Canberra faces up to FOFA flaws

The government's effort to fix its FOFA reforms will extend the financial services industry's transition period, but it closes up conflicted remuneration loopholes.

Crikey

The government has made a significant shift on its Future Of Financial Advice reforms steered through parliament last year by Bill Shorten, delaying the start of part of its new ban on conflicted remuneration to address problems around the grandfathering of existing financial planning contracts.

As Crikey reported late last year sections of the financial services sector discovered that regulations implementing a key aspect of the government's FOFA reforms – a ban on conflicted remuneration such as commissions to financial advisers that encourage them to channel clients into products from which they derive a fee – were flawed.

Many commissions are provided to financial planners by the owners of the 'platforms' that provide the basis for product comparisons and tailoring funds to suit clients' needs. The biggest platforms are owned by the major banks and AMP, which together in effect control the retail superannuation sector.

The ban on conflicted remuneration couldn't apply to existing contracts for constitutional reasons, so the ban only applied to new financial planning contracts from July 1, 2013.

However, the drafting of the regulations implementing the ban meant financial planners could still receive conflicted remuneration even for new clients, as long as the products they provided for new clients came from platform operators under arrangements already in place. This potentially meant that conflicted remuneration would remain in place permanently.

After a two-month discussion with industry, Treasury has issued a draft of new regulations for public comment that mean from July 1, 2014, financial planners cannot receive conflicted remuneration for new clients even under existing platform arrangements. In effect, the problem has been removed, but at the cost of an extra year for financial planners and platform operators under existing arrangements. However, arrangements entered into between planners and platform operators after July 1, 2013, won't be grandfathered.

While many in the industry still rely on commission-based platform arrangements, many larger owners are now moving away from commission-based models, preferring to offer more competitive and appealing products to clients, while more forward-looking sections of the financial planning industry have long accepted that the days of relying on commissions and financial advice 'fees' of which clients were unaware were coming to an end.

The new regulations also address a specific issue around 'buyer of last resort' arrangements, in which platform owners guarantee to purchase financial advice businesses; this won't be considered conflicted remuneration if the valuation of the business is based on valuing the products of the buyer similarly to other financial products. This is understood to be particularly directed at the 'buyer of last resort' arrangements of AMP.

Since the grandfathering problem was first raised, there has been speculation within the industry about how it happened, with some suggesting a c-ck-up and others a conspiracy. Some suggested the original regulations were intentionally drafted with a broad remit; others that it was a drafting error (which are by no means unknown in legislative and regulation drafting) or an unintended consequence. However, there was less interest in the cause than in a rapid, certain solution, and the industry has quietly negotiated with the government to resolve the issue, with few industry figures willing to speak about the discussions even on background. Crikey understands the draft regulations were first circulated on a limited basis last week.

The extra year for grandfathering arrangements may mean the financial planning industry enters a period of consolidation, with older planners and owners looking to exit the industry before the commencement of the new arrangements in 2014.

However, there still remains the uncertainty of the election: the Coalition, which on superannuation issues is controlled by the more regressive, anti-consumer sections of the financial planning industry, recently recommitted to rolling back elements of FOFA.

This story first appeared on www.crikey.com.au on March 5. Republished with permission.