Navigation: Previous Page | Contents | Next Page
Dissenting Report by Coalition members of the Committee
Coalition members of the Committee recognise that the financial
services and advice industry provides an important service, helping Australians
with their financial health and wellbeing.
Financial advisers help
Australians better manage financial risks and maximise financial opportunities.
In doing so financial services providers deal with other people's money, which
is why it is important to have an appropriately robust regulatory framework in
place balancing the need for effective consumer protection with the need to
ensure access to high quality financial services and advice remains available,
accessible and affordable.
Subjected to the stress testing
of the global financial crisis the Australian financial services industry
performed well overall. There is no doubt that Australia's financial services
reforms legislated in 2001 provided a solid regulatory foundation for our
financial services industry.
There is always room for
improvement. However, in pursuing regulatory change the Parliament must focus
on making things better not just more complex and more costly for everyone. The
Parliament must avoid regulatory overreach where increased red tape increases
costs for both business and consumers for little or no additional consumer
In the wake of the global
financial crisis there were a number of high profile collapses of financial
services providers across Australia, such as the collapses of Storm Financial,
Trio and Westpoint.
Following on from those collapses
it was important for policy makers to assess what went wrong and what could be
done better in the future to prevent – or at least minimise the risk of – such
collapses occurring in the future.
This is why in February 2009, the
Parliament asked the Parliamentary Joint Committee on Corporations and
Financial Services to conduct a comprehensive inquiry into Australian financial
products and services.
That inquiry colloquially
referred to as the Ripoll inquiry reported back in November 2009 and made a
number of well considered and reasonable reform recommendations.
The centrepiece of the Ripoll
Inquiry’s report was the recommendation to introduce a fiduciary duty for
financial advisers requiring them to place their clients’ interests ahead of
The report’s recommendations
provided a blueprint the government could have adopted with bipartisan support,
to make important improvements to our financial services regulatory framework
to further enhance Australia’s already first class regulation of the financial
One of the key observations of
the Ripoll Inquiry in 2009, which Coalition Committee members continue to
support was that:
The committee is of the general view
that situations where investors lose their entire savings because of poor
financial advice are more often a problem of enforcing existing regulations,
rather than being due to regulatory inadequacy. Where financial advisers are
operating outside regulatory parameters, the consequences of those actions
should not necessarily be attributed to the content of the regulations.
Instead of implementing the very
sensible and widely supported recommendations made by the Ripoll Inquiry, the
government allowed its Future of Financial Advice reform package to be hijacked
by vested interests creating more than two years of unnecessary regulatory
uncertainty and upheaval in our financial services industry.
The government's decision making
processes around FOFA over the past two years leave much to be desired. There
were constant and at times completely unexpected changes to the proposed
regulatory arrangements under FOFA right up until the introduction of the
current legislation. Invariably this was done without proper appreciation or
assessment of the costs involved, of any unintended consequences or other
implications flowing from the proposed changes to the changes.
Important financial advice
reforms recommended by the Ripoll inquiry have been delayed by more than two
years so the government can press ahead with a number of additional contentious
changes such as its costly Industry Super Network initiated proposal to force
Australians to re-sign contracts with their financial advisers on a timetable
imposed by the government, not chosen by consumers – the Opt-In proposal.
It is the view of Coalition
Committee members that the FOFA package of legislation in its current form is:
complex and in large parts unclear
- Expected to
cause increased unemployment
to enshrine an unlevel playing field amongst advice providers, inappropriately
favouring a government friendly business model
- Likely to
cost about $700 million to implement and a further $350 million per annum to
comply with, according to conservative industry estimates
Based on the evidence provided to
the Committee, Coalition Committee members conclude that this will lead to
increased costs and reduced choice for Australians seeking financial advice.
In pursuing regulatory changes,
government must rigorously assess increasing costs and red tape for both
business and consumers. It is incumbent on the government to conduct a proper
regulatory impact assessment to a standard which is consistent with its own
best practice regulation requirements. Coalition members of the Committee
assert that such an adequate regulatory impact assessment is necessary to
properly assess the impact of FOFA on businesses, consumers and the wider
According to the government's own
Office of Best Practice Regulation the government did not have adequate
information before it to assess the impact of FOFA on business and consumers or
to assess the cost/benefit of the proposed changes. This is highly
unsatisfactory given the complexity and costs associated with the contentious
parts of the proposed FOFA changes.
Not only were the government's
draft regulatory impact statements found to be inadequate by its own Office of
Best Practice Regulation, it based its assessment of the impact of FOFA on jobs
on a single report commissioned by the Industry Super Network (ISN).
In this context it is important
to note that Industry Super Network provided the only submission to the
original Ripoll Inquiry arguing in favour of Opt-In. The ISN proposal for a
mandatory Opt-In requirement was not accepted by that very comprehensive
inquiry, with no recommendation made to implement Opt-In. The government
decided to proceed with the ISN recommendation for Opt-In anyway. In the
circumstances, research commissioned by ISN is hardly an objective assessment
of this proposed change that can be relied on by the government or the
Coalition Committee members
recommend that the Parliament insist on a proper and adequate Regulatory
Impact Statement. That is a Regulatory Impact Statement which complies with the
government's own best practice regulation requirements and is found and
certified to be adequate and compliant with those requirements by the
government's own Office of Best Practice Regulation.
Coalition Committee members
support sensible reforms which increase trust and confidence in Australia's
financial advice and financial services industry by increasing transparency,
choice and competition.
However, any reforms in this area
need to strike the right balance between appropriate levels of consumer
protection and ensuring the availability, accessibility and affordability of
high quality financial advice.
The government has been unable to
point to another example anywhere in the world where a government has sought to
impose a mandatory requirement on consumers to re-sign contracts with their
financial advisers on a regular basis. Coalition Committee members don't
support government attempts through this legislation to make Australia world
champions in financial services red tape. The FOFA red tape envisaged in this
legislation will increase the costs of financial advice for millions of
Australians with no or only very little commensurate consumer protection
benefit. A government seeking to lead the world in imposing additional
financial services red tape should at least submit those proposals to a proper
Further, these reforms will put
at risk Australia's world class financial services industry which is one of the
most respect financial services industries in the world.
Coalition Committee members do
not support this legislation in its current form and urge the government to
adopt the 16 sensible recommendations that would improve this legislation.
If the government is not
spontaneously prepared to take these recommendations on board, we urge the
Parliament to insist.
Coalition Committee members
highlight the following specific concerns with the legislation and urge all
Members of Parliament to carefully consider these concerns before voting on the
Impact of FOFA on the financial advice industry
The Committee received evidence
from many industry participants about the very serious detrimental effects the
introduction of this legislation in its current form would have on the industry
and on consumers. Detrimental effects include high additional costs imposed on
industry participants with resulting increased costs of advice for consumers,
reduced employment levels in the financial services sector leading to reduced
availability and access to affordable high quality advice, as well as a further
concentration of advice providers which would lead to an undesirable reduction
in competition and choice for consumers.
The Committee received evidence
from the Financial Services Council that the government’s proposed changes
would cost the industry $700 million to implement upfront and $350 million a
Mr Craig Meller, Managing
Director of AMP Financial Services, told the committee that there could be job
losses in the industry of up to 25,000 over the next few years:
One of AMP's overriding concerns is
that the bill has been rushed in its drafting and that, if enacted in its
present form, it would have deleterious impacts on customers, financial
advisers and the broader community. We believe there are so many problems with
the bill that a rigorous stock-take is necessary and substantial additional
work needs to be undertaken to get the drafting right. It needs to be
recognised that the additional regulatory costs of this legislation will
ultimately be borne by customers, who will pay more and not obtain the advice
that they need. But the initial impact will be on financial planners, and even
the explanatory memorandum to the bill forecasts a halving of planner numbers
in the next few years. We believe that this could lead to job losses in the
industry of up to 25,000 over that period. We also fail to see how this would
improve advice access. 
Comments from Mr Richard Klipin,
Chief Executive Officer of the Association of Financial Advisers suggests that
the total job losses as a result of this legislation could exceed 30,000:
In conclusion, FOFA, as it stands,
will decimate the financial advice profession. Over 6,800 adviser jobs are at
risk and over 30,000 jobs in total. This excludes the businesses they support
in the communities they serve and the clients they service. A piece of
legislation that inflicts this amount of damage is unacceptable. FOFA as it
stands will also increase the cost of advice to consumers. This committee has
already had evidence that FOFA will cost hundreds of millions of dollars to
comply with—and this is just for the product providers at the big end of town.
It will also decimate the provision of financial advice to clients in the bush
and the regions. Advice will then become a service for the wealthy, and working
families and lower- to middle-income Australians who really need advice will be
priced out of the marketplace. 
Stakeholders argued that FOFA, if
passed in its current form, would cause an undesirable restructuring of the
financial advice industry, with increased concentration of players in the
market and less competition:
...I think there is likely to be a
migration of advisers to large players like AMP. So, despite the fact that we
think there is some competitive advantage in the advice industry for this
legislation to companies like my own, we do not believe it is in the broader
interests of the financial advice industry that there should be what we think
is likely, which would be a consolidation of advisers.
Professional Investment Services,
gave the committee examples of adjustments already occurring in the industry in
anticipation of what may happen under the proposed FOFA regime, such as Count
Count do? They thought, 'This is all too hard. We're now going to sell out,'
and they sold out to the Commonwealth Bank. Do you expect in the long term that
Count will be able to offer a great array of products—a choice of products—or
do you expect that their owner would ensure that their products are
represented, probably disproportionally, on their approved product list? You
have to ask yourself: will that be the case?
not get to be the No. 1 financial services hub in the world and respected by
everybody else because we were anticompetitive. I think this is an important
aspect of FOFA. We have to make sure that, in our rush to protect the consumer,
there is a balance between the objectives of being able to give the consumer
appropriate protection and not reducing the competition that is out there in
Coalition Committee members
consider that the disproportionate increase in costs to the industry and
consumers, the reduction in the number of financial advisers in Australia, the
associated additional job losses and the further concentration of financial
advice services providers will have detrimental impacts on the cost, availability
and accessibility of financial advice across Australia.
FOFA Regulatory Impact Statements fail government's own process
The government has failed to
properly assess the impact of its Future of Financial Advice changes on
businesses and consumers as required by the government's own best practice
On 8 August 2011, the Office of
Best Practice Regulation (OBPR) noted that an adequate RIS was prepared for
only one part of the proposed FOFA changes – the proposed broad ban on
volume-based payments from product issuers to financial advisers. It added that
while RISs were prepared for the other reforms they were not assessed as
adequate for the decision-making stage. As such, the OBPR assessed those FOFA
proposals as being 'non-compliant' with the Australian Government's best
practice regulation requirements.
The government's erratic development of, and constant changes to, the FOFA
reforms are partly responsible for this significant defect.
Mr Jason McNamara, the Executive
Director of the OBPR, explained before a recent Senate Estimates Committee that
the government's 'draft regulatory impact statements' did not have enough
information about the impact on businesses and consumers and the cost benefit
equation of FOFA for the government to make informed decisions:
Mr McNamara : Treasury provided a number of RISs in
that area. I think that there were six separate RISs in that area. But we found
those RISs not yet adequate. They had not met the best practice requirements.
Senator CORMANN: ...My question is: why?
Mr McNamara : In regard to those RISs, essentially the
impact analysis was not at a standard that we would pass.
Senator CORMANN: You say 'the impact analysis'. Can
you be a bit more specific?
Mr McNamara : The impact analysis of a regulation
impact statement is generally the area of the RIS that refers to the costs and
benefits associated with the policy. It is the detail—the impact on business,
consumers or the government. It is that sort of analysis—'this change is meant
to do particular things in the economy; it is likely to have these costs and
Senator CORMANN: Are you saying that the government
did not even have in front of it adequate information to assess the cost
benefit of the FOFA regulation changes?
Mr McNamara : The government did not have an adequate
RIS in front of it when it made those changes. That is true.
Senator CORMANN: ...the government's proposal to
introduce the mandatory opt-in requirement and the annual fee disclosure, are
they the sorts of things that were not properly assessed?
Mr McNamara: Yes. There were six elements.
Senator CORMANN: Can you list those six elements for
Mr McNamara: There was: the carve out of simple
products; treatment of soft dollar benefits; access to advice; replacement of
the accountant's exemption; renewal requirements on ongoing financial advice
fees to retail clients; and the treatment of paid commissions on insurance
products within superannuation and life insurance products outside of
Senator CORMANN: In all of these things the government
did not have adequate information in front of it as far as the regulatory
impact statement is concerned before it made—
Mr McNamara: There is a draft RIS on those elements.
Treasury had prepared RISs on those elements. From our point of view they were
not yet adequate.
AMP told the committee that:
...a full regulatory impact statement should be completed
before the legislation is enacted so that the impact on customers, the
community, the planners and the broader industry is fully known. This is
crucial given the substantial impact on small business, the implications for
financial advice and the capital expenditure required to be made by the
industry in computing, training, product disclosure statements, printing,
auditing and many other issues which, aggregated across the industry, we
believe will amount to several hundreds of millions of dollars.
Coalition Committee members
consider that it is imperative for regulatory changes of this magnitude to go
through the proper process. The least Australians should be able to expect is
that government initiated regulatory changes of this magnitude comply with the
government's own best practice regulation requirements, yet these FOFA changes
The regulatory impact of FOFA
includes additional costs to the industry which the Financial Services Council
estimated at $700 million to implement upfront and $350 million a year to
and the significant job losses outlined above.
Given the very heavy financial
cost imposed on the industry by the proposed changes and the associated
potential job losses, as an absolute minimum, the government must commission a
proper Regulatory Impact Statement, which complies with the government's own
best practice regulation requirements before pressing ahead with this flawed
If not, the Parliament should
insist on a proper Regulatory Impact Statement before dealing with any of these
That the Parliament defer
consideration of the FOFA legislation until the government has submitted a full
Regulatory Impact Statement in relation to the legislation currently before the
Parliament which is compliant with the requirements of the government's own
Office of Best Practice Regulation.
Unrealistic Implementation Timeframe
The government has proposed that
the FOFA changes come into force from 1 July 2012.
The AFA, the FPA, the Corporate
Superannuation Specialist Alliance,
the Financial Services Council
and ANZ Wealth
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.
Mr John Brogden from the
Financial Services Council highlighted to the Committee the impossibility of
achieving the government’s proposed timeframe, especially given that none of
the proposed regulations were currently available to the industry:
Senator CORMANN: That was my next question. I suspect
I know what the answer is going to be. Do you think that the 1 July 2012
implementation date is realistic? Do you think it would be more desirable to
align the implementation date of both FOFA and My Super? If so, can you give us
a bit of context around that from your point of view?
Mr Brogden: No, it is not realistic. Yes, we would
like to align them. I think originally the government's hope, understandably
with its parliamentary agenda being significant, was that this legislation
would go through in the second half of last year. We may have been able to wear
elements of it then coming into force on 1 July 2012. It is now inconceivable.
You could advise us, but this will not go through parliament or through the
House of Representatives until March, April or May.
Senator CORMANN: Mr Brogden, have you seen any
Mr Brogden: No. That is the issue. As you know, 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.
Coalition Committee members share
the concerns of the industry that the current implementation timeframe of 1
July 2012 is completely unrealistic given that the proposed commencement date
is less than five months away.
Coalition Committee members also
consider that it would make sense to implement FOFA and MySuper simultaneously.
These two major changes require significant changes to the same financial
service provider IT systems. It is sympthomatic of the Government's chaotic approach
to this area and its lack of understanding of practical business realities that
it seeks to impose two different implementation dates involving significant and
costly system changes in relatively quick succession. At least the FOFA
implementation should be staggered to take into account required system changes
for both FOFA and MySuper.
That the commencement date of
this legislation be timed to coincide with the commencement date of the
government’s proposed My Super changes, which are currently scheduled to
commence on 1 July 2013. The commencement date should provide at least a 12
month period from the date of finalisation of all legislation and associated
regulations to enable an orderly transition and implementation period.
Opt-in will add unnecessary additional costs and red tape
The Ripoll Inquiry, having
comprehensively considered the state of Australian financial products and
services back in 2009, made no recommendation to force Australians to re-sign
contracts with their financial advisers on a regular basis.
The government’s proposed two
yearly Opt-in provisions would unnecessarily increase costs and red tape for
consumers and businesses for questionable consumer protection benefit.
There is no precedent for this
sort of government red tape in the context of financial services and advice
relationships anywhere in the world. Despite repeated requests during the
inquiry for Treasury to point to examples in other parts of the world where
this sort of requirement had been successfully introduced they were unable to
The AFA stated clearly that “the
opt-in requirements would add an unnecessary layer of administration and
AMP also made their position on
opt-in very clear to the Committee:
I think AMP's position has been publicly and privately very
clear. We have never seen the need for the opt-in arrangements. We believe it
will not add to the quality of the advice or the quality of the relationship
between the financial planner and the client, and that it is an unnecessary
The Committee received clear
evidence the existing capacity for clients to opt-out of fee arrangements at
any time under current regulatory arrangements:
Clients already have the capacity to opt-out and we do not
believe that Opt-In benefits the consumer or is necessary but just adds another
layer of bureaucracy to the process and unacceptable level of risk to consumers
through loss of advice.
The Coalition Committee members
strongly opposed Labor's push to force people to re-sign contracts with their
advisers on a regular basis.
With the best interest duty in
place, appropriate transparency of fees charged and an ongoing capacity for
clients of financial advisers to opt out of any advice relationship at any stage
there is adequate consumer protection without the need to impose additional
costs and red tape for both business and consumers.
The Committee also received
evidence expressing concern about the negative consequences which may flow for
consumers who don’t opt-in within the required 30 day period – that is even
though they may have intended to continue with their financial advice
relationship and may even have assumed that the relationship was ongoing. Even
where the lack of Opt-In is inadvertent clients are automatically deemed to
have ended the financial advice relationship.
In its submission the Financial
Planning Association expressed its concerns as follows:
Unfortunately, the legislation in its current form does not
provide adequate protection to financial advice clients where ‘the disclosure
obligation’ or ‘renewal notice obligation’ is not satisfied by the financial
This is because by virtue of default the client will no
longer be considered an ‘advice client’ if the planner does not receive the
client’s opt-in renewal notice within the 30 day period. This may be contrary
to what the client understands and may have significant ramifications at a
later date when the client attempts to seek compensation from their planner for
not advising them of changes to the law and / or market movements etc that may
affect their financial position / decisions.
At the Committee
Hearings Mr Richard Klipin, Chief Executive Officer of the AFA, expressed his
concerns to the Committee that this provision could actually work against the
interests of consumers, especially at times of significant market turmoil:
...This is one of the reasons it plays against the consumer
interest. Except for those who actually respond and get their opt-in notice
back, the rest have effectively opted out. Our view is that a strengthened
opt-out is absolutely the way to go rather than a prescriptive opt-in. But if
someone opts out, then they are effectively outside the advice relationship,
and when you have a meltdown like the one we saw in 2007-08 or an insurance
contract where something medical is changed, if you are outside that advice
relationship you are outside it, not to mention the legal ramifications of that
should all this end up somewhere in court. When we talk about the vague and
opaque nature, when you play that circumstance out it does not play to the
consumer interest and it certainly just ties up advice practices in cost and
Ombudsman Service also highlighted in its submission that it regularly deals
with circumstances where clients have inadvertently not filled out a forms:
FOS has also dealt with a number of disputes involving
circumstances where a consumer has been sent a form for completion in order to
enter, renew or revise the terms of a financial arrangement with the financial
services provider and the consumer has failed to do so for reasons such as
illness, long holiday or difficulty in understanding technical language.
Coalition Committee members are
of the view that the Opt-In requirement proposed by the government in this
legislation will unnecessarily increase costs, red tape and uncertainty for
both consumers and businesses and should not be passed.
That the Opt-in arrangements
contained in the Corporations Amendment (Future of Financial Advice) Bill 2011
be removed from the Bill.
Retrospective Fee Disclosure Statements – not part of the government's
proposed changes until the last minute
The Ripoll Inquiry made no
recommendation to introduce an additional annual fee disclosure statement over
and above the current regular statements provided by financial services product
providers to their clients already.
Furthermore, the Committee
received strong evidence that based on the various FOFA consultation sessions
it was the industry's clear understanding that the government's proposal to
impose an additional annual fee disclosure statement would be prospective –
that is only apply to new and not existing clients.
According to the evidence
received by the Committee, after more than two years of consultations by the
government on FOFA, the introduction of a retrospective annual fee disclosure
statement was something that took the industry by surprise when it first
appeared in this legislation when introduced into Parliament in October 2011.
Mr Dante De Gori from the
Financial Planning Association expressed the shock of the industry at being
confronted with these provisions at the last minute:
Mr De Gori: The fee disclosure is a case in point; it
was not talked about. Our position was settled with respect to the exposure
draft and then that changed when we received the actual legislation; it was
different. There was no consultation in the middle of that.
Mr Richard Klipin, Chief
Executive Officer of the 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
In relation to the retrospectivity of the proposed fee
disclosure statements, AMP pointed out in its submission that the government’s
stated policy intention in its FOFA package released on 28 April 2011 was that
the opt-in requirements, including the annual fee disclosure statements, would
apply prospectively only.
At the committee hearings the FSC stated clearly that the
retrospectivity of the annual statements was never a matter that was discussed
by Treasury in consultations, even with the peak consultation group:
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.
In their submission
AMP also highlighted concerns expressed across the financial services industry
that the majority of information that would be provided in the proposed annual
disclosure statement is in fact already provided to clients. At best the
provision would provide for consolidation of such information into an
additional statement at considerable additional expense for little or no
additional consumer benefit:
We do not believe that the provision of an additional piece
of paper to a client should be seen as the solution to the purported lack of
interest by the community in dealing with financial products and services.
When looking at the purpose of a fee disclosure statement, it
is clear that the intention is to provide clients with an opportunity to assess
whether they are receiving services from an adviser that is commensurate with
the ongoing fee paid.
In light of the number of disclosure documents already
required to be provided to a client under existing financial services
legislation, it would be more efficient to incorporate the content of this
disclosure in existing documents rather than to introduce additional
Introducing a mandatory obligation for all legislated
documentation to contain a statement that ongoing advice fees are able to be
opted out of at any time by the client would be a more efficient approach to
tackling the problem Government is seeking to address.
FSGs, SoAs, PDSs and periodic statements would all contain a
mandatory disclosure that the client is able to notify their adviser at any
point should they wish to cease an ongoing fee arrangement. On an ongoing
basis, periodic statements setting out the quantum of any fees paid in relation
to ongoing advice would also contain the statement that a client is able to
cease making these payments at any stage.
highlighted the disproportionate impact the retrospective annual fee statements
would have on products it no longer offers to the public, or ‘legacy’ products and
called on the annual fee statements to be prospective only:
AMP, as with many older financial product providers in
Australia has a number of products it no longer sells or makes available to
clients. These products are typically referred to as ‘legacy’ products.
Many of these legacy products have had sales commission built
into the design of the product and clients are unable to ‘opt out’ of paying
the commission due to this. These products were sold within a completely
different regulatory regime whereby the commission represented the cost of
distribution. The cost across the industry of making system changes to support
the removal of commissions on such legacy products is highly cost-prohibitive,
largely due to the age of the IT systems on which these products are
Our experience is that for every dollar we would spend on
making a system change to a contemporary system, it would cost us $2.50 to make
the same change to a legacy product system.
For a system that is in the process of being decommissioned,
by virtue of it no longer administering products from which we expect to derive
new business, this is a highly inefficient and unnecessarily expensive
Therefore, it is imperative that all proposed FoFA reforms
uniformly apply on a prospective basis only.
The Financial Services Council
estimated that implementation of the fee disclosure requirements will cost
approximately $54 per client prospectively (for new clients) and $98 per client
retrospectively (for existing clients).
Coalition Committee members
consider this last-minute introduction of a retrospective requirement for
additional annual fee disclosure statements without consultation with relevant
parts of the industry as yet another example of the very poor and deeply flawed
consultation process engaged in by the government in relation to FOFA.
The government appears to have
conducted some very one sided consultation with only one section of the
industry, which was not taken by surprise, while ignoring the majority of
relevant stakeholders in the financial services and advice industry.
Coalition Committee members
consider it imperative that the government be held to account for the
commitment it made during the consultation process, which was accepted in good
faith by industry participants, to make any additional annual fee disclosure
statements prospective only.
Given the significant additional
costs involved, at the very least the Parliament should insist that this
additional change made by the government to this legislation very late in the
process be subject to a proper Regulatory Impact Assessment. That assessment
should assess whether the increased costs to be incurred by both financial
services providers and ultimately consumers are proportionate with the additional
consumer protection benefit sought. It must be compliant with the government's
own best practice regulation requirements to be certified by the government's
Office of Best Practice Regulation.
That the annual fee disclosure
statements contained in the Corporations Amendment (Future of Financial Advice)
Bill 2011 be prospective only as per the government's long standing commitment
and that they should not apply retrospectively to existing clients on the basis
that the increased costs – ultimately borne by consumers – far outweigh the
questionable additional consumer protection benefits.
That the annual fee disclosure
statement requirements be amended from “detailed” prescriptive information and
inflexible issue rules to “summary” information only “given” at least annually
to the client.
Best Interests Duty
The Best Interests Duty is an
important and central part of the FOFA changes. Coalition Committee members
support the introduction of a statutory best interest duty for financial
advisers into the Corporations Act. However, to avoid confusion and minimise
the risk of future disputes it is important to get the drafting of the Best
Interest Duty right.
It is obvious that the government
has struggled to come up with an appropriate definition of the Best Interest
A version of the Best Interests
Duty was included in the Exposure Draft of what became the Corporations
Amendment (Future of Financial Advice) Bill 2011 but was hastily removed
from the version of the Bill that was ultimately introduced into Parliament.
The current version of the
proposed Best Interest Duty included in the subsequent second FOFA Bill is
certainly an improvement to the version included in the Exposure Draft.
However, as was pointed out to
the Committee the duty contained in the legislation is not a true fiduciary
duty as recommended by the Ripoll Inquiry. The Trust Company asserted that a
best interest duty as provided for in the Bill:
...is not a complete fiduciary obligation but one aspect of
it. A fiduciary obligation is a principle based on undivided loyalty and trust
to act in good faith and in the best interests of a client. Looked at in
isolation a best interest obligation is not as far reaching.
The best interest duty as expressed in the Bill is a
prescriptive duty and will cause confusion and uncertainty in the industry. It
is confusing a duty of care on one hand with a duty of loyalty on the other.
The Bill attempts to address a duty of loyalty by using standards and rules
which are associated with the duty of care. These two duties cannot be
confused. It is the duty of loyalty that underpins the fiduciary obligation and
it is this duty that should be met.
The Joint Consumer Groups told
the Committee that clause 961B may cause uncertainty and unpredictability:
...it may be difficult for courts and external dispute
resolution schemes to interpret the duty and there is a risk that their
interpretations may not further the government's policy aim.
The Financial Services Council
noted that new best interests obligations on advisers would add to, rather than
replace, existing duties for advisers:
...whilst the steps in s961B(2) are largely congruent with,
they are additional to the duty an adviser owes their client
under common law fiduciary obligations (profit and conflict rules) and at
contract law (and torts). As such advisers will operate under a number of, each
slightly nuanced, disparate legal 'best interest' obligations which adds to the
complexity and cost of the regime.
Many stakeholders argued against
the inclusion of the 'catch-all’ provision in 961B(2)(g), including the Law
Council of Australia:
Although section 961B(2) provides that a provider will be
deemed to comply with their statutory best interests duty if they prove that
they have satisfied all of the steps in section 961B(2), section 961B(2)(g)
effectively takes away the certainty the opening words offer...In other words,
a provider will comply with their statutory duty to act in the best interests
of their client if they prove that they have acted in the best interest of
their client. The statutory defence in section 961B(2) therefore gives
providers no comfort at all that if they follow the prescribed steps they will
have discharged their obligation and leaves them with the difficult task of
determining what the statutory duty to act in the best interests of their
The Financial Services Council
warned the best interests duty will push up Professional Indemnity insurance
premiums for advisers:
Without a defined duty and non-exhaustive conduct steps,
Professional Indemnity ("PI") insurers will become cautious for years
(whilst the new duty is tested in the courts) during which time – costs of PI
cover will remain high (higher than current costs) thereby increasing the cost
of advice for Australians without any commensurate consumer protection.
Coalition Committee members
consider that a properly drafted Best Interests Duty would enhance and improve
the consumer protections afforded to clients of financial advice in Australia
by enshrining the principle that financial advisers must place their clients’
interests ahead of their own when providing financial advice.
However, we are concerned that
the ‘catch all’ provision contained in section 961B(2)(g) would create
uncertainty for both clients and their advisers and leave the legislation
subject to potentially protracted legal arguments. We therefore recommend that
this clause be removed from the Best Interests Duty.
That section 961B(2)(g) be
removed from the proposed Best Interests Duty to remove uncertainty about the
practical operation of the Duty.
Providing Scaled Advice
One way of ensuring that clients
are able to access affordable and appropriate financial advice would be to
allow advisers and their clients to limit the scope of the advice to a series
of discreet areas identified by the client rather than to mandate a full
financial plan in every case.
This concept of focusing advice
to areas specifically identified by a client has become widely known as
Numerous submissions to the
Committee expressed concern that the wording of the best interests provisions
in the proposed legislation does not allow for scaled advice to be provided.
Several organisations argued that
the wording in subsection 961B(2) should be amended to explicitly allow the
provision of scaled advice.
As stated by the FSC:
Clear express statutory recognition of the ability to scale
or scope the advice subject matter is what enables an adviser to focus their
advice investigation to the area(s) the client has identified, instructed or
agreed they want the advice to address and therefore curtail the cost of
providing the advice...Further amendment is required to s961B(2) to expressly
provide the ability to scale advice.
A mere amendment to the EM to
enable an adviser to have regard to the client’s relevant circumstance rather
than all financial circumstances will not enable scalable advice. The adviser
will still not be able to limit or scale the investigation to the client’s
relevant circumstances to the scope of the client’s instructions. Therefore the
adviser will still have to investigate all the client’s relevant financial
circumstances. Only by enabling the client to limit the adviser’s investigation
in agreement with the adviser, will scalable and affordable advice be delivered
by these reforms.
The availability of scalable
advice and the capacity of an adviser and a client to be able to scope the
advice subject matter should be clarified beyond doubt in the legislation.
Limiting the investigation is not
a reduction or curtailment of the adviser’s best interest duty to that client.
It is important to also consider that not all prospective advice clients will
want to limit or scale the advice. Indeed the adviser’s over-arching duty to
the client would still require the adviser to ensure that a client whose
relevant circumstances requires broader advice to provide it consistent with
the best interest duty, thus the client remains protected.
Coalition Committee members
support and encourage the provision of scalable advice where the request for
such limited or scaled advice is instigated by the client. This would allow
many people to access advice more frequently and would be a very good starting
point for clients to seek financial advice for the first time without being
required to undertake a costly and sometimes unnecessary complete financial
We therefore recommend that the
provisions of the best interest duty be amended to explicitly allow for clients
and advisers to contract for such scalable advice.
That the best interests duty in
the proposed legislation be amended to explicitly permit clients and advisers
to agree to limit the subject matter of advice provided in order to facilitate
the provision of ‘scalable advice’.
The government’s confused and ever-changing position on Risk Insurance
Coalition Committee members
support the banning of conflicted remuneration structures such as product
commissions within the financial services industry and commend the industry for
moving proactively and effectively to abolish such conflicted remuneration
However we do not consider that
commissions paid on advised risk insurance, be they group policies or
individual policies, inside or outside superannuation, are conflicted
The Ripoll Inquiry did not make
any recommendation to ban commissions paid for risk insurance products.
The government’s position on this
matter has been confused and ever-changing.
In April 2011 Minister Bill
Shorten stated that:
... the Government has decided to ban up-front and trailing
commissions and like payments for both individual and group risk within
superannuation from 1 July 2013.
The Coalition did not agree with
this position because we do not agree with Labor's assertion that commissions
on risk insurance are in themselves a conflicted remuneration structure.
We know from recent experience in
the UK that the banning of commissions on risk insurance does not work, which
is why the UK has reversed that decision.
Banning commissions on risk
insurance will increase costs for consumers, remove choice and leave many
people worse off – particularly small business people who self-manage their
We already have a problem of
underinsurance in Australia, which this proposed ban would only make worse
because it increases the upfront cost of taking out adequate risk insurance.
To treat commissions on all risk
insurance inside super differently from insurance outside super will also
create inappropriate distortions, which would not be in the best interests of
We agree that those Australians
who receive automatic risk insurance within their super fund without accessing
any advice should not be required to pay commissions.
However, those Australians who
require and seek advice to ensure adequate risk cover, whether inside or
outside of their super fund, should have the same opportunity to choose the
most appropriate remuneration arrangement for them.
In August 2011 Minister Shorten
seemed to adopt the Coalition’s sensible position and agreed to limit any ban
on commission to automatic risk insurance arrangements within super where fund
members do not access any advice.
However, many submissions made to
the Committee expressed concern that the government’s proposals as contained in
the legislation before the Committee would not achieve the stated aims and may
lead to unintended consequences.
Much of the industry concern
centres on the government’s decision to ban commissions on risk insurance
advice considered to be ‘group risk’ which catches not only the default option
automatic insurance provided in a superannuation fund with no advice provided,
but would also extend to any advised risk insurance that is selected and
purchased by a fund member after receiving specific and tailored individual
advice if that risk insurance was covered by the ‘group’ policy held by the
These concerns were encapsulated
by this statement from IOOF Holdings:
A vast majority of the population settle for the default
insurance cover provided within their default super fund and are, consequently,
under-insured. Those that do seek advice obtain appropriate levels of cover
most typically through group life insurance arrangements. The ability to pay
commissions from inside super rather than having to pay from after-tax salary
is a primary reason for those who do accept to be advised on risk insurance.
The removal of risk insurance commissions inside super will exacerbate the
existing under insurance situation in Australia.
Fee for service with adviser-driven insurance presents
practical challenges. Imagine a situation where an adviser must do significant
work, and so charge the client at the time a claim is lodged following the
death or injury of the client’s partner.
The AFA argued against a ban on
The arguments for a ban on commissions on insurance have not
been anywhere near sufficient to gain broad support. In fact there are many
strong arguments for why commission should continue on risk insurance products.
Many of these arguments were covered in the Ripoll Inquiry. The key difference
between Investments/Superannuation and Risk is that commission free investment
and superannuation products already exist, and have in fact been readily
available for clients with larger investable amounts for a number of years.
Risk Insurance is a very different product set (similar in many ways to general
insurance type products), has an annual renewal period, and a defined benefit
or risk addressed. Thus the AFA has argued that risk should remain outside the
FoFA remuneration changes. The Government took a similar position in their
April 2010 announcement... The AFA recommends that this area be the subject of
greater research and investigation. In the context of corporate superannuation
and group life insurance, there needs to be a comprehensive review of the
current model across retail, corporate and industry fund superannuation plans.
Consideration needs to be given to a sensible alternative remuneration model
for insurance arrangements, where advice is provided.
IOOF Holdings argued that the
Bill creates distortions between advice that is provided inside and outside
We submit that it is inequitable to permit charging of
commissions on individual life risk policies within super while disallowing it
for group life risk policies, even though the clients in both instances have
obtained advice in relation to their insurance requirements. Equally it is
inequitable between clients within the superannuation and non superannuation
environments where a financial adviser is managing clients’ investments
holistically. We would further submit that it should be acceptable for level
commission to be payable to financial advisers on group life policies as this
in fact eliminates perceived conflicts.
The AFA was also concerned:
...we are facing a world where there are two different
playing fields. If you are an individual, you can get advice and the adviser
can get paid a commission inside and outside super. You can do the same for
large group plans outside super, but not inside super. So what you end up with
is a playing field that really has different rules and, in our view, will
distort the advice outcomes as consumers look for the best outcome and
obviously work with the advisers that look after them. The simple way to think
about it is to take the view that, where advice is provided, commissions are
allowable whether they are inside super or outside super; where no advice is
provided, clearly there should not be any payment. But to create an artificial
piece around the way advice is provided makes no sense at all. In fact, for
those advisers who are specialists in the small business superannuation
environment, it is a significant threat to their future and to their business.
Pauline Vamos from the
Association of Superannuation Funds of Australia (ASFA) also expressed concerns
about the approach taken by the government
Ms Vamos: There are two points I would like to make.
The first is that wherever you have regulatory arbitrage it will drive
Senator CORMANN: It will create distortions.
Ms Vamos: While ever you have distortion you will
drive certain behaviours. What those behaviours are I do not think we can
foresee but certainly any regulatory arbitrage is, I think, always something to
be avoided in any legislation and in any policy. In terms of the ban on
individual commissions within superannuation, the issue that has been raised
Senator CORMANN: Are you talking about risk insurance?
Ms Vamos: Risk insurance within super. The issue that
has been raised with us is this: the government's policy is very much when you
receive individual advice about your individual cover and it is a stand-alone
cover, so you are not part of an employer group, then commission should be able
to be paid because you have got an engaged managed relationship with that
adviser. Because of the nature of superannuation funds and because of the
nature of the trust structure, the trustee buys the wholesale group policy.
Where you have individual persons who are not part of employers but who are
individuals putting their insurance under the fund because of tax purposes or
efficiency purposes, they have individual cover, individual advice and are
individually remunerated to the adviser. But because it is under a wholesale
group policy they are still caught.
Coalition Committee members
believe that where possible such opportunities for regulatory arbitrage should
be avoided. We also believe that where individuals seek specific advice on
appropriate risk insurance the remuneration structure for such advice should be
neutral so that it does not distort the advice provided. This should be the
case whether the advice provided is within or outside superannuation or whether
the cover purchased is a stand-alone policy or within a wholesale group policy.
In fact, to make it harder and
costlier to obtain risk insurance through a wholesale group policy would lead
to Australians paying more for risk insurance and may exacerbate the existing
problem of underinsurance. This is a poor outcome of this policy and proposed
Considering the Government’s
proposed MySuper reforms will see all prospective superannuation guarantee
contributions made to a MySuper account from 1 July 2013, requiring these
legislative changes with a high probability of impacting Australian’s insurance
levels and increasing the cost of insurance is irresponsible of Government. The
Government’s consumer protection mechanism rests in the MySuper reforms and
should therefore refrain from these significant unjustifiable reforms.
That no changes to existing
remuneration structures be made where risk insurance is purchased by an
individual consumer who has received specific advice on such insurance, whether
such risk insurance is purchased inside or outside superannuation or whether
such risk insurance is purchased through an individual policy or through access
to a wholesale group policy.
That any ban of commissions on
risk insurance in superannuation be limited to automatic insurance cover within
superannuation funds where individuals have not accessed any specific advice,
namely in default superannuation arrangements.
As stated above, Coalition
Committee members support the elimination of conflicted remuneration structures
in the financial services industry and commend the significant moves taken by
the industry to eliminate such structures, particularly by moving to a fee-for-service
model and reducing the reliance on product commissions.
However, we are concerned at the
significant concerns highlighted by the industry to the Committee that the
proposed changes in the legislation were too broad, created unintended consequences
and prevented some legitimate payments that were not conflicted remuneration.
The concerns about conflicted
remuneration fall into three broad categories as follows:
2. Non monetary
conflicted remuneration; and
3. Other banned
remuneration such as shelf space fees.
Monetary conflicted remuneration
The Law Council of Australia is
concerned that the definition of conflicted remuneration is too broad and is
not limited to personal advice:
Any fee or charge may be conflicted remuneration under the
general definition in section 963(1) if the licensee or its representative
provides financial product advice to a retail client which could have the
necessary influence. For example, a product issuer who provides general financial
product advice (for example in the form of a product disclosure statement),
could be prohibited by the ban on conflicted remuneration from receiving a
management fee as the fee could be interpreted as being capable of influencing
its general advice to investors. It could also prevent trustees of
superannuation funds paying fees based on assets under administration or the
number of members to fund administrators (who also provide general or personal
advice to members).
ABA and FSC argued that remuneration
relating to general advice should be exempted from the ban, as general advice
in a far wider range of circumstances than personal advice and is therefore
likely to apply to a far wider range of situations than is necessary or
less influential on the decision of a retail client than personal advice; and
the context in which the issues and concerns referred to in the Explanatory
AMP expressed concerns that the
sale of a financial planning business between a licensee and its authorised
representatives may be caught up in the provisions of section 963B and be
considered conflicted remuneration simply because the nature of the business
involves conflicted remuneration. 
The Financial Services Council
pointed out that in many cases it would be administratively impossible to
comply with the provisions of s963B(1)(c) which offers an exemption. They
explained the conundrum presented by the drafting of this clause:
The execution only exception contained in s963B(1)(c) will
not apply if the licensee or representative has previously provided advice to
the client. There is no causal link and no time limitation as part of this
clause. Because of this, it will not be administratively possible to ensure
compliance with this provision.
(a) (Marketing campaign) A
general marketing campaign in the past conducted by the licensee that contained
general advice relating to superannuation products. This would mean that any
authorised representative of the licensee will not be able to rely on this
exemption for execution only services in relation to superannuation products.
(b) (Previous advice)
An employed financial adviser may have provided advice in relation to managed
investment schemes as part of a financial plan five years ago to the client.
This will mean that any execution only services in relation to managed
investment schemes provided by an adviser (of the same licensee) now will not
fall within the execution only exemption.
This concern was also strongly
expressed by Westpac in its submission to the Committee.
Coalition Committee members have
made a series of sensible recommendations to address these specific concerns
whilst preserving the spirit and intention of the ban on monetary conflicted
In relation to monetary
conflicted remuneration that:
advice’ should be specifically exempt from the definition of ‘conflicted
the proceeds of the sale of a financial planning business between a licensee
and its authorised representatives should be specifically exempt from the ban
on conflicted remuneration; and
section 963B(1)(c) be amended to link the payment for advice provided to a
specific advice provider (rather than to any representative of a licensee) and
to apply only where there is a causal link between past advice and current
Non monetary conflicted
In submissions to the Committee
the financial services industry also highlighted concerns that the legislative
bans on non monetary conflicted remuneration were confusing and in some cases
the legislation itself did not accurately reflect the stated policy intention
contained in the Explanatory Memorandum.
The Financial Services Council
explained this anomaly in its submission to the Committee:
Paragraph 2.39 of the Explanatory Memorandum (“EM”) states
“The ban on non-monetary benefits is also not generally
intended to cover the services provided by a licensee to its authorised
representatives for the purposes of the authorised representative providing
financial services on behalf of the licensee. These services would only be
captured by the ban if the services were provided in such circumstances where
it might conflict financial product advice.”
This statement confirms the intention of the Government to
permit licensees to provide nonmonetary benefits to authorised representatives
for the purposes of those authorised representatives providing financial
services. Some of the drafting for the exclusions to the overall ban on
non-monetary benefits does not fully reflect the intention expressed in
paragraph 2.39 of the EM.
Further, s963C as drafted captures benefits provided by an
employer to their employee (Licensee to their representative). We believe this
is unintentional and recommend these provisions be amended to include benefits
from Licensee to an authorised representative and or their representative.
The legislation imposes a $300
limit on the value of certain non monetary benefits. In its submission to the
Committee the Financial Services Council states that in all consultation about
this provision it was made clear by Treasury that this limit would apply
separately to a licensee and to each representative rather than on an aggregate
basis for each licensee.
However, the submission points
out that the Explanatory Memorandum for the Corporations Amendment (Further
Future of Financial Advice Measures) Bill 2011does not clearly reflect this
intention and may be interpreted to imply that the $300 limit may apply as an
Coalition Committee members recommend that this uncertainty should be clarified
by amendment to the Explanatory Memorandum.
The legislation allows an
exemption from the $300 limit for certain types of training and education.
However, it imposes a geographical limit on where the training can be conducted
restricting training to Australia and New Zealand only. The legislation also
restricts training to that which is ‘relevant to the provision of financial
AMP pointed out the negative
impact and limitation of opportunities that a geographical restriction on the
location of training would have for Australian financial planners:
To limit the location to Australia or New Zealand would imply
that conferences in other jurisdictions would not be genuine professional
development. For example, the Financial Planning Association in the United
States of America (USA) has a regular conference which can be extremely
beneficial for advisers to attend. Industry insights, the opportunity to learn
from others and to understand industry trends can be obtained from attending
such a conference. For Australia to be a financial services hub, it needs to
effectively compete with other jurisdictions. To limit professional development
to only Australia and New Zealand unnecessarily limits our opportunities as an
The Financial Services Council
highlighted that to restrict training to that which is deemed ‘relevant to the
provision of financial advice’ would prohibit provision of other very relevant
and important training:
Specifically, what is meant by the term “relevant to the
provision of financial advice”? Financial advisers are engaged in a range of
activities which extend beyond giving advice. Not only do they engage in
dealing activities such as arranging for investments to be made and for trades
to be placed, they also undertake administrative activities for clients.
Furthermore, there is a range of training that may be relevant to the business
of a financial adviser but which would not be obviously 'relevant to the
provision of financial advice' such as training relating to equal opportunity,
occupational health and safety training, running a (small) business and
marketing. Nor would it permit the development of soft skills like client
servicing/client relationship training which we understand from discussions
from ASIC pre the issue of Consultation Paper 153, are areas ASIC is interested
in seeing advisers improve. Courses on these types of topics are clearly for a
genuine education or training purpose but could be prohibited by s963B(c)(ii).
We are concerned that by requiring the training to be "relevant to the provision
of financial advice" uncertainty may arise regarding the range of topics
that can be covered at a conference.
The Financial Services Council
also highlighted an anomaly caused by the wording of subsection 963C(d)(ii):
The use of the expression "financial products issued or
sold by the benefit provider" in subparagraph (d)(ii) unnecessarily limits
the exemption to product issuers and does not include the licensee of a
financial planner unless they also happen to issue products.
Licensees who provide financial planning often do not issue
products or "sell" them. The most common scenario is for these
licensees to be authorised to advise on, and arrange for a client to deal in
financial products. We are also concerned for the reasons noted above that the
benefit should not be limited to "the provision of financial product
advice". The problem is even more acute in relation to this exception as
any software or IT support is likely to relate to systems to facilitate
advisers to access the issuer's product and to arrange for it to be issued to
their client or to implement changes to product options. These activities are
either dealing or administrative and are not in that sense "related to the
provision of financial advice" which might be seen as limiting any
software to research related information to enable an adviser to decide whether
to recommend a product.
Advice licensees should be able to provide IT support and
services to their authorised representatives and representatives and ensure
issuers can provide IT support and services relating to arranging for products
to be issued or varied.
To address the concerns expressed
to the Committee about the ban on non monetary benefits, Coalition Committee
members have made a series of sensible recommendations that preserve the
integrity of the conflicted remuneration provisions while providing clarity and
certainty for the financial services industry as to how these provisions will
apply on a practical day-to-day basis.
In relation to
non monetary benefits:
i. The legislation be amended to clearly state that non monetary
benefits can be provided by a licensee to its employee authorised licensed
representative or representatives;
ii. The Explanatory Memorandum of the Corporations Amendment (Further
Future of Financial Advice Measures) Bill 2011 be amended to make it clear that
the $300 limit should apply on a per employee basis rather than apply as a $300
aggregate across all employees;
iii. The training exemption in the legislation should permit training
which is relevant to conducting a financial services business rather than be
limited only to the provision of advice.
iv. The location of training, including conference location, should
not be geographically limited to ensure that the Australian financial services
industry remains world class; and
v. Subsection 963C(d)(ii) be amended to read “the benefit is related
to the provision of financial services to persons as retail clients”.
The Committee received many
submissions expressing strong concern about how the proposed restrictions on
volume-based fees in Division 5 of the Corporations Amendment (Further
Future of Financial Advice Measures) Bill 2011 would operate in
The government’s expressed policy
intentions, the divergence of Division 5 as drafted from the original policy
intentions, the unintended consequences that arise from the drafting of
Division 5 and the practical consequences for the industry were well summarised
in the submission from the Financial Services Council:
The Minister announced in April 2011 that “if structural
reforms in the industry is to truly transpire, all conflicted remuneration,
including volume rebates from platform providers to dealer groups must cease.”
Further the Minister was quite clear that “there will be a broad comprehensive
ban, involving a prohibition of any form of payments relating to volume or
sales targets from any financial services business to a dealer group,
authorised representative or advisers”.
We are broadly supportive of the policy intent of Division 5
as described in paragraph 2.50 of the EM. However, Division 5 is not limited to
payments that are paid to a dealer group, authorised representative or advisers
(as previously specified by the Minister).
Instead this section is a broad principles-based ban on the
payment of any benefit which is determined by volume between any licensees and
operators of custodial arrangements.
This Division has the potential to adversely impact the
efficient operation of the funds management industry – potentially putting it
out of step with international markets and impacting Australia’s ability to
compete as a financial services centre.
Further, contrary to our understanding of the policy intent,
this Division appears to have a number of unintended consequences, including:
(a) The proposed ban captures
platforms that do not seek to influence client decisions in relation to
financial products accessible through the platform;
(b) The definition of “funds
manager” captures many entities who are not funds managers;
(c) The term “volume-based shelf
space fee” on which the entire division hinges on is broadly defined on a
presumption of any benefit determined by value which captures many types of
payments that are not shelf-space fees (as commonly understood);
(d) Dollar based fees – the
legislation does not exclude “flat” shelf space fees that are operational in
nature as announced by the Government in April 2010;
(e) Volume rebates paid by fund
managers with respect to pooled investment vehicles appear to be banned for
IDPS structures, whether or not they are ‘reasonable’, potentially creating a
distortion in the market by giving a competitive advantage to mandate
structures. As previously documented in numerous FSC submissions to Treasury,
bias to one investment management structure will distort the market reducing
market competition and directly resulting in increased investment costs for
(f) To the extent that a rebate or
discount is banned by this section, consumers of these investments will no
longer be able to benefit from the Platforms passing on these rebates or
discounts (through a credit to their investment or superannuation account).
The policy announcements had stated that only volume based
shelf space fees paid by a fund manager to a platform provider (and any sharing
of these with licensees and/or advisers) would be banned.
The provisions are much broader due to the definitions of “funds manager” and “platform operator” being simply referenced as licensee to
licensee which captures many other licensee to licensee payments. The
application of the provision means that it may apply in much broader
circumstances than simply for fund managers to platform providers and does not
just prohibit payments for shelf space.
Further, there is confusion in
the varied payments and the term volume based shelf space fees. Unlike a
supermarket analogy, dollar based shelf space fees are not paid for
preferential placement on a menu but for the administration of the fund manager’s
investment option on the platform menu. The platform generally charges the same
fee for each investment option on the menu. In recent years, volume based shelf
space fees may have been charged by some platforms of fund managers for
preferential programs. There is agreement that these volume based shelf space
fees should be banned.
However, volume based rebates
have been consumed in the proposed legislation under the same definition
“volume shelf space fee”. This is not only erroneous, but to simply ban these
or make the burden of proof in receipt of these rebates so arduous is to
potentially legislate preference for certain types of funds management
structures over others. The end result of the bias will have profound impacts
on the funds management industry and therefore on the cost of investment for
many Australians – particularly via their super. To ban or make the burden of
proof so complex and competitively damaging may result in zero rebates
(effectively zeroing out investors investment management fee discounts). These
rebates must be able to continue to flow from fund managers to platforms and
super funds. No flow of rebates will be permitted to flow to advice licensees.
If concern remains, the legislation could simply read that volume related
payments or rebates of investment management fees are permitted from fund
managers AFSLs to platform providers/super funds for the benefit of the end
To address these concerns the
Coalition Committee members have made a series of sensible recommendations that
give effect to the government’s stated policy intention and provide the
industry with a practical, clear and certain pathway forward as they implement
some very dramatic changes to their business models to give effect to the
policy intention in relation to volume-based fees.
In relation to volume based fees
that Division 5 should be amended as follows:
i. Section 964 should be amended to
define the terms “fund manager” and “fund manager’s financial products” so that
the definition does not capture other providers that are not intended to be
caught by this section;
ii. Shelf space fee should be
explicitly defined to minimize the unintended consequence of capturing entities
and payments not intended to be the subject of any ban;
iii. Section 964A should be amended to
prohibit the paying or passing on of remuneration from a platform to a licensee
or representative to clearly reflect the intention of the ban;
iv. Section 964A should be amended to
expressly exempt general and risk insurance from the application of Division 5.
v. Flat dollar shelf space fees
should be expressly carved out of Division 5.
vi. That Section 964A(3)(b) be
amended to delete the words “does not exceed an amount that may reasonably be
attributed to efficiencies gained by the funds manager because of the number or
value of financial products obtained by a fund manager”. This will permits
rebates from fund managers to product providers/platforms in line with
government announcements, to ensure system neutrality and to retain consumer
scale benefit discounts.
Coalition Committee members
consider that it is a fundamental expectation of any legislative reform that
existing contractual arrangements should be recognised and grandfathered to
preserve existing property rights.
The financial services industry
expressed some concerns that the grandfathering provisions relating to the ban
on conflicted remuneration did not achieve this aim and that the wording of the
provisions would create uncertainty for many of these existing property rights,
in particular payments made by platform providers to dealer groups.
The Australian Bankers’
Association stated that:
Firstly, banks and other financial service providers have
varying employment and workplace arrangements as well as contracts and service
agreements. In the absence of clear grandfathering arrangements, it is
uncertain whether the Government is able to intervene in these arrangements,
contracts and agreements legally or whether banks and other financial service
providers are able to cease or alter these arrangements unilaterally or within
imposed timeframes. We note that some arrangements have years to run before
they expire or are due to be renegotiated...
Secondly, the issue of 'crystallisation' must be taken into
account during the drafting of the grandfathering provisions. This issue was
noted in Minister Shorten's announcement, which indicated that the ban on
conflicted remuneration would prohibit future payments to, for example,
licensees/representatives in respect of new investments through a platform but
will grandfather payments to licensees/representatives in respect of
investments in a platform accumulated prior to 1 July 2012. This means the
level of volume payments from platform providers to dealer groups will
'crystallise' and result in the need for major reconfigurations to support
crystallisation of overrides, such as trail commissions, as at the commencement
In a supplementary submission to
the Committee, Professional Investment Services also pointed their concern that
the inadequacy of the grandfathering provisions may raise Constitutional
Grandfathering of existing arrangements are allowed for
commissions arrangements already in place (prior to commencement of legislation)
without express statutory protection of existing platform provider payments and
arrangements. This is inconsistent with the transitional arrangements and
grandfathering of existing commission payments provided for in s1528 of the
Bill and is also at material risk of constitutional validity challenge with
s51(xxxi) of the Constitution.
Professional Investment Services
also articulated their specific concerns about the grandfathering provisions as
follows: Following is PIS’s explanation of the grandfathering issue Sub 17
supplementary page 12
We submit that there is a significant risk that failure to
grandfather benefits provided by platform providers under existing
arrangements, or arrangements entered into prior to the commencement of the
legislation, is contrary to the constitutional power s51(xxxi) which provides
Parliament with the power to make laws with respect to the ‘acquisition of
property on just terms from any State or person for any purpose in respect of
which the Parliament has power to make laws.’
The FoFA reforms proposing to ban existing contractual rights
(we note that contractual rights can be property for the purposes of s51(xxxi)
of the Constitution8), such as prohibiting payments received from platform
providers without grandfathering provisions, may fall foul of the requirement
to acquire property on ‘just terms.’ This is on the basis that one party is
deprived of the right to receive a payment of money arising under a contract
while the platform provider receives the corresponding benefit of no longer
having to make such benefits.
We therefore recommend that
appropriate amendments be made to the grandfathering provisions to recognize
and preserve existing and long standing property rights and to ensure that
commission payments from platform providers are not banned retrospectively.
That sections 1528(1)(b) and
1528(2)(b) should be deleted because they retrospectively ban long-standing
contractual payments from platform providers.
The proposed new section 965 is
an anti-avoidance provision designed as a catch all provision. This is a
complex and far reaching provision that does not have regard for what is
permitted, grandfathered or made exempt by the reforms.
The Anti-Avoidance measure was
introduced to Parliament on 13 October 2011 as part of the Corporations
Amendment (Future of Financial Advice) Bill 2011 before the industry had an
opportunity to review or assess its impact.
In its submission to the
Committee the Financial Services Council expressed its concern that the scope
of the provision appeared to capture existing legally binding contractual
arrangements that are actually grandfathered in other parts of the legislation:
Further, the scope of the application of section s965 is
complicated by the uncertainty regarding how this provision interacts with any
arrangements already entered into (or entered into prior to 1 July 2012) and
with any grandfathering provisions which the Government may provide.
Specifically, the wording of s965 does not exclude existing
arrangements which may inadvertently capture legitimate, and legally binding,
arrangements already entered into. The problem is that the provision applies to
the carrying out of a scheme without clearly indicating that schemes commenced
before a specified date or grandfathered, will be excluded from the application
of the section.
Professional Investment Services
likewise raised concerns regarding the ability for existing legitimate
arrangement to fall foul of the anti-avoidance provisions:
The legislation is not clear that anti-avoidance provisions
will only apply for schemes entered into at the commencement of the
legislation, or at the very least from the announcement of FoFA. The concern is
that existing legitimate arrangements could be caught up by the anti-avoidance
provision due to the lack of clarity around the effective date which the
provision applies to. We note the legislative handbook setting out the
importance of providing for retrospective legislation in exceptional
circumstances. For the avoidance of doubt the application of this provision
must be clarified and commencement should be for schemes entered into at
commencement of legislation or at the very least the announcement of FoFA..
Coalition Committee members are
concerned that the lack of time to consult and review this catch-all provision
will create uncertainty in the industry and greater red tape and costs. We also
want to ensure that the provisions apply prospectively to avoid any unintended
consequences through retrospective application.
The anti-avoidance provision must
only apply prospectively and not capture or render existing legal arrangements
as unlawful. The provision should be amended to carve out legally permitted,
exempted or grandfathered arrangements.
New ASIC powers
Coalition Committee members
support the enhancement of ASIC powers that would enable the corporate
regulator to more effectively regulate the financial services industry and
eliminate any minority rogue elements within the industry.
Our support is directly in line
with the recommendations made by the Ripoll Inquiry to provide such enhanced
powers to ASIC.
We express our strong concern
that the government’s continued uncertainty and prevarication in settling on
its FOFA changes has delayed the introduction of such important and necessary
powers as recommended by the Ripoll Inquiry, which reported more than two years
We also note the concerns
expressed by some organisations who submitted to the Committee that ASIC's
proposed new powers under the Bill are too broad.
The Joint Accounting Bodies
For us, the issue of giving any regulator such a broad power
was not something that we looked at lightly. However we had to look at what is
best for the clients and protecting their interest. ASIC has told us that often
they have been hamstrung in taking the necessary action because of the existing
legislation so giving them these powers would then allow them to take those
actions. However we do not want to give ASIC carte blanche and we think that
they need to set out in strict terms the circumstances in which they will use
those powers and how they will use those powers and how people can then appeal
against the use of those powers. Our concern was making sure that if ASIC had
this power that there were some rules around it and they did not just have the
capacity to take whatever action they wanted.
The Law Council of Australia
The Committee is concerned by the breadth of the discretion
these powers give to ASIC. There is no standard of proof which must be
satisfied by ASIC and no prescription of the matters which go to whether a
person is “likely to contravene” their obligations. Given the consequences that
can flow from an exercise of ASIC’s powers under new sections 913B(1)(b),
915C(1)(aa), 920A(1)(f) and 920A(1)(h), including the closure of a licensee’s
business, the Committee submits that what is required in order for ASIC to form
the view that a licensee is “likely to contravene” their obligations should be
subject to greater certainty.
The Financial Services Council
called for assurances that the enhanced powers will only be enforced following
Given the widening of ASIC's powers, the legislative scheme
should ensure that all decisions involving the exercise of those powers should
be made after affording affected individuals or licensees an opportunity to
appear at a hearing and to make submissions to ASIC, and all decisions should
be reviewable by the Administrative Appeals Tribunal and Federal Court.
Coalition Committee members want
to see ASIC act proactively and effectively to ensure that wherever possible
rogue elements are detected and prevented from operating in the financial
services sector in Australia as soon as possible.
However, we consider that the
exercise of these powers should be subject to appropriate safeguards including
the long standing principles of procedural fairness that apply to
administrative decision making and allow for appropriate administrative and
That Parliament ensures that the
exercise of the enhanced ASIC powers contained in this Bill is subject to
appropriate administrative and judicial review in the same way as other
decisions made by government agencies.
Intra Fund Advice not defined by FOFA legislation
Intra fund advice is the
provision of financial advice by superannuation funds to their members.
Currently, the term ‘intra fund
advice’ and the advice provided by various superannuation funds ranges widely
from very general advice, product specific advice, advice on retirement options
or even more specific or individualised ‘holistic’ financial advice.
Today intra fund advice only
exists by an ASIC Class Order exemption. Coalition Committee members consider
that if intra fund advice is to continue to be provided in the future it should
be provided under the same legislative and regulatory framework as all other
Despite intra fund advice clearly
being to type of financial advice there is no definition or scope of such
advice provided in the FOFA legislation. There is no limitation placed on what
may constitute intra fund advice and there are no provisions determining who
should pay for such advice.
Coalition Committee members consider
that the complete lack of consideration, definition or restriction of intra
fund advice within the FOFA legislation is a serious omission on the part of
the government that exposes consumers to severe risks.
This is particularly the case
because intra fund advice would not be subject to any best interests duty and
because many industry super funds currently fund such intra fund advice by
levying fees for this advice on all fund members. This creates a situation
where all those fund members who do not access such advice are subject to a
secret commission and results in a cross-subsidy for the benefit of those
members who do access the advice.
Given the reliance of many
industry super funds on the provision of intra fund advice for marketing
advantage and the attraction of new members, we are concerned that the
government has avoided defining and limiting the scope of intra fund advice
because it has bowed to the interests of the union-dominated industry super funds.
Coalition Committee members
strongly recommend that intra fund advice should be defined in the FOFA
legislation, that there be express limitations to ensure that such advice is
general in nature only (similar to the provisions relating to basic banking
products) and that any financial advice accessed within a superannuation fund
beyond such general advice be expressly subject to the best interests duty and
be paid for by the person accessing this advice without any cross-subsidy from
other fund members.
That the FOFA legislation be
a comprehensive definition of the term ‘intra fund advice’;
that ‘intra fund advice’ is general in nature only, similar to the provisions
relating to basic banking products;
that any financial advice accessed within a superannuation fund beyond such
general advice be expressly subject to the best interests duty;
that any financial advice accessed within a superannuation fund beyond such
general advice be paid for by the person accessing this advice without any
cross-subsidy from other fund members; and
the existing ASIC Class Order exemption as it would be superfluous once
intra-advice is properly defined within the FOFA legislation.
|Senator Sue Boyce
||Senator Mathias Cormann
|Mr Paul Fletcher MP
||Mr Tony Smith MP
Navigation: Previous Page | Contents | Next Page