The Assistant Treasurer has released a paper containing further details of the Future of Financial Advice (FoFA) reforms

The Assistant Treasurer has released a paper containing further details of the Future of Financial Advice (FoFA) reforms. Mr Shorten announced new elements of the FOFA reforms - they include:

• A prospective ban on up-front and trailing commissions and like payments for both individual and group risk within superannuation from 1 July 2013. This will not apply to risk insurance outside superannuation.
• 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. This ban will not apply to pure risk insurance. The paper also noted that, following the conclusion of formal consultations, some industry stakeholders raised the issue of arrangements such as equity share schemes or special purpose vehicles being used to circumvent the ban on volume-based payments. The Government said it shares these concerns and will consult with consumer and industry groups on anti-avoidance provisions.
• 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 - this is designed to create 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 (eg savings accounts), first home saver account deposit accounts and non-cash payment products (eg travellers cheques and cheque accounts).
• The Government will explore whether the term "financial planner/adviser" should be restricted under the Corporations Act 2001.

Accountants' exemption

Last year, the Government announced that the existing exemption permitting accountants to provide advice on the establishment and closing of self-managed super funds (SMSFs) without holding an Australian Financial Services Licence (AFSL) would be removed and the Government would consult on an appropriate replacement. The paper provides an update on this proposal.

The paper states that the "Government believes it is in the interests of accountants and their clients, for accountants to be able to consider a broader range of financial issues when advising clients, particularly in relation to the establishment of SMSFs." The paper adds that the "Government also recognises that many accountants are not financial advisers, and may not wish to provide holistic advice or recommendations to clients to purchase specific financial products."

The paper says Treasury, ASIC and the accounting bodies "are now working together on various initiatives that maintain a level playing field for what is needed to provide financial advice but at the same time will assist accountants to obtain a licence". It says measures discussed by ASIC, Treasury and the accounting bodies to date include: ASIC recognising relevant experience of accountants for licensing purposes; granting licences that relate to classes of financial products rather than specific financial products (ie "non-product financial advice") in order to reduce ongoing compliance costs; and providing specific guidance about how a typical accountant might apply for a licence.

The paper says Treasury will report to the Government "at the end of May this year and a decision will be made at that stage as to whether any broader legislative changes are needed".

Statutory best interests duty

Under the FOFA reforms, the Government announced, among other things, that it would introduce a statutory best interests duty for financial advisers. The paper notes that Treasury has been consulting with stakeholders on various formulations of a duty that would require a person providing personal advice to a retail client to act in the best interests of the client and, if there is a conflict between the client's and the interests of the person providing personal advice or the providing entity, to give priority to the client's interests.

The paper notes that the legislation will provide that a person providing personal advice cannot contract out of the duty. It also notes that liability for any breach of the duty will rest with the relevant providing entity. This means that individual advisers will not be held financially liable for any breach of the duty. However, the individual adviser who provides the advice may be subject to administrative penalties in the form of a banning order if they breach the duty.

Timeline

The Government is expected to release draft legislation for public comment after the middle of this year. Consistent with the timetable announced last year, legislation giving effect to these reforms will be introduced into Parliament before the end of 2011.

In response to the paper, the Joint Accounting Bodies (including the NIA) said they were pleased the Government had recognised the role of accountants in providing guidance and advice. "This is a positive step in developing a suitable replacement for the current 'accountants' exemption' and takes into consideration the experience and expertise of accountants," the accounting bodies said. They said the reform "should give professional accountants scope to provide 'non-product' financial advice to clients".