Why you should care about FoFA, even if you have no money to manage
After Clive Palmer backed down last week the government’s Future of Financial Advice (FoFA) reforms are law … well, sort of. We take you through the nitty-gritty in the law — what’s changed, and what it means.
What is happening with the act?
We are in a very curious position: the normal legislative process is working in reverse! On June 30, when the government realised it didn’t have the numbers in the Senate, Finance Minister Mathias Cormann circumvented the Parliament and bought time by issuing interim regulations, which gave legal effect to the FoFA reforms from July 1 until the end of 2015. Labor and the Greens tried to disallow the Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014 but failed last Wednesday when the Palmer United Party voted with the government. The government still has to pass the Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014, incorporating minor changes requested by Palmer, as was flagged in a media release. At that point the relevant provisions of the regulations will transfer into the act.
I don’t have a financial adviser, why should I care?
Choice campaigns manager Erin Turner says the government’s FoFA wind-back will affect all Australians, firstly through economy-wide impacts — ASIC estimates consumers lost $5.7 billion between 2006-10 as a result of financial advice scandals from Westpoint to Commonwealth Financial Planning, losing their homes and life savings — and secondly through a loss of trust in our largest financial institutions, which will be giving more unsolicited, general advice. “From now on, whenever you walk into a bank, the tellers are going to be incentivised, more than ever, to provide general advice and steer you towards certain products, as part of their bonus,” Turner said. Her recommendation? Exercise extreme caution. The playing field has tilted, back to the advisers.
Best interest test
The Labor government introduced the original FoFA reforms after a series of mis-selling scandals led to the Rippoll Senate Inquiry, and they took effect from July 1, 2012. Section 961B of the corporations law imposed tough new obligations on financial advisers giving client-specific advice, more like the fiduciary duty that falls on other professionals like lawyers and accountants.
Sub-section 961B(1) said financial advisers “must act in the best interests of the client in relation to the advice”. Sub-section 961B(2) gave advisers a seven-point checklist — a so-called “safe harbour”, which, if satisfied, would amount to compliance with the first sub-section. The first six points covered basic obligations to give appropriate client-specific advice. The last clause, s961B(2)(g), obliged the adviser to take “any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances”.
Advisers hated that last “catch-all” provision — the open-ended, “any other step” bit — and now it is gone. So is another provision, s961E, requiring advisers to act with objectivity and care.
Advisers still have to comply with the six-point checklist in s961B(2) to be sure they’ve met their obligations to the client. But there are new exceptions: for example, bank employees are exempt from parts of the checklist, if they are providing advice related to basic banking products, general insurance products, consumer credit insurance or a combination of those.
So the best interests test remains, but it is much weaker.
Personal advice, scaled advice, general advice
Both the previous Labor FoFA reforms and the government’s current reforms distinguish between three forms of financial advice:
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