End of the 'phony war' on FOFA

With the Government’s release of its Future of Financial Advice proposals, Mike Taylor writes that the financial planning industry now has a tangible target at which to aim its lobbying efforts.

It was a measure of the public posture adopted by the Assistant Treasurer, Bill Shorten, that he held his major media briefing concerning the Government’s Future of Financial Advice (FOFA) changes accompanied by “a victim of the Westpoint collapse”.

It is also worth nothing that the minister’s announcement attaching to the FOFA changes specifically mentioned Storm Financial, Trio Capital and Westpoint.

It must have been clearly in the minds of Shorten’s advisers that these three collapses provided a solid case for announcing the Government’s preferred position on the FOFA changes, particularly the banning of volume rebates and commissions with respect to risk in super as well as the implementation of a two-yearly opt-in.

However, in circumstances where Storm Financial represented a fee-for-service operation and where many investors in both Trio Capital and Westpoint were self-directed rather than advised, advisers affected by the Government’s FOFA approach have every reason to feel their industry is being made the scapegoat for a wide range of ills, including inherent shortcomings in the Financial Services Reform Act and the regulatory approach undertaken by the Australian Securities and Investments Commission (ASIC).

The chief executive of the Association of Financial Advisers (AFA), Richard Klipin, was absolutely right when he declared that, for his organisation, the release of Shorten’s FOFA announcement represented the end of the “phony war”.

What Klipin meant was that after months of participating in the Government’s consultative processes around FOFA and haggling with Treasury officials about what might and might not be included in the ultimate legislation, the industry now has something concrete to aim at.

The AFA, together with the Financial Services Council (FSC), the Financial Planning Association (FPA) and other organisations lobbied hard on the issue of opt-in, fiduciary duty and commissions related to risk insurance and, while the outcome announced by Shorten has been widely panned by planners, the industry managed to extract a number of key concessions from the Government.

Foremost amongst those concessions was the grandfathering of volume rebate arrangements entered into before 30 June, next year, and the apparent continuation of rebate arrangements between fund managers and platforms.

However, the greatest loss on the part of the industry, and one which appeared to blind-side the leading lobbyists, was the decision to ban all commissions related to the sale of risk products within superannuation.

According to the lobbyists who discussed the issue with Money Management, the major industry organisations did not become aware of the Government’s intentions on risk commissions until little more than a week before Easter.

What the Government can now expect is that the AFA and virtually all the other major industry organisations will direct their attention towards convincing Shorten to amend his approach banning all commissions relating to risk in super while creating some more flexibility around volume rebates.

What the release of FOFA also signals is a formal beginning to the Parliamentary political debate, with the Opposition spokesman on Financial Services, Senator Mathias Cormann, making it clear to Money Management that the Coalition would be vetoing the package in its present form.

He pointed out, however, that while the Opposition could not by itself force amendments to the Government’s package, nor could the minister ensure passage of the legislation without the support of the independents.

“I would think, however, that a number of those independents would be influenced by the impact these changes would have on planning practices in their electorates,” he said.

In circumstances where the FPA and other industry organisations have already exhorted their members to lobby their local Member of Parliament with respect to the FOFA changes, Cormann’s assessment relating to independent members in the House of Representatives is probably right.

In the heat which accompanied Shorten’s initial announcement last week, it was easy to lose sight of the fact that the overall FOFA package did not contain many of the measures originally outlined by the former Minister for Financial Services, Chris Bowen, before last year’s Federal Election.

That was a package which canvassed annual opt-ins, a blanket ban on commissions and some tough requirements around fiduciary duty.

That Shorten’s package contained some obvious compromises, prompted FSC chief executive, John Brogden, to reflect that the latest package was more balanced than that originally proposed by Bowen.

Equally, Cormann also reflected that FOFA 2 contained elements which were less objectionable than FOFA 1 and it was possible the package ultimately introduced to the Parliament might be even more palatable than FOFA 3.

With the “phony war” around the FOFA changes now over, the financial services industry will need to begin lobbying in earnest in the knowledge that, with the Greens gaining control of the Senate later this year, the best strategy is to achieve change either before the legislation is introduced or via amendments in the House of Representatives.

What the industry can be sure about is that some elements of their lobbying will be strongly countered by the industry superannuation funds.