The Ripoll Review

The Future of Financial Advice

On the 28th April 2011, Bill Shorten, Minister for Financial Services and Superannuation, announced more detail regarding the government’s response to the PJC Inquiry into Financial Products & Services.

The following is a brief overview of this document, titled The Future of Financial Advice 2011, as well as some brief views of our own regarding the impact of these new measures on the provision of financial advice.

Summary of Reforms

1. Application of the Ban on Conflicted Remuneration to Risk Insurance

A prospective ban on up‐front and trailing commissions and like payments for both individual and group risk within superannuation from 1 July 2013.

2. Operation of “Opt‐In” Under the Adviser Charging Regime

A prospective requirement for advisers to get clients to opt‐in (or renew) their advice agreement every two years from 1 July 2012.

The document provides an insight into the implementation process for Opt‐In :

The adviser being required to send a prescribed renewal notice no less than 30 days prior to the relevant (two year) anniversary date;
This notice would outline the fee the client paid in the previous year and a description of the services they received, and fee and service information for the forthcoming year (also alerting the client to the fact that they can opt out at any time);
If the client does not respond to the notice or opts out, the adviser cannot continue to charge an ongoing advice fee, and nor can the client continue to expect management of their financial arrangements;
If the client is unresponsive to the renewal notice, the adviser can continue charging the client for an additional 30 day ‘grace period’ after the anniversary date;
Every second year where no opt‐in renewal is required, a disclosure document would be required to be sent in its place, containing the same information normally contained in the opt‐in renewal notice (for example, fee information); and
If a client does not respond to a renewal notice, they are taken to have chosen to opt‐out 30 days after the anniversary date, meaning the adviser’s liability for ongoing advice ceases at the point that they can no longer charge an ongoing fee (advisers will still be liable for advisory services already rendered to the client).

It appears that Opt‐In does not apply to risk insurance as “Only those advisers intending to charge ongoing advice fees to retail clients need to send the notice”. We do not think that trailing commissions relating to risk (outside of super of course) would be regarded as advice fees.

3. Ban on Volume Payments

A prospective ban on any form of payment relating to volume or sales targets from any financial services business to dealer groups, authorised representatives or advisers, including volume rebates from platform providers to dealer groups.

For clarity, the ban will include a prohibition on the following payments:

Any volume‐based payment from a product provider, platform provider, or any other entity to a licensee, authorised representative or adviser in relation to distribution or advice for retail financial products.
Any volume‐based payment by the product provider, platform provider or any other entity to the licensee or adviser which is generally conditional on the licensee having large funds under management with the product (except asset‐based fees paid by a client to a licensee or adviser);
Any volume‐based payment from licensees to their employee advisers or authorised representatives for distribution of retail financial products, contingent or based on meeting sales targets; and
Any volume‐based shelf‐space fees which are paid from the fund manager to the platform provider and from the platform provider to the licensee.”

This ban does not apply to pure risk insurance – so we expect to see the insurance companies to continue to offer volume incentives.

John Brogden, CEO of the Financial Services Council has made a press release on the morning of the 28th April stating that “Volume rebate arrangements contractually existing before 30 June, 2012 will continue to exist under the Government’s Future of Financial Advice (FOFA) changes, under an agreement with the Government brokered by the Financial Services Council (FSC).”

He also states that “it is understood this (the ban on volume bonuses) does not extend to arrangements between fund managers and platforms”.

If Mr Brogden is correct we would suggest that there will be a flurry of volume bonus arrangements put in place prior to July 2012.

4. Ban on Soft Dollar Benefits

A prospective ban on soft dollar benefits, where a benefit is $300 or more (per benefit) from 1 July 2012. The ban does not apply to any benefit provided for the purposes of professional development and administrative IT services if set criteria are met.

This is just a further tightening of the net over payments that may influence product decisions. We expect that product providers will target the technology area to provide additional support.

Once again the ban does not apply to risk insurance (outside of superannuation). Does this means that insurance companies can suddenly recommence offering soft dollar incentives of any amount? It seems that the government is not as concerned regarding consumer interests, which is noted as a principal driver behind these reforms, when it comes to risk insurance. We expect this will be adjusted before July 2012.

5. Statutory Best Interests Duty

The government will consult further with industry to develop legislation to implement this measure.

The issues for consideration raised in the document include:

The Government recognises that the focus of the duty should be on how a person has acted in providing advice rather than the outcome of that action.
Compliance with this duty will be measured according to what is reasonable in the circumstances in which the advice is provided.
A person giving personal advice will not be required to broke the entire market or a subset of the market of all available financial products to find the best possible product for the client, unless this service is offered by the adviser or requested by the client and subsequently agreed to by both parties.
The legislation will provide that a person providing personal advice cannot contract out of this duty. If a person considers that they cannot provide advice that is in the best interests of the client in accordance with the duty, they must refuse to provide the advice.
Financial liability for any breach of the duty will rest with the relevant providing entity. This means that individual advisers will not be held financially liable for any breach of the duty.

This is a step back from the “fiduciary duty” that was raised a year ago. There is further consultation required so expect further change in this area, however there will be a standard implemented.

6. Access to Advice

Expanding a new form of limited advice called scaled advice, which can be provided by a range of advice providers, including superannuation trustees, financial planners and potentially accountants, creating a level playing field for people who provide advice. Scaled advice is advice about one area of an investor’s needs, such as insurance, or about a limited range of issues.

Almost every piece of advice that we see has been limited in some way – so this concept is nothing new.

7. Limited Carve‐Out for Basic Products

A limited carve out from elements of the ban on conflicted remuneration and best interests duty for basic banking products where employees of an Australian Deposit‐taking Institution (ADI) are advising on and selling their employer ADI’s basic banking products. Basic banking products are basic deposit products (e.g. savings accounts), first home saver account deposit accounts and non‐cash payment products (e.g. travellers cheques and cheque accounts).

Simple bank account products should be easily presented to the consumer. The carve out does not apply when more complex products are involved as well as the basic products.

Interestingly, the ban on conflicted remuneration structures and the requirement to act in the client’s best interest do not apply here, so bank staff can be paid bonuses for sales volume even if they know there is a better product available.

8. Restriction on the Term Financial Planner / Adviser

The Government will explore whether the term ‘financial planner/adviser’ should be restricted under the Corporations Act 2001 (Corporations Act).