Future of Financial Advice reforms announced

On 28 April 2011 the Federal Government issued a media release in which it provided further detail about the direction of the government’s ‘Future of Financial Advice’ (FoFA) reforms.  The key elements of the reforms announced by the government are a requirement for financial advisers to get clients to ‘opt-in’ every two years if they wish to continue to receive ongoing advice, banning all commissions on risk insurance inside superannuation, and a broad ban on volume-based payments.


The Assistant Treasurer and Minister for Financial Services and Superannuation, The Honourable Bill Shorten, has released an information package which contains further detail on the ‘Future of Financial Advice’ reforms announced by the Federal Government in April 2010.  There are no real surprises in the package, which mostly confirms the approach the government had previously indicated it would take on issues such as conflicted remuneration and client engagement.  The most significant aspect of the announcement is that the government will proceed with the ‘opt-in’ client engagement model, of which adviser groups have been critical, although there is a compromise on the timing of the ‘opt-in’ obligation (clients will have to ‘opt-in’ every two years instead of annually as first proposed, with a disclosure notice sent to the client every other year).

Key elements of the announcement

The key elements of the proposed reforms announced are:

  • A prospective ban on up-front and trailing commissions and like payments for both individual and group risk within superannuation from 1 July 2013. However, the government has decided not to extend the ban on conflicted remuneration to risk insurance outside superannuation. The government indicated in Stronger Super that it would not allow commissions for insurance in MySuper, which is due to be implemented from July 2013, so it is no surprise that it has extended the ban on commissions for insurance to other superannuation products.
  • A prospective requirement for advisers to get clients to opt-in (or renew) their advice agreement every two years from 1 July 2012. Advisers will also be required to provide clients with an annual disclosure notice detailing fee and service information for the previous and forthcoming year which informs the client of their right to ‘opt-out’ at any point in time to an ongoing advice contract.  The government is still consulting on what penalty will be imposed on advisers that breach this requirement.  The change to a two year requirement will be some comfort to adviser lobby groups, such as the Association of Financial Advisers, that have been outspoken in their criticism of the ‘opt-in’ regime, but they would have preferred any reform be based on an ‘opt-out’ model.  There will still be an annual compliance obligation for advisers, however, with a notice having to be sent to clients every other year when the client is not required to ‘opt-in’.
  • A prospective ban on any form of payment relating to volume or sales targets from any financial services business to dealer groups, authorised representatives or advisers, including volume rebates from platform providers to dealer groups. The ban will not apply in relation to pure risk insurance, or where employees are advising on and selling their Australian Deposit-taking Institution (ADI) employer’s basic banking products only, and it appears fund managers will still be able to pay volume rebates to platforms and trustees. Again, this is no surprise – the adviser industry has seen the writing on the wall with volume-based rebates and payments from platforms, with most starting to move away from this model.
  • A prospective ban on soft dollar benefits from 1 July 2012, where a benefit is $300 or more (per benefit) (benefits under $300 will be allowed provided there is no pattern of similar small payments). The ban does not apply to any benefit provided for the purposes of professional development and administrative IT services if set criteria are met. This is new, but not surprising, and should not cause too many concerns in the industry (although it creates another compliance obligation, with advisers now having to consider whether a ‘value add’ provided by a service provider is a ‘soft dollar’ benefit, and then considering whether it is more or less than $300 in value, and whether it is exempted or not). However, as training is the most common form of soft dollar benefit, its exemption will assist with this compliance.
  • Introducing a ‘best interests’ duty for advisers which the adviser cannot contract out of. Compliance with this duty will be measured according to what is reasonable in the circumstances in which the advice is provided (ie focussing on the process, rather than the outcome). What is reasonable in the circumstances is commensurate and scalable to the client’s needs.

This means that if the client’s needs indicate that only limited advice is necessary, the adviser will not be required to provide holistic advice.  The adviser will not be required to broke the entire market or a subset of the market of all available financial products to find the best possible product for the client, unless this service is offered by the adviser or requested by the client and subsequently agreed to by both parties. Financial liability for any breach of the duty will rest with the relevant providing entity (ie the licensee).

This means that individual advisers will not be held financially liable for any breach of the duty. However, the individual adviser who provides the advice may be subject to administrative penalties in the form of a banning order if they breach the duty.

This was one of the more contentious aspects of the FoFA changes announced in April 2010, and the government doesn’t appear to have progressed too far with the detail.  The only thing that is ‘new’ in the announcement is the confirmation that the providing entity, rather than the individual adviser, will be primarily liable to the client for breaching the duty, but as the law currently makes licensees liable for the actions of their representatives, this is hardly ‘new’.

  • Expanding a new form of limited advice called ‘scaled’ advice, which can be provided by a range of advice providers, including superannuation trustees, financial planners and potentially accountants, creating a level playing field for people who provide advice. Scaled advice is advice about one area of an investor’s needs, such as insurance, or about a limited range of issues. Most industry participants already consider that financial advice is scalable under the current provisions of the Corporations Act 2001 (the Australian Securities and Investments Commission (ASIC) said as much in its Regulatory Guide 200) so the government appears to be announcing a ‘new’ initiative that is already available as the law currently stands.
  • The government appears to be committed to repealing the accountant’s licensing exemption for advising on Self-Managed Superannuation Funds (SMSFs), but the announcement indicates that Treasury, ASIC and the accounting bodies are now working together on various initiatives that will allow accountants to provide such advice but at the same time will assist accountants to obtain a licence. It is likely that accountants will only be able to give advice that is not product specific under the new regime. The government appears to be committed to making the transition to a licensing regime relatively simple for accountants as recognition that, if accountants don’t give advice about setting up SMSFs, many people setting up SMSFs will do so without any advice at all.
  • A limited carve out from elements of the ban on conflicted remuneration and best interests duty for basic banking products where employees of an ADI are advising on and selling their employer ADI’s basic banking products (eg savings accounts, first home saver account deposit accounts and non-cash payment products such as travellers cheques and cheque accounts).  This makes sense; basic deposit products are not considered ‘high-risk’, and no-one is going to be surprised if they go to a bank and an employee tries to persuade them to open an account.
  • The government will explore whether the term ‘financial planner/adviser’ should be restricted under the Corporations Act 2001. This appears to echo previous (rejected) initiatives to classify advisers as either ‘financial planners’ or ‘sales representatives’.  If commissions are banned, it is questionable whether such a restriction is necessary.

Next steps

Consultation on each of the elements outlined above will continue to resolve any outstanding issues as part of the development of the necessary legislation. The government expects to release draft legislation for public comment after the middle of this year, with legislation giving effect to these reforms intended to be introduced into Parliament before the end of the year.


Harry New

Harry leads our financial services team and focuses extensively on financial services law and corporate advisory.

Adrian Verdnik

Adrian’s financial services law practice covers superannuation, managed funds, insurance, and financial advice.

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