FoFA Rolled Back In Following PUP Split

Thursday 20 November 2014 @ 11.04 a.m. | Corporate & Regulatory | Trade & Commerce

In previous posts we have reported on the Federal Government's controversial "roll-back" of the previous Labor Government's Future of Financial Advice reforms (known as FoFA). Today (20 November 2014) we find that we are reporting that the "roll back" of the previous provisions, has become a "roll back in" with the Senate last night voting 32 to 30 to scrap the Federal Government's FOFA reforms.

This position came about when support for the Federal Government's "roll back" regulations delivered in the Senate by the Palmer United Party (PUP) and independent Senator Ricky Muir was lost. The support was lost as a result of a split between PUP Senator Jacqui Lambi and the rest of her party, the defection of Senator Muir and the formation of a group of independent Senators, led by Senator Nick Xenaphon which was an independent group willing to vote with the opposition and the Greens last night to disallow the Federal Government's FoFA Reforms.

FoFA as Originally Enacted

As originally enacted, FoFa was intended to be a set of consumer protection measures relating to the Financial Advice Industry that would have, among other matters, forbid banks rewarding their financial planners and tellers for steering customers into the institution’s own products, and also would have required, financial advisers to tell their former clients how much they are continuing to pay in ongoing fees and commissions.

The reforms, it was argued at the time they were introduced, were designed to protect consumers of financial advice from the type of losses that had resulted from scheme failures like Storm Financial and the more recent Commonwealth Bank financial planning scandal which saw the Senate's Economic Review Committee Chair Senator Mark Bishop calling for a Royal Commission (see our previous post: Senate Committee Says Commonwealth Bank and ASIC Should Face Royal Commission).

The Roll Back

The roll back regulations struck out many of the above described parts of the original FOFA reforms  and were due to come into force July 2014 and were registered by the Finance Minister Mathias Cormann on Monday (1 July 2014) when the wait began to see if they would be disallowed by resolution of the Senate, a position it was assumed would not eventuate given the support of the PUP in the Senate. Support not without compromise for the Federal Government.

The Roll Back In - Effect and Reaction

The disallowance of government's regulations, means the legislation passed by the previous government would come into force and for financial planners, the scrapping of the changes means that they will have to contact hundreds of thousands of customers and ask them if they want to remain clients. As The Age reports:

"These laws include a requirement for clients who signed up after July 2013 to opt-in every two years; a broader duty for advisers to act in clients' best interests; and tougher restrictions on payments from the makers of wealth products to advisers."

The Age further reports the chief executive of the Association of Financial Advisers, Mr Brad Fox, as indicating that hundreds of thousands of new clients who had been contracted since July 2013 last year would have to be contacted under the "opt-in" rule which:

". . . means financial advisers would need to have all clients who joined them after July 2013 opt-in every two years to stay a client, . . . As well, advisers would have to provide retrospective fee disclosure statements to hundreds of thousands of clients who signed up before July 2013."

The Age also reports Mr Fox as saying that disclosure statements had been required for all new clients since the middle of 2013 but that such had been ineffective:

"The evidence so far is that clients are not valuing this report. It's not causing them to take any action and it's repeating information they already receive in other statements."

The Finance Minister is reported as saying that:

". . . the move had nothing to do with protecting consumers . . . What you're doing is putting a gun to the government's head, . . . If this [regulation] is disallowed today it will be gone and it will have massive ramifications."

In defence of the "roll back in" independent Senator Nick Xenophon is quoted as saying on Wednesday (19 November) that:

". . . the senators opposed to the government's changes were particularly motivated by a 'grueling' Senate estimates last week into the Timbercorp collapse that heard from people who had their lives ruined 'as a result of bad financial advice'."

Victims of previous financial scheme failures are reported as supporting the Senate's disallowance, and quoted as saying that still more needed to be done, while consumer groups are reported as supporting the Senate's disallowance and seeing it as a win for customers. The Age quotes legal adviser to National Seniors, Mr Paul O'Shea, as saying that the previous government's FOFA reforms had been law since July 2013 and that, "there had been ample time for the industry to prepare itself".

Mr O'Shea is also reported as saying that the government's move to roll back previous government's rules through regulations, because it did not have the Senate support to pass legislative amendments, was the cause of the uncertainty.

Some financial services industry participants do support of the "roll back in". The Age, for example ,quotes Jan van der Schalk, financial services analyst at CLSA, as saying ".  .  . it was important to 'restore faith' in the industry" and further saying:

"All of this is part of restoring the fortunes of superannuants in Australia. Especially in light of what's coming out around mis-selling with CBA, it's a good thing to have financial advisers as strictly regulated as possible, . . ."

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