The complex regulations implementing the government’s critical Future of Finance Advice Reforms may permit financial advisers to continue providing conflicted financial advice even to new clients, causing concern across the financial services industry.
A key element of the Future of Financial Advice reforms successfully maneuvered through Parliament by Financial Services Minister Bill Shorten earlier in the year is a ban on “conflicted remuneration”, including commissions, by financial advisers, to end the long-running practice of financial advisers channelling clients into products from which they derive a fee.
The reforms commenced on July 1 this year but don’t become mandatory until July 1 next year, and don’t apply to existing financial advice contracts, for constitutional reasons.
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The grandfathering required to protect these existing arrangements is where the drafters of the regulations implementing the reforms appear to have gone too far (regulations are drafted on direction from departments by the confusingly-named Office of Legislative Drafting, in the Attorney-General’s Department, as opposed to the drafting of legislation itself, which is done by the separate Office of Parliamentary Counsel).
The new section of the Corporations Act providing for a ban on conflicted remunerations establishes that regulations may determine if the ban on conflicted remuneration applies, in addition to not applying when
(a) the benefit is given under an arrangement entered into before the application day; and
(b) the benefit is not given by a platform operator.
So far so good, but the regulations that fill out the intent expressed in legislation to ban benefits that are given by a platform operator after July 1, 2013 are problematic. The relevant regulations came into effect in October and say the ban also doesn’t apply if the benefit is given:
(a) by a platform operator; and
(b) under an arrangement that was entered into before the application day, within the meaning of subsection 1528 (4) of the Act.
This appears to suggest that financial planners can continue to derive benefits like commissions from platform operators as long as the contractual basis for doing so was entered into before the commencement of the new rules, even for new clients of the planner. The new rules would only apply if a financial planner changed their relationship with a platform operator.
Aside from the constitutionality of retrospectively banning commissions, the goal of the FOFA reforms on this issue was to transition the industry to a commission-free model, as commission-based financial services became an ever-decreasing legacy with new, non-conflicted advice applying to new clients after 2013. This would give the industry time to shift to a new world of client-centred financial advice.
The impact of the regulations as drafted, however, may well be to preserve the industry as-is.
Crikey understands Shorten, who landed the FOFA package in Parliament after extensive negotiations with key industry players, is across the issue and currently working to resolve it with industry. Apart from industry super funds that don’t use financial planners or commissions, there are a growing number of financial services providers that have already moved away from relying on commissions to sell their products, preferring to rely on the merits of the products themselves to drive sales.