Delay in financial reforms no win for clients or their money
This week was meant to be the dawning of a new era of trust and confidence for Australian retail investors as a result of the introduction of the Future Of Financial Advice reforms.
Instead, the actual introduction date for the ban on commissions would appear to have been delayed for 12 months due to the passing of grandfathering provisions by the Senate late last week.
Both the opposition and vested-interest financial service industry groups had been calling for a delay in the introduction of the ban on commissions. The reason given for the delay was the financial services industry needed more time to implement the FOFA reforms properly.
When you consider that the financial services sector was first told of the changes in April 2010 it had more than two years to get its house in order to meet the new requirements under FOFA. By comparison the entire business sector had slightly over 18 months to put in place the systems needed to cope with the introduction of the GST system.
What is puzzling is that these requests for the delay in the application of FOFA were happening at a time when the new regulations to effectively achieve this were being passed by the Senate. It is also surprising that there was no mention on the ASIC or FOFA websites that the ban on commissions was being delayed until July 1, 2014. As is always the case, the devil is in the detail and this is the case when it comes to the regulations passed on June 28.
Those regulations state that the ban on conflicted remuneration for benefits paid to platform operators will apply to only new clients from July 1, 2014. It also states that for non-platform providers the ban will apply to new clients and investments in new products by existing clients from July 1, 2014.
Investment platforms are widely used by financial planners for investing a client's money. An investment platform provides advisers with a list of managed funds and direct shares that they can recommend. In most cases the client's investment returns are therefore affected by a two-tier level of costs.
The first tier is the platform's costs that vary greatly between providers. The second tier is adviser commissions. These can include the ingoing commissions, also known as conflicted remuneration, and trailing commissions for allegedly providing ongoing financial advice.
It would now appear that as a result of this regulation being passed last week financial planners will have a further 12 months to provide advice that is conflicted due to their ability to still charge commissions.
This whole process has been made more complicated than is necessary due to what appears to be the government's cave-in to the pressure brought to bear by vested interests and the opposition, that have been focused on protecting revenue sources for the financial services sector rather than looking after investors.
As a result of the changes, anyone getting financial planning advice from an adviser that puts them into an investment platform up until and including June 30, 2014, will always be affected by commissions paid to their advisers. For advice obtained from advisers recommending direct investments, the ban will apply to new clients and investments from July 1, 2014.
This means that unless anyone receiving advice from now until July 1, 2014, does not want their investment returns decreased by commissions paid to an adviser they need to ask one simple question. Does the adviser voluntarily comply with the FOFA reforms? If they say no, look for an adviser that does.