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"Highly unlikely to ever see a Storm again"

by Andrew Starke | 22 Jun 2014

It started out as an ambitious opening gambit, got bogged down in a strategic middle game and now financial advice reform seems to be drawing to a final resolution with clarity on the best interest duty and a checkmate delivered to all commissions.

Changes to the Future of Financial Advice (FoFA) legislation outlined by the government on Friday have generally been well received, with many in the industry now hoping for final clarity on a process that has been running since the Labor Government revealed the proposed reform package in April 2011.

While the previous government should be lauded for instigating the legislation, the final version will carry the fingerprints of politicians and legislators from both side of the house.

Bernie Ripoll, former Chair of the Parliamentary Joint Committee on Corporations and Financial Services, released his report on the inquiry into corporate collapses, financial services and products in Australia in November 2009 and this provided the cornerstone for the Labor Government's FoFA package.

The inquiry came about as a consequence of the Storm Financial and Opes Prime corporate collapses and the resulting investor losses.

However, the Coalition, then in opposition, consistently and repeatedly expressed concern that investors receiving financial advice would face more red tape, increased costs and reduced choice if the FoFA laws were passed in full.

And so striking a balance between appropriate levels of consumer protection and ensuring the availability, accessibility and affordability of financial advice were central to the political debate as FoFA became law on 1 July last year.

Wolf of Wall Street

In announcing a few tweaks to the government's proposed changes after another round of industry consultation, Senator Mathias Cormann, Minister for Finance and Acting Assistant Treasurer, committed the Coalition to "implementing the improvements to the FoFA laws it took to the last election".

"Labor's FoFA changes did not strike the right balance," he said. "As the then Minister, Bill Shorten must have known they did not, given he refused to put those FoFA changes through the former government's own required regulatory impact and cost-benefit assessment."

First and foremost, the changes outlined by the government on Friday ensure a clear ban on commissions after it had previously left the door open via the so-called ‘Wolf of Wall Street’ clause within general advice. Any possibility of a return to commissions on investments or superannuation products has now been ended.

“This response removes all doubt that commissions will be introduced in the provision of general advice. The government will define and ban commissions in black letter law" said John Brogden, CEO of the Financial Services Council (FSC).

“The changes outlined by the government also maintain a detailed and comprehensive best interest duty requiring a financial adviser to act in the best interests of their client.”

Best interest clarified

While the perceived watering down of the best interest duty has attracted a great deal of attention in the mainstream press, Brogden said this should be put in perspective. Prior to FoFA, financial advisers simply had to offer 'appropriate advice' while they now need to comply with a raft of regulation.

“There are six separate duties in the Corporations Act that require a financial adviser to act in the best interests of their client. In addition, there are six specific steps that must be met by an adviser when providing advice that codifies the best interest duty,” Brogden said.

“The government has made one minor change to the best interest duty by removing an unnecessary ‘catch all’ provision. This change will actually clarify the best interest duty and remove any ambiguity for a financial adviser to always act in a client's best interests.”

The FSC has legal advice from leading commercial counsels Ian Jackman SC and Gregory Drew which it said confirms that the removal of ambiguous 'catch-all' phrase will not dilute the obligation of an adviser to act in the best interest of their client.

Brogden said the industry and consumers could take heart that we are now "highly unlikely to see a Storm again" and called for industry superannuation funds to stop their "scare tactics".

“It is time for the misinformation and scaremongering on the best interest duty to stop. Industry funds and other groups have been misleading consumers and scaring them unnecessarily,” he said.

ABA and FPA support

The Australian Bankers’ Association (ABA) also welcomed the announcement and said the amendments would preserve the original intent of the law while correcting the current overreach and broader uncertainties.

“There has been significant misinformation and misunderstanding about the technical amendments which the banking industry has been seeking to ensure the law is clear and works properly," said Steven Münchenberg, chief executive of the ABA.

“We also welcome the government’s commitment to make it absolutely clear that upfront and ongoing commissions cannot be charged, including for general advice. Bank staff are not paid commissions or performance bonuses directly related to the sale or offer of individual financial products.”

The Financial Planning Association of Australia (FPA) said the announcement was "a decisive victory in favour of all consumers who seek certainty in their dealings with the financial advice system in Australia".

“The Future of Financial Advice reforms (FoFA) began as an ambitious sprint to transform our sector, became a four-year marathon bogged in detail and has ended as a smart-run victory to place the interests of all Australians first,” said FPA chief executive Mark Rantall.

Rantall said the FPA had campaigned hard over 48 months on key aspects of FoFA and was delighted to see its work on specific issues recognised and reflected in the announcement.

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