure that they are specifically addressed as part of the process of
delivering the advice'.[19]
New signature and acknowledgement
of receipt requirements
2.23
CPA Australia and Chartered Accountants Australia and New Zealand noted
that they had no objection to the requirement for a client to sign an SOA to
acknowledge receipt, but questioned the benefit of the measure for consumers:
There have been previous examples where clients have been
requested by their financial adviser to sign the statement of advice to
acknowledge the SOA. One such example was Storm Financial, where on reflection
it was evident that many clients did not understand the advice they were
provided, despite the fact in some circumstances they had signed every page of
the SOA.
Further, given the providing entity does not fail to provide
an SOA merely because the client does not acknowledge the SOA we again question
the relevance of this new provision.[20]
2.24
Similarly, the National Insurance Brokers Association suggested the
requirement for a client to sign an SOA to acknowledge receipt 'seems unlikely
to have any significant end benefit for the customer whilst increasing
compliance costs'.[21]
2.25
The AFA noted several practical issues that it believed could arise as
result of the amendments, particularly for financial advisers who conduct a
large proportion of their business via phone or email:
This is likely to be the case for advisers who operate in
regional and rural areas, where proximity to clients is an issue. We would like
to ensure that the guidance provided around this measure gives particular
emphasis to the rural/regional scenario and clearly addresses the options with
respect to electronic signatures.[22]
2.26
The FSC noted that the Revised Explanatory Memorandum provides that
client and adviser (or advice provider) signatures on an SOA could be either in
writing or by electronic signature (as defined in section 10 of the Electronic
Transactions Act 1999). The FSC was supportive of this flexibility, but
noted that this reference to using electronic signatures only appeared to apply
to the SOA amendments, and not to the amendments requiring that a client sign
instructions for further or varied advice. The FSC recommended that the
reference enabling electronic signatures should also extend to those
amendments.[23]
2.27
For the sake of providing further flexibility, the FSC suggested that
consideration be given to allowing a client to acknowledge receipt of the SOA
over the phone through a voice recording, rather than by written or electronic
signature. This option, the FSC argued, would:
...provide more efficient and effective solutions for clients
and advice providers in acknowledging the advice received and would be
consistent with the government's objectives of reducing compliance burden.[24]
2.28
Similarly, the ABA suggested that some advisers provide advice to
clients by phone, videoconference, online or through other digital
technologies, or are seeking to do so. The ABA recommended that:
...the Bill and the [Explanatory Memorandum] be amended to
reflect that a voice recording of the client’s verbal acknowledgment or other
forms of electronic or digital verification should meet the requirement for a
client signature in s946A(2B) and s946A(2E). It is important for the law to
accommodate and encourage technology and recognise that financial advice is not
always [provided] face to face and through hard copy documentation.[25]
2.29
The FSC further suggested that a client could acknowledge receipt of a
SOA when receiving online advice by clicking 'accept'.[26]
BT Financial Group made the somewhat broader suggestion that these obligations
should be able to be discharged 'in a manner that is technology neutral'. It
suggested that this would be:
...consistent with other obligations in the Corporations Act
2001 and the recent Financial System Inquiry Interim Report which makes
several observations about the benefits of adopting a technology neutral
approach – including that it can provide flexibility to adapt to the future and
reduce the need for constant regulatory change.[27]
2.30
The Australian Financial Markets Association (AFMA) wrote that the
requirements for SOAs to be signed by clients and returned to the advice
provider would prove:
...impracticable and administratively burdensome. SOAs are
rarely (if ever) issued ‘on the spot’. They require detailed and lengthy effort
to prepare and are generally sent to the client some time after the adviser and
client have met face-to-face. As such, the client must sign the document and
send it back to the adviser – yet another document the client must sign and
despatch after completing a raft of engagement documents such as application
forms, banking authorities, transfer forms and so on.[28]
2.31
The AFA also argued there is a need for clarification regarding the
obligations of a financial adviser should a client refuse to sign an SOA,
particularly in instances where the client has declined to accept the advice
provided:
This should not be an unlimited obligation in the
circumstances where the financial adviser has taken all practical steps, but
the client still refuses to sign the SoA. In many cases it would be impractical
to enforce a client to sign for the receipt of an SoA, where that client
declines to accept that advice.[29]
2.32
The Stockbrokers Association of Australia also argued that the
implications of a client not signing an SOA required further consideration:
A very practical issue that needs to be considered in any
provision requiring documents to be signed or acknowledged by clients is what
happens if a client fails to sign and/or return them to the licensee.
Traditionally, the return rate for such an exercise can be low. Does the advice
lapse? Should there be a time limit? What if the client cannot be contacted? In
rapidly changing market conditions, stockbrokers are not able to guarantee
future price movements in stocks that are the subject of an SOA, and therefore
should not be bound by the advice contained in an SOA for an unreasonable time
into the future. This is a very problematic area, and could lead to great
uncertainty for clients and advisers alike – and unnecessary complaints -
unless it is properly constructed.[30]
2.33
AFMA noted the Explanatory Memorandum's point that in signing an SOA a
client was not agreeing to or accepting the SOA; rather, the client would be acknowledging
the receipt of the document. However, AFMA suggested that the client will need
to have this distinction explained to them:
This will no doubt lead to misunderstandings, given that any
signature on a document is usually associated with a binding agreement or
contract. SOAs are not contractual documents. An SOA is the provision of advice
which the client may choose to ignore in whole or part, or indeed, act in
contradistinction to the contents. Furthermore, any perception that the client
has agreed to the advice may give pause to a client wishing to seek redress
because of poor advice (in as much as 'but I agreed to the advice').[31]
2.34
The ABA proposed that the requirement for the client to sign an SOA only
apply when the client agreed to proceed with the implementation of the advice:
It is current industry practice for the providing entity to
ensure the client signs the SOA or an alternative document known as an
Authority to Proceed (ATP) where the client has chosen to proceed with the
advice. This clarification will codify existing industry practice, providing
better consumer protection in circumstances where the client will be
implementing the advice, without resulting in a substantial and potentially
costly change to current industry practice.[32]
2.35
While supportive of the requirements for an adviser to obtain signed
instructions with respect to a client seeking further or varied advice, the AFA
sought clarification on what an adviser should do in situations where an adviser
has acted on a client's verbal instructions and the client subsequently refused
to put this in writing.[33]
Documenting further or varied
advice
2.36
The FPA expressed concern about the introduction of the terms 'further
advice' and 'varied advice' into the Act without a legislative framework to
support them. It suggested that there is a need for further guidance on the
circumstances in which the proposed documentation requirements for further or
varied advice would apply. Specifically, the FPA pointed to a need for guidance
as to whether:
...this new disclosure obligation reflects existing practice to
update the advice as the circumstances, needs, and objectives of the client
change, or if it applies in other cases as well.[34]
2.37
The FSC, meanwhile, suggested that if the intent of the requirement that
a client provide documented instructions for further or varied advice was that
it should only apply to further or varied personal advice (as FSC assumed it
was), and not to general advice or advice that did not require a SOA, this
should be expressly stated.[35]
The ABA made similar points in its submission; it suggested that the
requirement should not extend to general advice or advice that would not
require an SOA. The ABA further argued that if the requirement was to
extend to further or general advice following the provision of personal advice,
this would be:
...problematic as the providing entity will need to create new
processes for recording and storing the instructions given that detailed
records of general advice are generally not maintained in connection with
general advice. Such processes would drive substantial inefficiency in the
provision of general advice.[36]
2.38
The ABA questioned the application of the requirement for documentation
of further or varied advice, and in particular how this requirement would operate
in a time critical situation:
The [Explanatory Memorandum] at [paragraph] 4.13 provides an
example of a ‘market crash’ where either time critical advice or further market
related advice might be given. In respect of time critical advice, we propose that
the requirement to document, sign and acknowledge the instructions applies (and
a SOA be given as required by current law), however, in respect of further
market related advice where a relevant SOA has already been provided and there
is an established relationship with the client, the requirements to document,
sign and acknowledge the instructions should not apply. For further
market-related advice, the consumer is protected by the requirement to record
the client’s instruction and basis for any advice in a Record of Advice (ROA).
ROA processes have generally been well systematised and allow for the efficient
provision of market related advice which is often time sensitive and given very
frequently.[37]
Views on changes to the fee disclosure statement timeframe
2.39
As noted in the previous chapter, the bill would change the time period
in which advisers are required to send a fee disclosure statement to a client
in an ongoing fee arrangement. Whereas the current law requires that a fee
disclosure statement be provided to a retail client within 30 days of the
anniversary of the day the ongoing arrangement was entered into, the bill would
extend this to 60 days.
2.40
The AIST argued that the original 30 day timeframe was sufficient, and
opposed the change.[38]
In contrast, the AFA expressed strong support for the amendment to the
timeframe for the provision of fee disclosure statements from 30 days to
60 days. The AFA argued:
The requirement to issue FDS’s within 30 days places
significant pressure upon financial advice practices which could negatively
impact the provision of advice to clients of the practice. There is often a
significant delay in the provision of information from product providers to
licensees and thus individual advice practices, which places huge and unnecessary
pressure on the whole process. For advisers who would prefer to deliver an FDS
in a face to face manner, it may not be possible or convenient for clients to
attend an appointment in the limited window of opportunity that exists at the
end of this 30 day period. Extending this deadline by a further 30 days will
not have any impact upon consumer protection, will be more convenient for
clients and will enable businesses to operate the FDS process more efficiently.
In fact a delay is likely to mean greater accuracy in the statements.[39]
Committee view
2.41
The committee welcomes the new measures in the bill and text in the
Explanatory Memorandum putting beyond doubt that it is not the government's
intention to reintroduce commissions. The committee is satisfied that the bill,
as it is now drafted, makes it very clear that the general advice exemption
from the ban on conflicted remuneration does not permit commission payments.
2.42
The committee notes that some stakeholders have expressed concerns about
the new SOA requirements. While the committee is generally satisfied that the
apparent intent of the new measures is sound—that is, to reinforce the
obligations of financial advisers and enhance client awareness of these
obligations—the committee nonetheless believes the government will need to
carefully monitor the implementation of the new requirements to ensure they operate
efficiently and effectively in realising this intent.
2.43
While this report does not consider the entire bill, the committee
maintains that the central finding of the committee's previous report on the
earlier version of the bill still holds—that is, the proposed amendments to
FOFA strike a proper balance between providing adequate consumer protection and
sound professional and affordable financial advice.
Recommendation
2.44
The committee recommends that the Senate pass the bill.
Senator Sean Edwards
Chair
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