The Assistant Treasurer has released the first tranche of draft legislation to implement the Government's Future of Financial Advice (FoFA) reforms.

The first tranche - the Exposure Draft Corporations Amendment (Future of Financial Advice) Bill 2011 - will amend the Corporations Act 2001 and covers a number of key components of the FoFA reforms, including opt-in, the best interest duty, and the increase in ASIC's powers to enforce the new elements of these reforms. The draft is on Treasury's FOFA website.

The second tranche, which the Assistant Treasurer expects to release shortly, will include the ban on conflicted remuneration (covering commissions and volume payments), the ban on "soft dollar" benefits, the ban on asset-based fees (where there is gearing), and the definition of intra-fund advice. At that time, Mr Shorten said he would also announce his decision on the replacement of the accountants' AFSL exemption.

First tranche - key points

Best interest duty

The draft Bill proposes a statutory duty to require a person when providing personal advice to a retail client to act in the best interests of the client: proposed Pt 7.7A of the Corporations Act 2001. Advisers will also be required to give priority to the interests of the client in the event of conflict between the interests of the client and the interests of the individual providing the advice, the licensee and the authorised representative (where different).

The best interest duty will apply from 1 July 2012 and include steps that advisers must follow in acting in the best interests of the client. The penalty for breaches of the obligations will rest with the authorised representative or licensee with a maximum penalty of $200,000 for individuals ($1m for corporate entities).

Amendments are also proposed to replace the existing requirements in s 945A of the Corporations Act 2001 which require a "reasonable basis" for advice and to warn clients in particular situations. These amendments include de-criminalising these requirements, so they have the same penalty as the best interest obligations.

The draft Bill also includes an obligation on licensees to take reasonable steps to ensure their representatives' compliance with the best interest obligations. However, an exemption will apply for authorised representatives, so they do not breach the obligations where the breach resulted from reasonable reliance by the authorised representative on information or material provided by the licensee.

"Opt-in" renewal every 2 years

If a financial adviser is to charge an ongoing fee to a retail client, the advisers will be required to send a renewal ("opt-in") notice every 2 years to new clients, as well as an annual fee disclosure statement to all clients. The opt-in will apply to new clients from 1 July 2012.

It is proposed that significant flexibility will apply to how advisers are able to discharge the opt-in obligation. Advisers who charge on-going fees but do not have regular face-to-face meetings with their clients will be able to use electronic channels such as phone or internet and could potentially use a record of advice to record the renewal. For example, the client could fill in a short form online and click a "send" button (that sends the email). If the client does not renew the adviser's services by "opting in" to the renewal notice, they will be assumed to have opted out and an ongoing advice fee can no longer be charged. The client will also be entitled to recoup any ongoing fees that are charged in the event the adviser fails to send either a fee disclosure or renewal notice. Only those advisers intending to charge ongoing advice fees to retail clients need to provide the notices.

Where an adviser continues to charge an ongoing fee after a fee arrangement terminates as a result of the renewal notice obligation (either after a client chooses not to renew, or does not respond to the renewal notice), they will be subject to a civil penalty. Because a breach of opt-in is likely to be relatively less serious than, for example a breach of the best interests duty, it is subject to a lower maximum penalty ($50,000 for an individual and $250,000 for a body corporate) and would be proportionate (to the extent any action is taken at all).

ASIC's powers

The draft Bill contains provisions to enhance the ability of ASIC to supervise the financial services industry through changes to its licensing and banning powers. These amendments include:

• a change to the licensing threshold so that ASIC can refuse or cancel/suspend a licence where a person is likely to contravene its obligations. This sets a higher standard than the current threshold which is that ASIC can refuse or cancel/suspend a licence where a person will not comply with its obligations;
• an extension to the statutory tests so that ASIC can ban a person who is not of good fame and character or not adequately trained or competent to provide financial services (in essence they are not a fit and proper person);
• a change to the banning threshold so that ASIC can ban a person if they are likely to contravene a financial services law. This sets a higher standard than the current threshold which is that ASIC can ban a person if they will not comply with a financial services law; and
• clarification that ASIC can ban a person who is involved, or is likely to be involved, in a contravention of obligations by another person.

Other key points

• ban on risk insurance commissions - will apply to commissions on group life insurance in all superannuation products, and to commissions on any life insurance policies in a default or MySuper product from 1 July 2013;
• ban on soft dollar benefits - Mr Shorten said that, with broad agreement among stakeholders that the ban on soft dollar benefits should include life insurance outside superannuation, he had decided to extend the ban in order to provide increased consumer protection and certainty for business;
• stockbroking - traditional remuneration models in the stockbroking industry "will not be unduly impacted" as a result of the reforms, the Assistant Treasurer said. For example, stamping fees or similar payments relating to capital raising will be permitted in order "to preserve an important channel for companies to continue accessing the retail investor market in order to raise capital". Where brokers undertake financial planning activities, the ban on product commissions will still apply;
• transition to ban on commissions - the ban on conflicted remuneration (including the ban on commissions) will not apply to existing contractual rights of an adviser to receive ongoing product commissions. This means that, in relation to trail commissions on individual products or accounts, any existing contract where the adviser has a right to receive a trail commission will continue after 1 July 2012, or in the case of certain risk insurance policies in superannuation, 1 July 2013;
• "financial planner" restricted term - Treasury will release a public consultation paper by the end of the year on restricting the term "financial planner" in the Corporations Act 2001.

Comments
Comments are welcomed by the IPA for an upcoming submission to Treasury.  Please have all comments to the IPA by 10 September 2011 to Reece Agland, manager member integrity, This e-mail address is being protected from spambots. You need JavaScript enabled to view it