01.FoFA changes paused
In a welcome turnaround, acting Assistant Treasurer Mathias Cormann has said the government will put its commitment to amend the Future of Financial Advice reforms (FoFA) on hold. The matter will now be allowed to continue through the normal parliamentary process.
The government had recently indicated that it would attempt to enact the changes through regulation instead of waiting for the legislation to make its way through the Senate consultation process, a manoeuvre CHOICE and others opposed.
The government's proposed changes aim to undercut key provisions of the reforms, including a ban on commissions and a requirement that advisers act in the best interests of their clients.
Significantly, the Financial Services Council, Financial Planning Association of Australia (FPA), Institute of Chartered Accountants, and CPA Australia (which represents certified practising accountants) have all applauded the government's change of course.
However, Mr Cormann said that the government remains "determined to achieve these changes" and maintains it "is committed to the retention of the Best Interest Duty and we do not intend to reintroduce conflicted remuneration or sales commissions for financial advisers".
The assertion that the proposed changes retain such protections runs counter to the view of many consumer advocates as well as CPA Australia chief executive Alex Malley.
Mr Malley said "the changes the government is seeking to make to FoFA tip the balance too far the wrong way and erode important and hard won consumer protections".
FPA chief executive Mark Rantall says the organisation also "fundamentally supports the original intent of the reforms".
CHOICE letter campaign
Last week CHOICE, in partnership with seven leading consumer organisations, wrote to then Assistant Treasurer Arthur Sinodinos and other senators urging the federal government to reconsider its changes to the reforms.
The organisations included national representatives of financial counsellors, older Australians and the peak body for Australian consumers.
This letter campaign followed a submission to the federal government last month detailing our objections to the return of commission-driven financial advice and hidden superannuation fees. We also opposed the watering down of the requirement that advisers act in their clients’ best interests.
We called on senators to block the changes that would undercut one of the most important gains in consumer protection in recent decades – the culmination of over 20 years of campaigning by CHOICE and other consumer rights organisations.
We also expressed concern that the government intended to rush the changes through regulation, ahead of actual legislation, an approach that would have circumvented parliamentary scrutiny and created significant confusion for industry and consumers.
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The back story
The financial services industry is a tough customer, and it’s fighting hard to get rid of important consumer protections in the Future of Financial Advice reform package – to the point where the reforms would no longer achieve the intended effect of removing bias and conflict of interest.
The anti-reformists have gone right to the heart of why the reforms came about in the first place.
Among other things, the industry is pushing to have the legislation amended to allow advisers to continue recommending financial products from which they draw ongoing commissions. Many advisers may not let such vested interests influence their advice; but there are many who would. The victims of financial advice scandals such as Storm Financial can attest to that.
And in an attempt to hold on to passive income streams – those hidden ongoing fees you pay whether or not you’ve asked for or received any services – the industry is out to scuttle the opt-in clause, which would require advisers to ask customers every two years whether they would still like to keep paying the fees charged to their accounts. The advice lobby also wants to do away with the requirement to provide customers with an annual statement explaining what they’ve been paying for.
These provisions were included in FoFA for good reason – because such information has been woefully lacking for decades, and the lack of transparency has cost Australian consumers dearly.
The advice industry argues that the cost of implementing the reforms without its recommended changes would be passed onto consumers and that, as a result, fewer people would be able to afford advice. The counter-argument is that conflicted advice and hidden fees are the greater long-term threat to consumers.
Advisers also have a habit of selling advice to consumers that’s inappropriate to their circumstances, which is why FoFA requires that advisers act in the “best interests” of their clients. The advice industry is also seeking to undercut this key FoFA clause.
In its submission to the federal government, CHOICE called on lawmakers to:
- keep the best interests obligation intact
- keep the opt-in requirement intact
- ensure that consolidated annual fee statements go to existing clients, not just new ones
- ensure that the ban on commissions is not watered down.
We’re not the only ones who have found evidence of a broken system. An ASIC investigation in 2012 found that only 58% of retirement advice was of an acceptable standard. In many cases, the bad advice was attributed to the influence of commissions and the failure of an adviser to act in the client’s best interest.
Getting rid of commission-driven sales and ensuring proper transparency are founding principles of FoFA and have been a particular focus of CHOICE’s long involvement in the push for reform. It follows that allowing the commission-driven culture to continue would deal a significant blow to the original purpose of the reforms and to the best interests of consumers.