A Senate committee has recommended the government's Future of Financial Advice (FOFA) reforms be passed, in a 156-page report that left industry participants underwhelmed.
In the keenly-awaited Senate Economics Legislation Committee report tabled in Parliament late yesterday, the committee set out nine relatively mild recommendations on the Corporations Amendment (Future of Financial Advice) Bill 2011. The recommendations largely reflected those set out two weeks ago by the Parliamentary Joint Committee (PJC) on Corporations and Financial Services.
"The committee recommends that, subject to the above recommendations, the FOFA bills should be passed," the committee, chaired by Senator Mark Bishop, said in its tenth and final recommendation.
The committee backed the opt-in and annual fee disclosure components of FOFA, although it recommended more clarity around the latter, calling for minimum disclosure guidelines and more detail on how it would apply to existing clients.
Advisers have expressed confusion over draft FOFA laws, which do not make clear whether the fee disclosure requirement would apply retrospectively.
It backed the 1 July 2012 start date for FOFA, saying ASIC's 'facilitative approach' would smooth the transition.
"Whilst the committee would prefer that the reforms be implemented as early as possible, they consider that it is not unreasonable for institutions facing substantial system changes to be given some leeway in implementing the reforms and that the 'facilitative approach' proposed by ASIC would be appropriate in the first year of operation," it said.
ASIC has said it would work with advisers and others in the first year after FOFA's implementation where reforms were inadvertently breached.
The committee supported the introduction of a law that required advisers to act in the best interests of their clients. It acknowledged the clause was widely seen as confusing, but nonetheless said the FOFA draft definition struck a balance.
In section 961B(2)(g) of FOFA, advisers are urged to take any steps that could reasonably be regarded as being in the best interests of clients, which advisers have said left them exposed.
"The committee acknowledges the concerns from some sections of the industry regarding the inclusion of paragraph 961B(2)(g), however, the committee believes the bill strikes an appropriate balance between providing some certainty for industry while ensuring professional standards are raised," it said.
It also recommended an independent review, in which ASIC would participate, of FOFA to be conducted one year and two years after the reforms kicked in.
FPA policy and government relations general manager Dante De Gori expressed disappointment that the committee's recommendations had "not addressed the FPA's fundamental concerns".
Specifically, De Gori was disappointed there was no amendment to the proposed 1 July start date, and no recommendations on whether fee disclosure applied only to new clients or not.
"While the report does acknowledge the FPA's concerns re opt-in and fee disclosure, we are disappointed that there were not the recommendations we were looking for," he told InvestorDaily.
"They're immaterial and not substantial amendments, minor clarifications. There still has been no official response from the government to the PJC's recommendations."
Association of Financial Advisers chief executive Richard Klipin expressed disappointment that the Senate's recommendations reflected the PJC's report.
"While we welcome the report, we are facing the biggest changes to financial services in a generation," Klipin said.
"We remain committed to the process, and we see the sense in promoting this, but we are disappointed that they haven't taken up our recommendations."
See below for the committee's recommendations.
The Corporations Amendment (Future of Financial Advice) Bill 2011 in this instance is referred to as the FOFA bill.
Recommendation 1: that regulations for the FOFA bill provide for minimum disclosure guidelines outlining what must be included by providers in the annual fee disclosure statement.
Recommendation 2: a revised explanatory memorandum to the FOFA bill be issued, which explains in further detail how the fee disclosure statement will apply to existing clients.
Recommendation 3: regulations pertaining to proposed paragraph 964A(3) of the FOFA bill be drafted to include a materiality threshold to determine when a benefit is not presumed to be a volume-based shelf-space fee.
Recommendation 4: that Treasury consult with corporate superannuation specialist firms to discuss alternative models of remuneration in alignment with the FOFA reforms.
Recommendation 5: that the FOFA bill be amended to preclude the timeshare product from the bans on conflicted remuneration.
Recommendation 6: the use of asset-based fees be closely monitored by ASIC post-implementation of the FOFA bill. ASIC's findings should contribute to the proposed independent review of the FOFA reforms (see recommendation 9).
Recommendation 7: further material be provided in the explanatory memorandum and regulations to the FOFA bill to outline examples of legitimate training, such as practice management or client relationship skills; and specific examples of IT support and software that are banned, and not banned.
Recommendation 8: regulations for the FOFA bill should not place a domestic requirement on the conflicted remuneration exception provided for genuine education and training benefits. Paragraph 2.33 of the explanatory memorandum should be amended accordingly.
Recommendation 9: the committee recommends that independent reviews of the FOFA reforms are conducted in 12- and 24-month intervals following the commencement of the FOFA bills. The reviews should consider the measures taken by ASIC in response to the new measures as well as industry's compliance with the provisions of the bills.
Recommendation 10: subject to the above recommendations, the FOFA bills should be passed.
