FoFA Reforms Rolled Back with Palmer Support

Wednesday 16 July 2014 @ 11.12 a.m. | Corporate & Regulatory | Trade & Commerce

Yesterday (15 July 2014) the Federal Government went ahead with its controversial roll-back of the previous Labor Government's Future of Financial Advice reforms (FoFA). Reforms designed to protect consumers of financial advice despite the damning Senate report into the Commonwealth Bank financial planning scandal which saw Senate's Economic Review Committee Chair Senator Mark Bishop calling for a Royal Commission into the matter (see our previous post: Senate Committee Says Commonwealth Bank and ASIC Should Face Royal Commission).

Background

The regulations negating the key reforms to financial advice were registered by the Finance Minister Mathias Cormann on Monday (1 July 2014) and waited until this week to see if they would be disallowed by resolution of the Senate, which resumed sitting on Monday 7 July 2014. Having now obtained the support of Clive Palmer and his Palmer United Party Group (PUP) in the Senate, the previously disallowed now redrafted regulations were able to pass.

The roll back regulations strike out parts of the FOFA reforms which were due to come into force this month, that would have forbidden banks rewarding their financial planners and tellers for steering customers into the institution’s own products. Further, financial advisers would also have been forced to tell their former clients how much they are continuing
to pay in ongoing fees and commissions.

The PUP support for the roll back regulations was not without compromise and it is reported that while Mr Palmer has retreated from his previous position of support for Labor and the Greens in the Senate to veto the changes to the FoFA reforms registered by the Finance Minister on 1 July 2014, Mr Palmer put to Senator Cormann a list of demands which the Federal Government had to consider to obtain PUP support. The demands are reported as including:

  • requiring an institution providing advice to issue the investor a legally binding statement vouching that the advice was "independent and in the best interest of the investor";
  • providing the investor with a statement detailing the commissions and fees being paid and over what time frame;
  • allowing investors a "14 day cooling off" period on any investment agreed to, in addition to that already provided for in the Corporations Act 2001 (Cth) which is “defined in plain language’’ and given to the investor as a clear undertaking; and
  • provision for a get-out clause in which the investor could order a switch in strategy should their investment begin to sour.

Reaction and Comment

Today's Business Insider in the Australian is reporting that "Financial Planners are Happy the Government's FOFA Rollback is staying" opening with the comment that;

"It only took a week but the government has finally had a “win” in the Senate by avoiding the strike down of its changes to financial advice laws that were passed by the previous government under its FOFA reform package."

The report quotes the Association of Financial Advisers (AFA) a key financial planning industry body, as commenting yesterday that in their view:

“These amendments do not reduce consumer protections, but importantly enhance the efficiency of the financial advice system.”

On the other side of the debate an article in Macro Business makes the point that:

"We should not forget that the original FoFA regime, implemented by the former Labor Government, was born out of the collapse of Storm Financial and followed a landmark parliamentary inquiry and three years of negotiations. To wind them back now, and re-introduce commissions and other forms of conflicted remuneration, is a highly retrograde move".

In its Business Day section the SMH also makes this point in the article "A rogue, Storm and poor advice" where it speaks of the vertical integration as being the "elephant in the room" pointing out that:

"The stakes are enormous. The big four banks and AMP have spent billions of dollars buying up wealth management businesses in the past decade or so and now own or control up to 80 percent of the financial planners, whose job it is to flog their products."

Given this the article makes the point that: ". . . they [the Bank etc] are against anything that might curb their reach into the pockets of Australians and their retirement savings."

Still to Come

Now that the FoFA reforms have been rolled back in the name of red tape reduction and in response to bank lobbying to water them down, it will be even more interesting to see what will be made of the Murray Report into the Financial System, given that the interim report has been critical of matters like the Commonwealth Bank financial planning scandal and the flaws in the vertical integrated model currently in play, that is,  where the banks own wealth management divisions and use financial planners to sell their products. A a model likened in one report to pharmaceutical companies being allowed to own doctors. Doctors who would then be remunerated by the pharmaceutical company and who are ascribed certain targets such as the number of pills they prescribe. "A model obviously riddled with conflicts".

In another report it is  argued that the question of where the client's best interests lie needs to be looked at as the country's retirement savings continue to grow due to compulsory superannuation and as that report puts it:

"The brutal reality is Murray [Murray Report into the Financial System] and all sides of politics should be looking at what makes a good financial planner and what is the best structure for them to work in the best interests of consumers".

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