Financial advice reforms to (finally) become effective in 2013!

It’s now been nearly 3 years since the Government first announced its Future of Financial Advice (FoFA) reforms in April 2010.

Since this time there has been much discussion and debate over the proposed changes and this has led to various amendments and plenty of fine-tuning. However, the reforms (albeit, significantly revised) have now been passed by Parliament and compliance will become mandatory from 1 July this year.

So what do the final changes look like?

Well, broadly speaking, the FoFA legislation introduces 4 key reforms to the financial advice industry.

1) A ban on conflicted remuneration structures for investment products

The ban will prevent financial planners from accepting commission payments from product providers that are recommended to clients. Additionally, the ban will also mean that volume-based payments (which traditionally have been used to incentivise financial planners (and the dealer groups that employ them) to sell more of a certain product) are abolished. In short, banning conflicted remuneration structures should assist in removing influence from investment recommendations. It should be noted however, that the ban does not extend to conflicted remuneration structures on life insurance products.

2) A best interests duty for financial planners

This reform is designed to ensure that financial planners put client interests before their own. Advisers will need to demonstrate they have taken ‘reasonable steps’ before recommendations are provided to retail clients.

3) An opt-in obligation

Opt-in only applies where clients are paying ongoing fees to their financial planner. From 1 July 2013, advisers will be required to renew the ongoing fee arrangements with their clients every 2 years. This requirement should ensure higher levels of ongoing advice and service are provided to clients. However, where an adviser is signed up to a professional code with a relevant industry body or association, ASIC may exempt them from opt-in obligations.

4) Increased powers for ASIC

The existing civil penalty regime will be extended to include licensees and financial planners. This means ASIC will be able to bring civil penalty proceedings against licensees and financial planners where a range of FoFA regulations are breached. Penalties will be severe and may be as much as $1m.

Overall, the FoFA reforms are designed to increase the quality of financial advice and consumer protection by introducing higher professional standards and greater levels of accountability for financial planners.

The new regulations are certainly a (big) step in the right direction but time will tell whether greater reform is needed.