Draft Future of Financial Advice legislation released
Treasury yesterday released draft legislation of the first tranche of the Future of Financial Advice (FOFA) reforms for public consultation. The key measures contained in the draft legislation include:
Best interest duty
Persons providing personal financial product advice to retail clients will be subject to a duty to act in the best interests of clients and give priority to the interests of clients in the event of a conflict of interests. The introduction of a statutory best interest duty was previously announced by the Government as a part of its initial package of proposed FOFA measures released in April 2010 (April 2010 announcements). The penalty for breaching this duty will be a maximum of $250,000 for individuals and $1 million for corporate entities (licensee or authorised representative).
Enhancements to ASIC powers
Grandfathering of existing trail commission arrangements
It has been clarified that the proposed ban on trailing commissions, proposed by the April 2010 announcements, will not apply to any existing contract where the adviser has a right to receive trailing commissions after 1 July 2012 (or 1 July 2013 for certain risk insurance policies).
Additionally, there is some good news, and some bad news, for platform operators and dealer groups using platforms. It is proposed that the reforms will prohibit future payments to licensees (or their representatives) in respect of new investments through a platform, but will grandfather future payments to licensees (or their representatives) in respect of investments in a platform accumulated prior to 1 July 2012. In short, this means that the level of volume payments from platform providers to dealer groups will ‘crystallise’, and should not increase in size after the commencement of the reforms on 1 July 2012. We will await the wording of this draft legislation, but it appears that the Government intends to cap the amount a platform operator can pay to a dealer group at whatever the amount is at 30 June 2012, irrespective of how much funds under management increase after that time.
Treatment of insurance commissions
In its April 2011 announcements on FOFA (April 2011 announcements), the Government indicated that it would ban all up-front and trailing commissions and like payments relating to individual and group risk insurance within superannuation from 1 July 2013. Treasury has now clarified that this ban will apply to commissions on group life insurance in all superannuation products and to any life insurance policies in a default or MySuper product. This means that commissions on individual life insurance policies within superannuation would only be allowable on Self Managed Superannuation Funds and Choice products (ie options in a superannuation product that is not the default option). Additionally, by 1 July 2013, the superannuation industry is required to unbundle disclosures so that the dollar and percentage value of commissions is disclosed for all new and renewed policies.
Extension of bans on soft dollar benefits
The ban on soft dollar benefits has been extended to include non investment-linked life insurance outside of superannuation (but not general insurance). Previously, the proposed ban on soft-dollar benefits only covered retail investment financial products and life insurance within superannuation but not risk insurance outside of superannuation.
Stamping fees or similar payments to stockbrokers for capital raising
In order to continue to facilitate and encourage capital raising by stockbrokers, stamping fees and similar payments will be carved out of the prohibition on conflicted remuneration models. The announcement noted that “broking firms will not be unfairly impacted so that employee brokers can continue to be remunerated on brokerage they generate, including, where remuneration is set as a percentage of the firm’s income from broking fees”.
Restrictions on the use of the term “financial planner”
It has been proposed that the use of the term “financial planner” be restricted. Details of the restriction will be made clear in a consultation paper proposed to be released by the Government by the end of this year.
We will provide further updates as more information comes to hand.
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