FOFA - the final countdown

Three years have passed since the start of initial talks about the Future of Financial Advice changes. The debate rolls on, but the financial services industry has received little clarity and deadlines are fast approaching, writes Graeme Colley.

It is just over three years ago we were starting to debate the content of submissions for the various enquiries and reviews that were hungrily awaiting comments on tax, financial services, and then superannuation reform – just to name a few.

The concerns we’ve had since those original announcements revolve around a range of issues such as tax deductions for financial planning fees, charging fees and commissions, financial firm failures, performance of super funds, and so on.

Despite the time that has elapsed, the debate rolls on as to the impact of any reform and the timing of its introduction.

Those who have well run financial services practices accept change as part of the evolution of their business, and adapt as part of the challenge to survive.

Practices and their licensees that are able to predict the road ahead accurately and are prepared to change have already adapted or are currently in the process of changing.

Some changes have come as part of the ‘business as usual’ process, while others require a rethink of the business model being used in preparation for that change.

These changes, coupled with the economic uncertainty of the day have meant a huge rethink on how to survive as a financial planner or whether to ease out of a profession which seems to be under inordinate pressure.

The pressures that the proposed reforms will exert on the superannuation and financial services will be no different to those that have come before, time after time.

At least they will get us to have a look at how our businesses are managed and how capable they are of adapting to change.

Just like with the Financial Services Reforms (FSR) earlier this decade, those who were dragging the chain on issues relating to licensing of financial planners either dropped the ball, got out of the industry, picked up their game, or somewhat begrudgingly did the minimum to get across the line in the longest possible time.

Could we see this with the reforms that are proposed to arrive on our doorstep by 1 July this year?

You can bet on it. Anyone who wants to stay in financial services as a professional business already has clients who know what they are charged for – and that is service.

Those that do not, will need to regroup to work out their challenge.

What we seem to have been given as part of the reform process has been to start out with a clear announcement of the enquiries and terms of reference.

Each enquiry has its own route by taking independent consultation, making recommendations to the Government and then the Government responding to those recommendations as appropriate.

After starting out from a base with a clear purpose, it seems that this may have resulted in a relatively complex web of intrigue consisting of many components – some of which appear to have merged.

In addition, as a consequence of the Government response the process seems to have been elongated by the creation of working parties to consider the practical implications of what has finally been accepted.

Subsequent to that, exposure drafts of the proposed legislation have been published, with some making it to the Parliament and introduced as bills.

I think you could easily agree that the clarity of the original announcements has certainly gone through the wringer to come out looking a relatively different beast in terms of size, shape and complexity. What can we expect next?

Trying to keep up-to-date with the progress of the current ‘state of play’ seems to have become a career in itself.

Whether any of the proposals actually make it into law is anyone’s guess, due to the minority government, the independents and the balance of power in the Senate.

I suppose the volume of information being published gives us at least some idea of where we could end up in the financial services and superannuation world at some stage in future.

Trying to pick and choose what will be the final outcome is anyone’s guess. The timing of implementing whatever makes it through the Parliament will also be a challenge if the program goes ahead as proposed.

Current indications are that the legislation may be passed early in the first sittings of 2012.

It must be considered that in the best of all possible worlds this is really cutting the cloth very finely. Organisations may end up rushing headlong into considerable systems changes, which in the cool light of day could be put in place more cheaply or simply. 

I suppose we could always say this irrespective of what type of changes we experience in business, and whether the decision is something of our doing or that of others. 

You must wonder whether at this relatively late stage the Government may opt for a series of transitional measures to allow the industry to make the relevant changes over a reasonable time or by a series of steps.

Of course, you would think the likelihood of this occurring must be balanced with the electoral cycle.

With all the reports, recommendations, submissions and miscellaneous chatter that have been going on, you must ask the question: could there have been a better way of doing things?

That is, could the submissions, recommendations and draft legislation have been released in a better way with a clearer result to provide more certainty and direction?

So far, we have seen the two tranches of the Future of Financial Advice (FOFA) reforms released; we then saw amended versions of some of the exposure drafts introduced to the Parliament.

We’ve also seen some of the MySuper legislation and various papers on Stronger Super discussing what has arrived and what is to come.

While the bills have been made public, the machinery provisions to flesh out the skeleton will be included in regulation – something we won’t see until the relevant law has been passed.

If the current system to implement change causes so much angst amongst some of the participants, what are its alternatives?

True reform is usually uncomfortable for most of us, except possibly when we control it absolutely. There are many aspects which can be identified as the reason for the discomfort that is experienced.

One example of the dynamic nature of the change must be the change in technology which over time has been aimed at improving our lot in life.

While these may be generally positive, the change may have detrimental effects on whether we are able to retain our status quo by putting food on the table, and the effect on how each generation adapts to that change.

It would seem that if we don’t go through some discomfort, then maybe there is no reform at all.

It could be inferred that those who yell the loudest are those who don’t want change or are not prepared to adapt to it.

However, that is not always the case, as it is necessary to have at least some understanding of what the change is designed to do among all parties if it is to be a success. This applies whether those affected by the change like or dislike what is to come.

The changes and developments in financial services and superannuation over the many decades are examples of this for a range of reasons.

I’m sure there are those who have thought some were not too bad, while others they found were particularly objectionable.

The proposed changes may fall into either or both of these categories.

In my opinion, the alternatives to the current system of how the change is negotiated could be placed on a continuum.

At one end of the scale, it could range from a system where the Government takes the sole role as a benevolent dictator and implements change by putting rules in place in which we had nothing or very little say in the ultimate decision.

We may end up blindly following these rules from the date of inception, with no true conviction in a vain attempt to stay in business.

In contrast, at the other end of the scale it may be considered that no or very little change should take place, and things will adjust to the required position by some sort of vague negotiation.

Somewhere in-between these two ends must be desirable if we are to obtain a general consensus and a level of equity.

That is, we may not like what we end up with to some degree, however, what we would like to end up with is a system that is able to operate without any huge impediments to consumers and business operations.

Is the Government the correct central point in the community to initiate this change in attitudes to act as a negotiator between the various parties?

While the role of government may change over history, the question to be answered in all cases where reform is involved should be – will reform take place naturally in the marketplace within the allotted time span, to the degree required, and equitably between the parties involved.

If this will not occur, then reform can only be achieved by the use of a common denominator – the relevant government.

Thus, it would appear the manner in which reform is being managed so that more equitable outcomes may be achieved for users of financial services and superannuation would seem to be along the right track.

If we accept that the reform is inevitable – and we should share in the process with the aim of making it work among the disparate groups who compose the financial planning and superannuation industries – then we need to consider the way the process works.

The current system generally starts with some type of announcement which provides some information, and usually seeks comments from the world at large.

This may evoke a range of comments from those in the broader community, but usually it is restricted to those who have a specific interest in the subject – often including an element of self-interest.

There may be a minority who contribute to the pile due to community interest, and others who have no interest at all but just like to stick their noses into the mix.

Subsequent parts of the system are relatively formal, and usually consist of a report to Government with the recommendations that are made having some link to the submissions, public enquiries or observations the relevant committee has made based on research into the relevant subject.

Next is the decision as to whether the recommendations will be accepted or rejected, and can be used as a basis for any rules and regulations that may follow.

There may also be some further negotiation on whether the proposals will work or how it is possible to make them work.

Finally, in most cases some of the accepted recommendations will become law after further debate in the Parliament and lobbying by interested parties.

Despite the fact that we may complain about the current system, what we have is very public and generally consists of transparent negotiation which must be indicative of any democratic system.

With the exception of the publicity to the negotiations, how similar is this to most types of business deals?

In those arrangements, arguments and positions are put by the parties and a final position agreed upon.

Where any negotiation is abandoned completely, a further attempt may be made at a later time when things may become more palatable for both parties or they may never see the light of day again.

The manner in which the introduction of the enquiries, reports and legislation has been managed can always be debated.

However, you must ask yourself, would it have been better for the enquiries to be announced in one huge chunk or in parts? Which is the way it worked out.

It seems to me that the Government may not have had a choice in the way in which the enquiries were announced.

The urgency for a review of the financial services system was prompted by the failure of various financial planning and financial product providers and the reaction of the public and politicians to those events.

The superannuation enquiry was due and probably well beyond its review date, considering the legislation that nurtured the current system had not been closely examined for over 17 or more years. 

Since that time, the electronic age had taken hold of how we all transact our lives. This, linked with the wish to increase superannuation funding, was the need for the reform – not due to any systemic failure in the superannuation system itself.

What seems to have contributed to the difficulties of the introduction of the legislation and the relevant reports and recommendations is the merging of some aspects of both reports.

This, coupled with the coincidence of the similarity of a number of pieces of legislation in the Parliament has meant a greater need to look at each piece independently as their contribution to the whole reform package. 

In the end, what will all this reform mean?

First, it must be questioned whether the consumer will be lost in all this and the reform merely results in a reorganisation of the deckchairs by financial advisers, their associations and product providers of all shapes and sizes.

It should have the impact of providing greater confidence that people will use a financial adviser as a person of financial choice.

In addition, it should also assist to ensure superannuation is treated as something people will take an interest in, and make a definite choice.

Second, the way in which the review process has taken place is probably the best way of providing a transparent look at the system.

This provides a vigorous yet lengthy debate on the subject which has allowed examination from a range of angles, including the consumer, product provider and the financial adviser as the intermediary.

Third, we need to ensure our business practices are able to adapt to change with the need to accept that if it’s not one thing that threatens our survival as financial planners it will be something else – FSR one day, FOFA the next, Stronger Super after that, or will it be the economic and business conditions?

Those who can adapt will be there in the end, while those who don’t will be looking for something else. There’s nothing new in any of that.

Graeme Colley is OnePath's national technical manager for advice and distribution.