Renato Mota
News

The Government’s recommendations on the Financial Advice Industry

By TechConnect

The Government has made its long awaited response and recommendation to the Parliamentary Joint Committee (Ripoll) inquiry and Super Systems review (Cooper). The recommendations are planned to be implemented by July 2012.

The recommendations are going to affect all individuals and organisations that service/support the advice industry from investment fund managers, platform providers, licensees, advisers and individuals paying for the services of a professional financial adviser.

The timing of this announcement is important. Originally, the Government announced it would respond to the Ripoll inquiry after it had considered the final report of the Cooper Review (ie after June 2010). However, it was brought forward and released before the Federal Budget. The Government clearly wanted this initiative out in the public before the release of the Henry Tax Review and the Federal Budget.

If the Government intends to introduce and pass the legislation before the Federal election, the Government will need the support in the Senate of the Greens (which they have) and the support of either Senator Nick Xenophon or Family First Senator Steve Fielding.

The Government’s recommendations include the following:

  • A prospective ban on conflicted remuneration structures including commissions and volume based payments, in relation to the distribution and advice of retail investment products including managed investments, superannuation and margin loans. The measure does not initially apply to risk insurance.

  • The introduction of a statutory fiduciary duty so that financial advisers must act in the best interests of their clients, subject to a ‘reasonable steps’ qualification, and to place the best interests of their clients ahead of their own when providing personal advice to retail clients.

  • Increasing transparency and flexibility of payments for financial advice by introducing ‘adviser charging’ that will help align the interests of the financial adviser and the client; is clear and product neutral; and where the investor will be able to opt in to the advice in response to a compulsory, annual renewal notice.

  • Percentage-based fees (known as assets-under-management fees) will only be charged on ungeared products or investment amounts and only if this is agreed to with the retail investor.

  • Expanding the availability of low-cost ‘simple advice’ to provide access to and affordability of financial advice.

  • Strengthening the powers of the Australian Securities and Investments Commission (ASIC) to act against unscrupulous operators.

  • The examination of a statutory compensation scheme by Mr Richard St John, who has significant corporate law experience.

  • The licensing exemption for accountant providing advice on self managed super funds (SMSF) will be removed and the Government will consult with professional bodies about alternative licensing arrangements.

The majority of these reforms will commence from 1 July 2012 and the Government will consult with the industry on the implementation of the reforms.

APPENDIX A - The PJC’s recommendations and the Government’s response

Summary of the Government’s response

 

PJC’s recommendation

Summary of Government’s response

1

The committee recommends that the Corporations Act be amended to explicitly include a fiduciary duty for financial advisers operating under an AFSL, requiring them to place their clients’ interests ahead of their own.

Support.

2

The committee recommends that the Government ensures ASIC is appropriately resourced to perform effective risk-based surveillance of the advice provided by licensees and their authorised representatives. ASIC should also conduct financial advice shadow shopping exercises annually.

Support in principle.  ASIC is appropriately resourced to perform its functions.

3

The committee recommends that the Corporations Act be amended to require advisers to disclose more prominently in marketing material restrictions on the advice they are able to provide consumers and any potential conflicts of interest.

Do not support.

4

The committee recommends that the Government consults with and support the industry in developing the most appropriate mechanism by which to cease payments from product manufacturers to financial advisers.

Support with additional strengthening.

5

The committee recommends that the Government considers the implications of making the cost of financial advice tax deductible for consumers as part of its response to the Treasury review into the tax system.

The Government’s response to the Independent Tax Review will be released on 2 May 2010.

6

The committee recommends that section 920A of the Corporations Act be amended to provide extended powers for ASIC to ban individuals from the financial services industry.

Support.

7

The committee recommends that, as part of their licence conditions, ASIC requires agribusiness MIS (managed investment scheme) licensees to demonstrate they have sufficient working capital to meet current obligations.

Support in principle, noting that implementation is a matter for ASIC.

8

The committee recommends that sections 913B and 915C of the Corporations Act be amended to allow ASIC to deny an application, or suspend or cancel a licence, where there is a reasonable belief that the licensee ‘may not comply’ with their obligations under the licence.

Support.

9

The committee recommends that ASIC immediately begin consultation with the financial services industry on the establishment of an independent, industry-based professional standards board to oversee nomenclature, and competency and conduct standards for financial advisers.

Do not support.

10

The committee recommends that the Government investigates the costs and benefits of different models of a statutory last resort compensation fund for investors.

Support.

11

The committee recommends that ASIC develops and delivers more effective education activities targeted to groups in the community who are likely to be seeking financial advice for the first time.

Support in principle.

Additional Government proposals

1

The exemption permitting accountants to provide advice on the establishment and closing of self-managed superannuation funds (SMSFs) without holding an Australian Financial Services Licence (AFSL) will be removed.

Additional Government proposal.

2

Improve and simplify disclosure on the nature of financial services offered to investors.

Additional Government proposal.

3

Consult on the appropriateness of the current criterion under which a client is classified as retail or wholesale.

Additional Government proposal.

4

Improve access to simple or limited advice to assist in the affordability of advice, by removing regulatory barriers.

Additional Government proposal.

APPENIDX B - Reforms to Financial Advice – Adviser Remuneration

Form of remuneration

Description

Permitted under the new regime

Initial/upfront commission

Advice fee charged as a percentage of the client’s initial investment. The fee is an arrangement between the product provider and the adviser or the adviser’s licensee and built into the product. The fee may be funded by a matching contribution or entry product fee. 

Not permitted. There must be separate fees for the product and advice.

Trail commission

Charged as a percentage of the client’s assets (for example annually). The fee is an arrangement between the product provider and the adviser or the adviser’s licensee and built into the product. The fee may be funded by a product administration fee.

Not permitted. There must be separate fees for the product and advice.

Fee for service charged as an asset-based fee on un-geared products or investment amounts

A fee for service, agreed between the client and the adviser, charged as a percentage of the client’s funds under management and paid by the client to the adviser or licensee in relation to the provision of advice.
This asset-based fee can be deducted from the client’s investment, at the direction of the client.

Permitted.

Fee for service charged as an asset-based fee on geared products or investment amounts

Advice fee charged as a percentage of the client’s funds under management and paid by the client to the adviser or licensee in relation to the provision of advice.

Not permitted.

Other types of fee for service for advice

May be charged, for example, as an hourly rate, flat fee per service provided, fixed annual fee (a retainer) or performance or outcome based fees. This may be paid up front, deducted from the client’s investment funds at the direction of the client or through a payment plan (if offered by the adviser). 

Permitted.

Any form of payment based on volume or sales targets (examples A to C are below)

Whether this is in the form of a payment, from a product provider, or from any financial services business, in relation to the distribution or advice for retail financial products.

Not permitted.

Example A- Volume based
Volume bonus and fee rebate

Paid by the product provider to the licensee or adviser and is generally conditional on the licensee having large funds under management (FUM) with the product.

Not permitted.

Example B - Volume based
Volume based payments or sales incentives

Payments from licensees to their employee advisers or authorised representatives for distribution of retail financial products, which are calculated based on meeting sales targets or are volume based.

Not permitted.

Example C - Volume based
Shelf space fee payments (based on volume)

Payments based on volume that are paid from the fund manager to the platform provider and from the platform provider to the licensee.

Not permitted.

Shelf space fee payments (not based on volume)

Payments not based on volume that flow to and from the platform, including a product access payment (provided that payment is not based on volume).

Permitted.

Note: Any form of non-permitted remuneration described above would not be allowed after 1 July 2012. The reform applies to all financial products, with the exception of risk insurance. The application of the reforms to risk insurance will be considered at a later date.

Conclusion

These changes will reshape the industry and advice provided to different segments of the market. The devil will be in the detail when the draft legislation is released. However, financial advisers should take these announcements on notice that significant changes will be forthcoming and they need to fasten their seat belts for the ride ahead.