Is FOFA leaving too much to chance?

There are signs a lack of precision in the legislation has left too much to the interpretation of ASIC in translating FOFA into workable regulations, writes Mike Taylor.

Translating legislation such as the Government’s Future of Financial Advice (FOFA) package into appropriate and workable regulations was never going to be an easy exercise, and there are signs that a lack of precision on the part of the legislative draftsmen has left too much to the interpretation of the regulator – the Australian Securities and Investments Commission (ASIC).

One such sign was manifested in last week’s suggestion that the guidance provided by ASIC with respect to best interest duties could be interpreted as making asset-based fees just as conflicted as commissions.

According to the analysis of the managing director of specialist firm The Fold, Claire Wivell Plater, advisers “cannot recommend strategies or products that create extra revenue for themselves or their licensees unless they can demonstrate additional benefit for the client”.

Her interpretation may prove to be right, but if so it raises serious questions about the manner in which the shape and texture of a legislative package can be altered well after it has passed the Parliament.

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Because nowhere during the Parliamentary debate around the FOFA bills, or in the explanatory memorandum which accompanied those bills being introduced to the House of Representatives, did the Government indicate it held a clear-cut view that asset-based fees were in some way conflicted.

In such circumstances, we must ascribe any change to the status of asset-based fees to an interpretation emanating from public servants employed within ASIC who may, or may not, have actually considered the implications of their approach or measured it against the original intent of the Government.

It is in these circumstances that it would behove the office of the Minister for Financial Services, Bill Shorten, to make the Government’s underlying legislative intentions clear to ensure that a misinterpretation by the regulator does not give rise to any unintended consequences.

Equally, if the minister does have a view about asset-based fees representing conflicted remuneration, then he owes it to the industry to make those views clearer than has been the case up to now. The Federal Opposition might also formally declare its position.

Relatively recent history ought to have taught the Australian financial services industry that real dangers exist when legislative interpretations made by regulatory bodies go unchallenged.

The Financial Services Reform Act was arguably rendered unnecessarily unwieldy by an approach designed more to protect the well-padded backsides of the regulators than consumers.

Asset-based fees represent a legitimate basis for remunerating financial planners, and ASIC should be required to cite those elements of the FOFA legislation it believes underpin a regulatory approach which would make those fees less legitimate.

ASIC has proved itself a more than adequate regulator – but it is by no means a wellspring of infallible legal and legislative interpretations.