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Chapter 10
The consultation process and
implementation timeframe
10.1
The final chapter of this report details the extensive consultation
process undertaken by the government on the Future of Financial Advice (FOFA)
reforms. It then notes stakeholders' views on the implementation timeframe for
the legislation.
The consultation process
10.2
On 26 April 2010, the then Minister for Financial Services,
Superannuation and Corporate Law, the Hon. Chris Bowen MP, announced the FOFA
reforms.[1]
On 28 April 2011, the Assistant Treasurer and Minister for Financial
Services and Superannuation, the Hon. Bill Shorten MP, announced further detail
on the operation of the reforms.[2]
In providing this detail, Minister Shorten noted:
Since the Government announced the reforms there has been
extensive consultation with stakeholders. The Government has carefully weighed
and balanced all the feedback provided in consideration of today's
announcement. I greatly appreciate the active engagement from industry in the
preparation and early implementation of these reforms.[3]
10.3
The government released draft legislation and a draft Explanatory
Memorandum for the first FOFA Bill on 29 August 2011, with Treasury inviting
comments on the draft by 16 September 2011. It received 47 submissions.[4]
On 28 September 2011, the government released draft legislation and a
draft EM on the second FOFA Bill and invited submissions by 19 October 2011. Treasury
received 48 submissions.[5]
10.4
The Corporations Amendment (Future of Financial Advice) Bill 2011 and
the Corporations Amendment (Further Future of Financial Advice Measures) Bill
2011 were introduced into the House of Representatives on 13 October 2011.
Support for Treasury's role
10.5
In evidence to the committee, Treasury noted that the reforms 'have had
a long gestation period' and have involved 'extensive consultation' with
industry over the past two years.[6]
Treasury also told the committee that these consultations had led to changes in
the government's approach:
During the consultations, the industry's ability to adapt to
the change was taken account of in the government's final proposals. That is
why you saw the change in the opt-in proposal from 12 months to two years. That
was the government's response to issues raised about the impact on the
industry.[7]
10.6
Several stakeholders praised Treasury's efforts in consulting with
industry on the reforms. ANZ Wealth was asked whether it had had an opportunity
to discuss with Treasury some of the implications of the reforms including
changes to IT systems and training manuals. ANZ Wealth General Manager, Mr Paul
Barrett, responded:
We have had a number of opportunities to consult with Treasury.
We have provided them with a fairly detailed breakdown of the impacts on our
systems and the number of hours involved, et cetera. I would like to take this
opportunity to thank Treasury because they have been incredibly accessible
throughout the process and very consultative.[8]
10.7
Mr John Brogden, Chief Executive Officer of the Financial Services
Council (FSC), told the committee that:
...Treasury have been faultless through this process and they
have been extraordinarily consultative. We are very happy with the access to
Treasury. We also say publicly that, despite their best efforts, this has been
very complex and it is an area they have not had expertise in. So there has
been a very significant learning period, but access has been exceptional.[9]
10.8
The Industry Super Network (ISN) Chief Executive, Mr David Whiteley,
told the committee that the reforms 'are moderate and reasonable and have been
developed over a period of years following consultation with all sectors in the
financial services industry'.[10]
The ISN also noted that the Bill's annual fee disclosure requirement was 'very
well canvassed' in Treasury's consultation meetings.[11]
10.9
The Financial Planning Association told the committee that it has been
'a strong contributor' throughout the development of the legislation and provided
'many hundreds of pages of consultation feedback'.[12]
It noted that it had participated in numerous consultation meetings and
discussions hosted by Treasury as well as individually with the Minister's
office.[13]
Consultation on the annual fee
disclosure requirement
10.10
Chapter 3 discussed the issue of annual fee disclosure statements to be
sent to all clients by financial advisers. The committee received comment from
some stakeholders that the government's consultation on this provision was
inadequate.
10.11
Mr Richard Klipin, Chief Executive Officer of the Association of
Financial Advisers (AFA), told the committee that:
Fee disclosure statements were never part of the conversation
and never part of the consultation. They jumped in at the last minute and are
retrospective. They are a redundant item and will just cost endless amounts of
time and money and will be one of the reasons why a lot of advisers will focus
on the higher value clients at the expense of low and middle income
Australians.[14]
10.12
The Financial Planning Association criticised the 'retrospective' aspect
of the disclosure fee obligation, claiming the consultation process had only
discussed applying this requirement to new clients (as per the draft
legislation). It claimed that this change had created confusion among
stakeholders.[15]
The FSC put the same argument:
With regard to the fee disclosure statement, particularly
with regard to the retrospectivity of the statement, that was never discussed
in any detail with Treasury, particularly with the peak consultation group. It
was never, ever alluded to until it appeared in the legislation which was
tabled in parliament. Indeed, in the month just preceding the bill being tabled
in parliament, the conversations with Treasury, peak consultation groups and
other consultation participants was that the policy was determined and it would
be prospective, and therefore no discussion was entered into.[16]
10.13
On the other hand, the ISN and the consumer groups defended the
government's consultation on the annual disclosure requirement. The ISN was
asked whether it—like others—was taken 'by surprise' that the annual fee
disclosure requirement is to apply to existing clients. Ms Robbie Campo,
Manager of Strategy at the ISN, told the committee:
It took me by surprise that it took anyone by surprise,
because I attended all of the consultation panel meetings and that idea had
been discussed at the consultation meetings.[17]
10.14
Indeed, Choice noted in its submission that the idea of an annual
disclosure notice was first discussed at a peak consultation group meeting led
by Treasury on 24 January 2011. It observed that the disclosure
requirement was raised:
In response to the industry’s concerns about annual opt-in
consumer groups suggested that if opt-in was required every two years instead
of annually then it would be reasonable for consumers to be told the amount
they had paid in fees for services in the intervening year.
It was raised and supported as a good faith attempt by those
who strongly supported annual opt-in to find a way to meet the industry’s concerns
about an annual measure.[18]
10.15
Choice drew attention to the government's 28 April 2011 FOFA information
pack which stated that the two year 'opt-in' requirement:
...will be supplemented by an intervening annual disclosure
notice to be provided to the client detailing fee and service information for
the previous and forthcoming year, informing the client of their right to ‘opt-out’ at any point in time to an ongoing advice contract.[19]
10.16
On 29 August 2011, Minister Shorten's press release stated that 'the
'opt-in' measure requires a financial adviser or planner to send a renewal
('opt-in') notice every two years to new clients, as well as an annual fee
disclosure statement to all clients'.[20]
10.17
Choice did acknowledge that the draft legislation relating to disclosure
notices did not apply to all clients, as the Minister’s press release had
indicated. It was subsequently amended such that the measure applies as it was outlined
in the government's April 2011 announcement.[21]
10.18
Associate Professor Joanna Bird from the University of Sydney argued
that it is reasonable for a consultation process to amend the draft
legislation. In her evidence to the committee, she reasoned:
You consult with bodies because you want to get their
opinion, and presumably you are going to be prepared to make changes if people
make submissions to you that convince you. So we should not be surprised that,
through the consultation process, the package of reforms has changed. It has to
be said that this very group of consumers put forward a submission that
actually argued that it should apply to all existing clients. That, and
presumably other information that came to the government, may have convinced
them that they needed to modify their legislation in response to it. That is
what happens in consultation processes; arguments are made to you and you are
convinced by them and you respond to them. If you are not prepared to change
anything, do not consult.[22]
10.19
Associate Professor Bird also noted that the consultation process on the
Bill is ongoing, through the parliamentary committee process. As she told the
committee:
...the idea that this is not being consulted on is strange
because we are talking about it and we are consulting on it. And there have
been something like 68 submissions made to you [the committee] and many of them
have raised this issue. So there is ongoing consultation.[23]
Committee view
10.20
The committee rejects the suggestion put by some stakeholders that the first
FOFA Bill's provision which require annual fee disclosure statements to be prepared
for both existing and new clients was not discussed during the consultation
process. While it is true that the draft Bill did not contain the requirement
for existing clients, the intent to apply disclosure statements to both new and
existing clients was publicly announced by the government in April and August
2011. The committee also highlights Treasury's comment that it consulted with
stakeholders about the potential cost of the disclosure obligations.[24]
The implementation timeframe
10.21
As chapter 1 noted, the commencement date for the provisions of the FOFA
Bills is 1 July 2012. The committee received mixed evidence on the merit of
this starting date.
Opposition to the 1 July 2012
timeframe
10.22
Several witnesses proposed aligning the commencement of the FOFA and
MySuper legislation. The AFA, the FPA, the Corporate Superannuation Specialist
Alliance the FSC and ANZ Wealth[25]
all argued for delaying the commencement and implementation of the FOFA reforms
until at least 1 July 2013 to synchronise the change with the start of MySuper.[26]
Beyond this, these groups' views varied on how the implementation of FOFA
should proceed.
10.23
The Chief Executive Officer of the FPA, Mr Mark Rantall, told the
committee that 'there should be a two-year transition and implementation time
frame for the FOFA reforms similar to those that apply to FSR'.[27]
10.24
The FSC drew the committee's attention to the costs of IT implementation
and training, noting that its members need 'at the very least' a six- to
nine-month period before they can start implementing the FOFA reforms. Mr John
Brodgen, the Chief Executive Officer of the FSC, noted that in waiting 12
months to implement FOFA, 'the industry will be better prepared to provide best
interest advice and adhere with this legislation'.[28]
10.25
The Corporate Superannuation Specialist Alliance told the committee that
the FOFA legislation 'should not be delivered in numerous separate tranches as
this makes it almost impossible for the financial services industry to plan
appropriately for and to cost-effectively implement the changes'.[29]
10.26
The Stockbrokers' Association of Australia told the committee that with
the July 2012 commencement date, its members 'will not have enough time to make
the systems, policy and procedural changes which will be necessary for their
implementation'. The Association sought a further transition period 'of at
least 12 to 18 months, from July 2012 to the end of 2013'.[30]
Support for the 1 July 2012
commencement date
10.27
The Joint Consumer Groups (JCG) told the committee that the proposed
transition provisions are 'actually quite generous'. It noted that under the intended
arrangements, there will be no opt-in notice required until July 2014 and for
new clients, the first fee disclosure statement will not be required until 1
July 2013.[31]
10.28
In its submission to the inquiry, ANZ Wealth set out its recommended
approach to FOFA compliance deadlines. It proposed that the following aspects
of the legislation should be implemented by 1 July 2012:
- the 'opt-in' requirement for new clients (which will not actually
commence until 1 July 2014);
- the annual disclosure fee requirement (providing it is only
prospective for new clients);
- the soft dollar ban;
- the Australian Securities and Investments Commission's (ASIC) new
powers;
-
the ban on conflicted remuneration as it applies to volume
bonuses;
- the ban on conflicted remuneration as it applies to workplace
employer defaults (provided there is no enforcement activity for one year after
1 July 2012);
-
the ban on conflicted remuneration as it applies to non-corporate
super; and
-
the best interests duty (with a three month grace period on
enforcement in light of the final shape of the duty not being known and in
recognition that systems changes will need to occur so that the duty is
appropriately applied to adviser activities).[32]
10.29
ANZ Wealth argued that if the disclosure requirement applies to existing
clients, the commencement date should be 1 July 2013. It also argued that the
ban on conflicted remuneration as it affects Authorised Deposit-taking
Institutions (ADIs) should wait until 1 July 2013, as should the ban on adviser
commissions in group insurance arrangements.[33]
10.30
In terms of its own industry, ANZ Wealth drew the committee's attention
to the 'substantial legacy systems and products' of many fund managers. In addition,
it noted that there are current products that will fall into the legacy
category as a result of the reforms.[34]
10.31
The ISN told the committee that there are in some cases substantial
changes to be made to the operating systems of large institutions. Mr Whiteley
suggested that the regulator should be aware of these transitional issues:
I have certainly got sympathy that elements of some of these
reforms mean that institutions are going to have very substantial system
changes if they are required. I am not an expert on the system changes that are
required, but certainly the evidence is suggesting from some of the major
institutions a substantial amount of change is required and that the regulator,
ASIC, should be sensitive to the implementation process.
...on the particular points around probably certain volume
rebates and some of the complex areas around platforms, we are very much of the
view that [the] regulator should be taking a constructive, sympathetic and I
think the term is soft approach to that first year of implementation, to be
respectful of and sympathetic to the fact that timelines are probably at little
bit more pushed out and people might have expected and the industry does need to
have the capacity to do this implementation.[35]
10.32
Treasury argued along similar lines. In evidence to the committee, Executive
Director of Markets Group, Mr Jim Murphy, noted:
...for the major companies we appreciate that major systems
changes have to take some time. There are ways of doing that. You can commence
legislation but have a very light touch from ASIC, more an educational role.
That is one way and not so much stringent enforcement. There are various ways
of approaching that.[36]
10.33
In its supplementary submission to the inquiry, the ASIC noted that it
had announced it will adopt a 'facilitative compliance approach' for the first
12 months of the implementation of the FOFA reforms. As an ASIC official
explained:
...provided industry participants are making reasonable
efforts to comply with the FOFA reforms, ASIC will adopt a measured approach
where inadvertent breaches result from a misunderstanding of requirements or systems
issues. However, where ASIC finds deliberate and systemic breaches we will take
stronger regulatory action.[37]
10.34
In evidence to the Senate Economics Legislation Committee on 16 February
2012, Treasury noted that various representations had been made by the industry
on the implementation timetable and a final decision was 'still with the
minister'. This included whether to synchronise the starting date for the
implementation of the MySuper and FOFA reforms. Mr Murphy did note that there will
need to be 'quite important changes to back officers in terms of education of
financial planners'.[38]
Committee view
10.35
The committee is cognisant that at the same time as it is preparing this
report, the Minister is conducting ongoing consultations with the industry on
the implementation timeframe for the FOFA Bills. The committee largely agrees
with ANZ Wealth that the vast majority of the FOFA provisions should commence
on 1 July 2012. The industry has been properly consulted and has known of
the FOFA Bills' provisions for some time. The annual fee disclosure for new
clients and the 'opt-in' requirement will commence in 12 months and two
years respectively. The fee disclosure requirement for existing clients relates
only to the client arrangements negotiated for the previous 12 months and as
such, should not be onerous.
10.36
The committee does recognise, however, that where institutions face
substantial systems changes, ASIC should show a measured approach to
inadvertent breaches in the first year of the legislation. The committee commends
ASIC for its 'facilitative compliance approach' but urges the regulator to
adopt a stricter approach 12 months after the commencement of the FOFA
provisions.
Cost of implementing FOFA
10.37
The FSC stated in evidence to the committee that based on modelling from
the industry, the full implementation cost of FOFA will be $700 million. Mr
Brogden added that on top of this cost, there will be an annual compliance cost
of $375 million across the industry.[39]
These estimates have been widely cited.
10.38
The $700 million implementation estimate was put to Treasury for its
comment during Senate Estimates in February. Mr Murphy replied:
I am very sceptical of that estimate...We are examining it...As
well as that, we look at what other people say. From what I can glean from all
the various estimates that have come out, it is going to have a marginal impact
on the financial planning industry.[40]
The regulations
10.39
There was some concern that industry will have very little opportunity
to see the regulations accompanying the legislation prior to the commencement
date of 1 July 2012. Mr Brogden of the FSC told the committee:
...this will not go through parliament or through the House
of Representatives until March, April or May...
...once the legislation goes through, Treasury will have to
provide the regulation. If we are lucky, we will know what the law says on 30
June 2012 for an implementation one minute later.[41]
10.40
However, the committee notes Treasury's comment that it expects the
draft regulations will be available for public consultation during March 2012.
This will give the industry at least three months in which to comment on the
draft regulations and know of their final form.[42]
Concluding comments and a final recommendation
10.41
The FOFA Bills represent a significant reform of the financial advice
industry in Australia. The impetus for the legislation was the committee's 2009
inquiry into financial products and services in Australia. That inquiry was in
turn a response to the financial collapses of Storm Financial and Opes Prime,
among others. As in the 2009 inquiry, the committee's principal interest in
examining the FOFA legislation is to ensure better outcomes and protections for
consumers of financial products and services. It believes that the legislation
will achieve that aim.
10.42
The FOFA Bills will not only enhance consumer protections, but promote
the professionalism of the financial advice industry. For too long, the
industry's standards have suffered from lax regulation and an inadequate focus
on the needs and interests of clients. The FOFA reforms will significantly
address these inadequacies, principally through the annual fee disclosure, opt-in
and conflicted remuneration provisions. The costs of implementation and
compliance for the industry will be far outweighed by the benefits to consumers
from high quality advice and transparency in charging fees.
10.43
The committee does appreciate that the next 18 months to two years will
be a time of significant adjustment for many in the financial advice industry. It
recognises that ASIC will take a measured approach to inadvertent breaches in
the first year of implementation. As this report has noted, it is also important
that ASIC assist with this compliance through publishing clear regulatory
guidance detailing what is expected of industry.
10.44
Moreover, the committee believes that in the interests of identifying
problems with compliance and implementation, the government should commission
an independent review of the FOFA reforms. The reporting of this review should
be staggered to allow an initial assessment of the annual fee disclosure
requirement and the industry's early adaptation, followed by a more complete
assessment to consider the opt-in provisions and ASIC's use of its new powers.
Recommendation 15
10.45 The committee recommends that there should be an independent review of
the application of the Future of Financial Advice (FOFA) legislation. The
review should be timed to comment constructively on how stakeholders have
complied with, and interpreted the FOFA provisions. To this end, the committee
recommends that an initial report should be given to government by the end of
2013 and a further report by the end of 2014.
Mr Bernie Ripoll, MP
Chair
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