Leading superannuation groups in Australia have raised concerns over potential risks to investor protection after the government made major changes to proposed regulations designed to improve the quality of financial advice.
In a series of amendments released last week, the treasury department removed what it called “unwieldy and burdensome” elements of the previous government’s Future of Financial Advice (Fofa) legislation. It has given the industry until February 19 to respond with submissions.
The amendments draw a line between different types of fund provider: industry funds seeking stricter controls on financial planners on one side, and retail funds that rely on planners for distribution and want greater freedoms on the other.
David Whiteley, chief executive officer of ISA, a peak body for the super funds sector, warns the amendments will eliminate key consumer protections and could bring conflicts of interest back into financial advice.
ISA is concerned about the “watering down” of rules that require financial advisers to act in the best interests of clients. “The original draft contained a prescriptive list of best-interest check points for advisers to adhere to, but it also included a ‘catch-all’ clause that went beyond the prescriptive text to impose a general duty towards a client’s best interest,” says Whiteley.
“Now the catch-all clause is gone and this reopens the debate about whether a financial planner is an impartial adviser or a sales rep.”
Another amendment he objects to is the removal of an opt-in requirement making it necessary for product providers to seek regular consent from clients to continue to charge a fee.
“The main focus of Fofa when it was first proposed was to eliminate trailing commissions,” explains Whiteley. “Fofa rebadged these commissions as fees, but importantly the original draft required product providers to go to their clients every two years and ask their permission to continue with the arrangement. Getting rid of the opt-in is a return to the bad old days.”
Other amendments include eliminating the need to produce retrospective fee disclosure statements and the exemption of general advice from conflicted remuneration.
But the Association of Superannuation Funds of Australia (Asfa), which represents both industry and retail funds, takes a softer line on some of the changes, noting it is too early to say whether they will have a material impact on quality of advice.
“The dust hasn’t settled on Fofa yet and there will be more tinkering ahead," says Pauline Vamos, who heads Asfa. "The whole industry needs to stand back and ask whether we are achieving what we set out to achieve and back this up with scientific evidence. We need outcomes-based research, not generalised statements from various interests."
Vamos isn’t excessively concerned about the removal of the catch-all clause as there is enough over-arching language within the legislation to ensure advisers know their clients and their products.
“The trick is to find a balance between providing protections, but also giving the industry the flexibility to offer a range of services and products,” she says. “Financial advisers need the ability to give single issue advice and/or limited advice to clients in between full catch-ups.”
Vamos is less confident, however, about the removal of the opt-in requirement, particularly in relation to superannuation investors with smaller account balances. “We surveyed wealthy people about the value of opting-in and they indicated it was less relevant. Those with low incomes seemed to think it was more important.”
Unsurprisingly the changes to Fofa have been welcomed by the financial advisory industry. In a statement last week, the chief executive officer of the Financial Planning Association (FPA), Mark Rantall, said the amendments were “more sensible, workable and practical”.
“The FPA has consistently spoken out against the need for opt-in and a retrospective fee disclosure statement, [which] we believe are onerous policies that will not benefit Australians seeking quality financial advice,” he said.
Australia has been working towards overhauling its financial advice sector and removing conflicted remuneration structures since the Fofa initiative was announced in April 2010.
Following the present consultation process, the government expects that the new rules will be finalised in March 2014 and passed through parliament by the middle of this year.