The Australian Federal Government has just passed its ‘Future of Financial Advice’ legislation, better known as FOFA. The intention of the legislation is to create a transparent market for financial advisers to act and operate in the best interests of consumers.
The debate over FOFA has been long and at times very intense within the financial advisory community.
Now that FOFA has been legislated the big question is: How will FOFA affect the Australian financial consumer?
To find the answer we asked the Association of Australian Financial Advisers (AFA) a series of questions that we believe are critical to the Australian consumer.
Why did the Government see the need to introduce the FOFA legislation?
Back in 2009 a Parliamentary Joint Committee (PJC) Ripoll inquiry was formed largely in response to the collapse of high profiles businesses including Storm Financial and Opes Prime. The inquiry was wide ranging and received a large number of submissions and held lengthy public hearings.
The Government recognises the benefits to consumers seeking advice, both financially and emotionally. However, only 20% of Australians actually seek financial advice. From the lessons learnt during the PJC inquiry, the Government proposed the FOFA legislation as an opportunity to improve the standard of financial advice.
What three proposals within FOFA do you believe will benefit everyday Australians the most?
The three FOFA proposals that should provide benefits to Australians are:
- Best Interest Duty
- Ban of conflicted remuneration
- Increased Australian Securities and Investments Commission (ASIC) powers.
Best Interests Duty – The AFA agree in principle with the Best Interests Duty. Advisers will have a statutory duty to act in the best interests of the client in relation to the provision of advice. This is a benefit for Australian consumers and should give them additional peace of mind when dealing with a qualified adviser.
Ban of conflicted remuneration – Reducing the conflicts in the remuneration system for financial adviser is a good outcome and will work in the best interests of Australian consumers.
Increased ASIC powers – ASIC is the Government’s ‘watchdog’ for Australian financial services. The AFA support the increased powers of ASIC and ASIC’s efforts to protect consumers by tackling unacceptable financial industry conduct and improving standards for financial advisers and product manufactures.
Are there proposals within FOFA that you don’t think will benefit Australians?
The AFA believe the following three FOFA package proposals will not benefit Australians:
- Fee disclosure statements
- Ban on commissions for insurance inside super.
Opt-In – This is the term used for a provision in the legislation that requires a client to ‘re-sign’ a service contract with their financial adviser every two years. If the contract is not re-signed for any reason, the client will cease to have a relationship with the adviser.
We believe the Opt-In provision is unnecessary given the inclusion of ‘Best Interests Duty’ and the ban on conflicted remuneration. Further it will be a costly exercise, from an administrative perspective, which is a cost that will need to be passed on to consumers.
Fee Disclosure Statement – Fee disclosure statement obligation is annual and is extensive in the detailed requirements. Due to the complexity it will be expensive for advisory firms to implement and unfortunately the costs of this complex reporting will inevitably need to be incorporated into client costs.
Ban on commissions for insurance inside superannuation – The AFA strongly opposes the ban on commissions for insurance inside super. Advice is important with this market and without commissions it is difficult for an alternative remuneration model to be built. AFA research ‘Back to Basics’ conducted by CoreData demonstrated that clients are happy to pay commission for advice and prefer to have choices.
A ban on commissions and this forcing clients to pay upfront fees will less people having access to advice and fewer will have adequate levels of insurance. This will probably further exacerbate the underinsurance problems in Australia. Furthermore, this will result in an uneven playing field as the ban will not apply to insurance outside superannuation.
Does FOFA make it more important to seek professional financial advice?
The need to seek financial advice is as important today as it has been in the past. We have a population that is quite literally growing older and putting additional pressure upon Government resources. This means more people will need to financially take care of themselves in retirement.
The past few years has seen the role of Financial Adviser and the Financial Services industry come under intense scrutiny. Whilst much of this scrutiny is welcome, there is a need to clearly address the key question – ‘What do financial advisers do, and how do they add value to their clients?’
The AFA research ‘Back to Basics’ conducted by CoreData demonstrates that consumers who have an advice relationship are better planned, are happier with their investments and have a good sense of financial freedom.
We strongly recommend that all Australians should seek advice from a suitably qualified financial adviser.
A big humble thanks to the team at the Association of Financial Advisers