On Wednesday 19 November, 2014, the Senate voted to disallow the Future of Financial Advice (FoFA) regulations, and the advice sector was once more plunged into uncertainty. What happened to cause the reversal of the Government’s FoFA amendments, and what does the latest turn around mean for the future of advisers?
FoFA reforms – a brief history
The FoFA reforms, a suite of legislative changes designed to increase consumer protections and improve their access to, and the affordability of, financial advice, began as two separate but related Acts, commencing on 1 July 2012.
Compliance with the FoFA reforms was mandatory from 1 July 2013; the Australian Securities and Investments Commission (ASIC) adopted a facilitative compliance approach to the reforms for the first 12 months, until 1 July 2014.
The Coalition’s amendments – timeline
29 February 2012: Prior to the passage of the two original FoFA Bills through Parliament, the Parliamentary Joint Committee on Corporations and Financial Services conducts a review of the FoFA legislation, issuing a report that recommends the laws be passed. The Coalition members of the Committee (who were then in Opposition) issue a Dissenting Report, which outlines 16 recommendations for change.
These 16 recommendations are flagged by the then Shadow Minister for Financial Services and Superannuation, Mathias Cormann, as being Coalition policy coming into the 2013 Federal Election.
7 September 2013: The Coalition is elected to Government. Prime Minister Tony Abbott appoints Senator Arthur Sinodinos as Assistant Treasurer, with carriage of the amendments to the FoFA reforms.
20 December 2013: Senator Sinodinos announces the Coalition’s package of FoFA amendments, including: a change to the ban on commissions for life risk products held inside super, removal of the opt-in and retrospective fee disclosure statement requirements, and fixes to the best interests duty and grandfathering arrangements wording.
Senator Sinodinos advises that, in order to provide certainty for industry and to ensure that the measures have effect as soon as possible, the Government will implement time sensitive measures through regulations to the extent legally possible, with amendments to be subsequently made in the primary legislation.
The legislative instrument known as a ‘regulation’ allows the Parliament to enact a change to existing legislation without the need for a Bill. This means changes can be made quickly, without the need for debate in both Houses.
MPs or Senators who do not agree with the change have the opportunity to put forward a ‘motion to disallow’, which, if passed, puts an end to the regulation, with immediate effect. The relevant legislation reverts back to its original form, prior to the enactment of the regulation.
29 January 2014: The draft FoFA amendment legislation and regulations are released by the Government for consultation. While the financial services industry is largely supportive of the changes, Industry Super Australia begins a campaign claiming the amendments will reintroduce commissions and remove the best interests duty.
19 March 2014: Senator Sinodinos stands down from his position as Assistant Treasurer, after he is named in a New South Wales corruption inquiry. The FoFA amendments legislation has yet to be introduced to Parliament. Senator Cormann, now the Minister for Finance, is appointed Acting Assistant Treasurer and given carriage of FoFA.
20 March 2014: The Government’s amendment legislation is tabled in the House of Representatives, including a number of changes arising from industry consultation. Among the changes to the Bill is the removal of amendments to the conflicted remuneration rules for insurance inside superannuation, with the Government saying it will conduct broader consultation with the insurance industry before proceeding with any changes.
The Bill is referred to the Senate Economics Legislation Committee (SELC) for review.
Government has agreed with the Opposition that a revised regulation to progress the broadly supported elements of the disallowed FoFA regulations be re-made
24 March 2014: Senator Cormann calls a halt to the FoFA regulations drafted by Senator Sinodinos, in the wake of significant criticism from Industry Super Australia, CHOICE and other consumer groups.
17 June 2014: The SELC delivers its report on the Government’s FoFA amendment Bill, recommending to Parliament that the Bill be passed. Both the Labor and Greens Senators on the Committee issue Dissenting Reports.
20 June 2014: Senator Cormann announces that, after significant industry consultation, the Government will proceed with its promised amendments, using regulations to ensure the measures are in place by 1 July 2014.
30 June 2014: The Government’s FoFA amendment regulations are registered, taking effect from 1 July 2014. The regulations remove the opt-in and retrospective FDS requirements, and fix grandfathering arrangements. Under Parliamentary process, legislative instruments such as regulations must be forwarded for tabling in both Houses of Parliament within six sitting days of being registered, meaning Senator Cormann has until 15 July 2014 to table the regulations.
9 July 2014: Labor Senator Sam Dastyari forces the Government to table the FoFA amendment regulations ahead of the expected 15 July deadline. The Opposition now has 15 days in which to lodge a motion to disallow.
15 July 2014: Senator Dastyari and Greens Senator David Whish-Wilson, lodge a motion to disallow the regulations. Senator Cormann announces he has reached an agreement with the Palmer United Party (PUP) and Australian Motoring Enthusiast Party (AMEP) Senators, securing their vote in the motion. Labor’s motion is voted down.
16 July 2014: Senator Dastyari announces a second motion to disallow, this time calling on the Senate to reject all of the reforms contained within the regulations except for the grandfathering amendments.
28 August 2014: The Bill to enact the Government’s FoFA amendments is passed by the House of Representatives. The Bill includes the recommendations from the SELC as well as the requirements agreed with the PUP.
4 September 2014: The FoFA Amendments Bill is tabled in the Senate, and is once again referred to the SELC for review.
22 September 2014: The SELC issues its second report on the FoFA Amendments Bill, again recommending that the Bill be passed. Labor and the Greens issue Dissenting Reports.
1 October 2014: The second motion to disallow the amendment regulations is voted down by the Senate.
18 November 2014: Senators Jacqui Lambie (PUP) and Ricky Muir (AMEP) decide to change their position on the FoFA amendments, aligning with Senator Dastyari to support his third motion to disallow the regulations.
19 November 2014: The Labor and Greens secure a vote to disrupt the usual order of business in the Senate to present the third motion to disallow the FoFA amendment regulations. After significant debate, the motion is passed 32 to 30 with the support of Senators Lambie and Muir. The amendments cease to have effect immediately.
ASIC issues a statement, advising it will adopt a facilitative approach to compliance with the FoFA legislation, in light of the speed of the change.
26 November 2014: The Government announces it has reached an agreement on grandfathering (refer below).
Together with the increased costs associated with delivering financial advice under FoFA, the biggest industry concern in the fallout from the disallowance motion was the removal of fixes to the original FoFA grandfathering arrangements. The Labor grandfathering regulations, which were enacted on 28 June 2013, were drafted in such a way that they appeared to prevent advisers from switching licensees and retaining grandfathered benefits. Synchron Director, Don Trapnell, described the issue as like putting ‘legislative handcuffs’ on advisers: “We now have, embodied in legislation, the Hotel California clause, whereby advisers can check out of a licensee arrangement anytime they like, but can never leave without suffering a significant financial penalty – a penalty too severe for most of them to survive.”
In response to industry pressure, the Government has managed to strike a deal with the Opposition to support the introduction of new regulations that will ‘…address unintended consequences, and facilitate competition in the financial advice industry, by enabling advisers to move licensees with their clients whilst continuing to receive grandfathered remuneration…’
“The Government has agreed with the Opposition that a revised regulation to progress the broadly supported elements of the disallowed FoFA regulations be re-made by the Government before the end of this year,” Senator Cormann said in a brief statement.
The regulations have yet to be drafted.
What the law says now
The following is a summary of the key elements of FoFA that have been impacted by the disallowance. Please note, this is not an exhaustive list and you should consult your licensee or compliance expert for advice on how to comply.
Fee Disclosure Statements
While advisers have been required to produce annual Fee Disclosure Statements (FDS) for their new clients since 1 July 2013, existing clients were exempt from this requirement under the Coalition’s amendments. Now, advisers must produce an annual FDS for all clients with whom they have an ongoing service arrangement, regardless of the date the relationship commenced.
ASIC has previously advised that advisers who are receiving commissions for life insurance products (or trail commissions on existing products) are not required to provide their existing clients in an ongoing advice relationship with an FDS. However, Steve Murray, Managing Director of Catalyst Compliance, says advisers should not assume that their existing clients are exempt from the retrospective FDS requirement.
“The question advisers need to ask is whether they are providing a regular, ongoing service to their clients, and receiving some kind of payment for that ongoing service. If the answer is yes, it is likely an FDS will need to be produced,” says Murray.
Advisers will also need to determine the anniversary date for each client; that is, the date the service arrangement began, after which the adviser has 30 days to issue the FDS to their client. Murray says that if the advice business elected to take advantage of transition arrangements available when FoFA first took effect, they may have nominated a single date for all clients. He says it is likely that ASIC will accept this nominated date as the anniversary for all existing clients that require an FDS. However, if no single date was nominated, each individual client’s anniversary date will need to be determined, along with the service agreement they have been operating under for the past 12 months.
*Note: As part of its industry consultation, the Government agreed to bring in an extension for the delivery of FDS, giving advisers 60 days to issue this document. However, this amendment has not been made effective and does not yet apply.
I would not be counting on all the amendments getting through Parliament
The opt-in requirement, which seeks confirmation from the client every two years that they are happy to re-enter their ongoing advice relationship, is now in effect. It only applies to clients who commenced with their adviser on or after 1 July 2013. This means the first opt-in notices will not be required to be issued until 1 July 2015.
Murray says there is still some ambiguity around exactly what records need to be kept to demonstrate compliance with the opt-in requirement.
“We need further guidance from ASIC on what form the agreement from the client can take. I also expect that the major adviser associations will look at getting their codes of conduct approved by ASIC, to provide an alternative approach to ongoing client engagement for their members. But we don’t know what the final form of these codes will be, or how long it will take to get them approved.”
Best interests duty
The amendments to the best interests duty and related obligations were largely to do with facilitating scaled advice, as well as providing certainty for advisers as to the ‘safe harbour’ steps they needed to take to demonstrate their compliance with the duty. The best interests duty now reverts to the way it was originally drafted, but Murray believes there will be limited impact on advisers.
“Advisers have been operating under the best interests duty for some time, and I doubt we will see any immediate impact on businesses as a result of this element of the reforms. However, there is possibly still some ambiguity about how the duty applies to scaled advice, and on this, again, we really need further guidance from ASIC. It may take some time for the full impact of this change to be felt.”
Where to from here?
Advisers who are expecting the full suite of Coalition FoFA amendments to be reinstated should not hold their breath, warns Murray.
“The Government may be able to secure another little victory, like they have done with the grandfathering arrangements,” he says, “but I would not be counting on all the amendments getting through Parliament.”
He believes it would be prudent for advisers to proceed with the process changes necessary to comply with the legislation as it currently stands, regardless of whether they believe it is good policy.
“Obviously, it would be good for advisers if the Government could negotiate with the Labor Party and cross-benchers to remove opt-in, especially in light of the fact that it is somewhat redundant in the wake of now having to provide an FDS to all clients in an ongoing advice relationship, but we can’t assume that common sense will prevail. This has been a political ‘hot potato’ and the Government has lost a lot of ground on this issue. There is no guarantee they will continue to pursue this matter with the same vigour we have seen to date.”
Emily Saint-Smith is riskinfo’s Senior Journalist.