The facts on FOFA, not the spin

An easy line of spin is being peddled on the antecedents and consequences of the Government’s FOFA amendments. But any examination of financial services history shows the spin-led claims are not matched by the facts. 

Not for the first time this year I have read a columnist for a major metropolitan daily newspaper asserting that the Future of Financial Advice (FOFA) changes were implemented by the Government as a result of the collapse of Storm Financial, Opes Prime and Westpoint. 

In fact, FOFA mostly grew out of the collapse of Storm Financial because the other two instances cited by the columnist, while topical, represent a repetition of the “spin” which holds that financial advisers must be involved in virtually every financial services mis-step. 

So let us be completely clear, and perhaps the columnists might like to add this to their archive: Opes Prime involved the trading activities of a stockbroking company, and the court proceedings which followed its demise made it very clear that financial planners were not front and centre. 

The earliest action on the Westpoint collapse dated back to 2004, many years before the Storm fiasco and the FOFA legislation.

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It was a mezzanine finance product and did, indeed, involve financial planners giving advice on the basis of inappropriately high commissions, but it needs to be seen in the context of the industry itself then acting on its own initiative to move to a fee for service environment well before the parliamentarians even dreamed of FOFA. 

Those columnists, if they had done their homework, might have mentioned that a number of accountants were equally guilty of exposure to the Westpoint collapse, and were – more often than planners – integral to losses incurred by collapsed agricultural managed investment schemes as they sought to scout out tax deductions for their clients. 

If these columnists had been seriously thinking about financial planners and failures in the context of a major collapse, then they might equally have discussed Trio Astarra, but mostly they have chosen not to do so. In any case, there is abundant evidence that the financial planners tied up in the Trio Astarra collapse were just as misled by the underlying illegality of the operation as were their clients. 

What also needs to be clearly stated in the context of all the material being written by commentators is that there is very little in the FOFA legislation – not even client best interests – which would prevent a reoccurrence of the collapse of Storm Financial. 

As has been stated in Money Management many times, Storm Financial was not guilty of a regulatory breach and its planners were not guilty of receiving obscene commissions.

The collapse of Storm Financial was the result of providing advice around an inappropriate leverage-focused strategy on the cusp of what turned out to be the global financial crisis. 

Was it wrong to expose Townsville retirees to a strategy which entailed double and triple leverage?

Absolutely. Did it look wrong or contrary to those clients’ best interests at the height of the pre-GFC boom?

Probably not. Further, there were many elements of the Storm Financial collapse, including failures within some of the major banks, which involved more than advice or leverage. 

Given all of this, it is far too simplistic for commentators to retail the notion that the Government’s amendments to the FOFA legislation and regulations will open the door to a reoccurrence of Storm or Westpoint. 

In many respects, the door was never closed.