AN ANNOUNCEMENT last Friday by Financial Services and Superannuation Minister Bill Shorten and the interim results of the Australian Securities and Investments Commission's 2011 shadow shop survey into the quality of financial advice, has demonstrated the power and influence wielded by the finance services sector.
In a speech to members of the Self-Managed Super Fund Professionals' Association of Australia, Shorten indicated that the government would soon be introducing the Future of Financial Advice reforms to Parliament.
The FOFA reforms were first announced in April 2010. The Labor government stated the reforms were needed to improve the trust and confidence of retail investors in the quality of the financial advice they received. This was to be achieved by tackling the conflicts of interest that existed within the industry.
Two of the main measures were a prospective ban on charging commissions by people providing financial advice, and the imposition of a fiduciary duty on advisers that they must act in the best interests of their clients.
That the reforms were needed has been evidenced many times by ASIC investigations. This is done by ASIC recruiting consumers to seek advice from financial advisers in what is called a shadow shop. The results from past shadow shops has in the main called into question the quality of advice being given.
The most recent shadow shop was carried out in 2011 and the headline results were recently presented to the parliamentary joint committee inquiry into the FOFA reforms. Of the 64 financial plans reviewed more than a third were rated as poor, and only two were rated as good. This indicates, despite the looming introduction of FOFA, many advisers are still putting their interests ahead of consumers.
Since the reforms were first announced the financial services industry has mounted a campaign to either have them watered down or their introduction delayed. Despite the FOFA reforms having been announced in April 2010, and with the measures due to be starting on July 1, the financial services industry have said they needed more time to prepare. At the heart of the financial services industry's opposition to the reforms is protecting their members' continuing conflicted remuneration, and keeping in place the financial distribution channels that masquerade as sources of advice.
Shorten in his speech to SPAA announced that the Labor government would not be watering down the reform measures but the introduction could be delayed by 12 months. That the reforms will not be watered down is good news for consumers, but delaying its introduction allows commission-driven advisers to continue giving conflicted advice.
This is because the ban on commissions will only apply to new contracts entered into after the FOFA reforms apply.
If the ban on commissions is delayed for 12 months this will mean commission-driven members of the financial services industry will have another year to fatten their bank accounts. Shorten stated that consumers should be protected despite the delay because the fiduciary duty on advisers to act in the best interests of their clients would come into effect on July 1.
The power and influence of the financial services sector over the Labor Party is less than what it has over the Liberal Party.
From the outset the Liberals have opposed the introduction of FOFA. Mathias Cormann, shadow minister for financial services and superannuation, took the side of the financial services sector by attacking ASIC for releasing the headline shadow shop results.