According to the federal government, there’s a new deal for investors from the long awaited reforms released yesterday.
The changes are in response to a long line of failures.
In fact the financial advice industry is littered with some ugly corpses: Storm Financial, Trio, Opes Prime, Fincorp and Bridgecorp.
And there are some larger groups such as City Pacific and a slew of private trusts that have failed or remain frozen because of losses.
This list doesn’t include those big listed failures like Allco, Babcock and Brown and of course, Centro where there’s an intermingling of small investors in the quoted units and in the unlisted trusts.
The government has resisted pressure from fund managers to water down the financial advice reforms, and will broadly ban volume based payments which have been blamed for encouraging financial advisers to get investors to over commit.
The various changes could cost financial advisers billions in lost revenue, so naturally, rather than admitting their errors, some groups are going to try and defeat the changes, having tried and failed on at least two earlier occasions.
Assistant Treasurer Bill Shorten says the government would introduce legislation this year that would outlaw the payments from July 2012.
He said the government would also ban upfront and trailing commissions for life insurance bought through super funds.
The reforms, which were first raised a year ago, also include a ban on so-called ”soft dollar” payments such as sponsorships of more than $300 and a requirement for clients to ”opt-in” when receiving financial advice.
As well, planners will be required to act in the best interest of their clients.
With media reports suggesting that financial advisers receive up to $2.9 billion a year from wealth management platforms (such as those run by the likes of the AMP and AXA) including volume rebates, insurance commissions and soft dollar sponsorships, the advice industry will lose a lot of money.
So the bans will cost money and advisers will be inclined to try and force investors to pay more. But at least that will be transparent and above board, and subject to negotiation, rather than being opaque and for many investors, undisclosed.
Three key elements of the reforms are: a requirement for financial advisers to get clients to ‘opt-in’ every two years if they wish to continue to receive ongoing advice; banning all commissions on risk insurance inside superannuation and a broad ban on volume-based payments.
Assistant Treasurer and Minister for Financial Services and Superannuation Bill Shorten said the new elements of the FOFA reforms are:
- A prospective ban on up-front and trailing commissions and like payments for both individual and group risk within superannuation from 1 July 2013.
- A prospective requirement for advisers to get clients to opt-in (or renew) their advice agreement every two years from 1 July 2012.
- A prospective ban on any form of payment relating to volume or sales targets from any financial services business to dealer groups, authorised representatives or advisers, including volume rebates from platform providers to dealer groups.
- A prospective ban on soft dollar benefits, where a benefit is $300 or more (per benefit) from 1 July 2012. The ban does not apply to any benefit provided for the purposes of professional development and administrative IT services if set criteria are met.
- Expanding a new form of limited advice called scaled advice, which can be provided by a range of advice providers, including superannuation trustees, financial planners and potentially accountants, creating a level playing field for people who provide advice.
Scaled advice is advice about one area of an investor’s needs, such as insurance, or about a limited range of issues.
- A limited carve out from elements of the ban on conflicted remuneration and best interests duty for basic banking products where employees of an Australian Deposit-taking Institution (ADI) are advising on and selling their employer ADI’s basic banking products.
Basic banking products are basic deposit products (e.g. savings accounts), first home saver account deposit accounts and non-cash payment products (e.g. travellers cheques and cheque accounts).
- The Government will explore whether the term ‘financial planner/adviser’ should be restricted under the Corporations Act 2001 (Corporations Act).
In addition, the announcement provides further details on other elements of the reforms, including the best-interests duty, access to advice and the accountants’ exemption.
Further details on all measures are included in the attached Information Package .
