FOFA: Opening Pandora's box

Mike Taylor reports that the former chief justice of the High Court, Sir Anthony Mason, has pointed to the legislative challenges facing the Government in delivering an equitable outcome from the Future of Financial Advice recommendations.

Virtually all legislative draftsmen employed within the Australian Public Service hold law degrees. It ought to follow, therefore, that they would not be in the business of ignoring the admonitions of a former chief justice of the High Court of Australia on questions relating to the Future of Financial Advice (FOFA) reforms.

Department of Treasury is expected to release the first exposure draft of the legislation evolving out of the FOFA changes this month, and every financial planner would be well advised to make themselves aware of the content because only limited opportunities will remain to seek to persuade the Treasury and the Government to change their minds.

However, the former chief justice of the High Court of Australia and patron on the Self-Managed Superannuation Professionals’ Association of Australia (SPAA), Sir Anthony Mason, last week made clear that the Government could be treading dangerous ground if it sought to exempt industry superannuation funds from the same rules it intends to apply to financial planners.

Mason chose to discuss the proposed FOFA legislative changes in the context of fiduciary duty, but he might just as well have discussed the issue of opt-in.

Mason made it very clear that he believed intra-fund advice ought not be exempt from whatever statutory fiduciary duty provisions were delivered in the new legislation.

“If the exemption is strictly confined to the provision of information about a contributor’s existing entitlement in a fund, that is one thing,” he said.

“But to grant an unqualified exemption for the provision of financial advice by a fund to a contributor would be to drive not only a horse and cart but a road-train through the statutory duty.”

The former chief justice also pointed to the fact (previously raised in Money Management) that the Assistant Treasurer, Bill Shorten, could not implement key elements of the FOFA changes without consequent amendments being required to other key legislation, including the Corporations Act.

Mason said clarity was required concerning the implementation of the reform. He said that currently an adviser could provide advice not in the client’s best interests and yet still comply with the Corporations Act — an issue that could be solved by simply amending section 945A of the Corporations Act.

“It would, however, be confusing to call the new statutory duty a ‘fiduciary duty’, as such a description will only suggest, quite wrongly, that the new duty is associated with the negative duties of a fiduciary not to put himself on a position of conflict of interest and duty, and not to make an unauthorised profit out of the fiduciary relationship,” he said.

Mason said that the duty of the financial adviser to his client could not be limited to the obligation to put the client’s interests ahead of their own and those of others.

He said they must go further and ensure that the advice was appropriate, and in line with the client’s instructions and their circumstances.

“In this respect, one alternative is to marry the duty to act in the best interests of the client with the existing provisions of section 945A [of the Act],” he said.

Another alternative was moulding the current duty of care requirements for advisers with the duties of directors of corporations under the Corporations Act, he added.

Mason said that should a statutory fiduciary duty be imposed, it could also require that financial advisers look beyond the Approved Product Lists in the search for appropriate investments and products for their clients — or at least demonstrate why they chose from their own list of products.

This differed from the current environment, where the onus was more heavily on the client to prove inappropriate advice had been given if a dispute arose, he said.

So in just one speech, one of Australia’s most experienced and senior jurists has made clear that the Government cannot isolate legislation evolving out of FOFA from the Corporations Act, and it is arguable that it will need to be conscious of legislative conflicts with respect to the Tax Act and the Superannuation Industry Supervision Act (SIS Act).

In this context, it is worth noting the degree to which the Government’s efforts to draft new legislation affecting the status of ‘collectables’ and ‘personal use assets’ have given rise to warnings of conflicts between the Income Tax Assessment Act and the SIS Act.

While Sir Anthony Mason clearly believes it would be inappropriate and, perhaps, legislatively and legally dangerous to hold industry fund planners to a different standard of fiduciary duty, it is arguably that the same logic ought to apply with respect to opt-in.

What the legislative draftsmen need to understand is that a number of industry superannuation funds outsource their financial planning requirements to companies such as Mercer and it would seem odd if some advisers operating as authorised representatives of Mercer were held to an opt-in requirement while others were not.