FOFA raising questions of trust

Mike Taylor reports that a number of submissions filed with the Parliamentary Joint Committee reviewing the FOFA bills have revealed a serious disconnect between what the Government has said it will do and what it has actually done.

When the Parliamentary Joint Committee (PJC) reviewing the Government’s Future of Financial Advice (FOFA) bills began its public hearings in Sydney, one thing would have become obvious – there exists a disconnect between what the Minister for Financial Services, Bill Shorten, has said and what is contained in the actual legislation.

On at least three occasions in 2011, Shorten appeared to react to industry concerns about the Government’s direction on FOFA by indicating there would be a softening in approach with respect to elements such as risk commissions within superannuation and, more recently, annual fee disclosure requirements.

The celebration and backslapping within the financial planning industry which accompanied the signalling of those concessions dissipated when it was realised that the bills which were finally tabled in the House of Representatives did not entirely reflect the industry’s expectations.

It is instructive that at the same time as submissions filed with the PJC have expressed concern that the content of the FOFA bills are not consistent with some of the words uttered by Shorten, the Tasmanian independent Andrew Wilkie has been struggling to connect the Government’s rhetoric on poker machine policy with a commitment to legislative reality.

Talk is cheap, even when the words are uttered by a Minister of the Crown – and the reality which confronted the financial planning industry from the moment Shorten tabled his FOFA bills in the Parliament is that change will now only occur by way of amendment.

The degree to which the financial services industry has found itself dealing with a disconnect between Government rhetoric and the black-and-white reality of the bills introduced to the House of Representatives was evident in the submission filed by the Australian Bankers' Association (ABA).

Not surprisingly, the ABA wanted to avoid any ambiguity with respect to the carve-out for basic banking products and general insurance.

It said that it strongly advocated “that the FOFA legislative package should not impact on the business of retail banking and business banking”.

“With this in mind, we welcome the carve-out for basic banking products as announced by the Government:

“There will be a limited carve-out from the ban on volume payments and best interests duty for basic banking products where employees of an Australian [authorised] Deposit-taking Institution (ADI) are advising on and selling their employer ADI basic banking products.

“However, the ABA does not believe that the FOFA legislative package is aligned with this stated policy intent. We consider that applying aspects of the best interests duty and conflicted remuneration provisions to basic banking products is inconsistent with Minister Shorten’s policy announcement,” the ABA submission said.

“It is essential for the legislative changes to target areas of concern without imposing unnecessary regulatory requirements and compliance burdens across the banking and financial services industry.”

In other words, the peak banking body well understands that once the FOFA bills pass the Parliament, the Government’s stated policy intent becomes irrelevant, making it imperative that the necessary amendments are put in place to remove all ambiguity.

Similarly, the Association of Financial Advisers (AFA) submission to the PJC pointed to the inconsistencies which had evolved between the Government’s rhetoric with respect to the payment of risk commissions inside superannuation and the ultimate wording of the FOFA bills.

“On 29 August 2011, when the Government released the draft Tranche 1 Bill, they changed the policy position on risk insurance inside superannuation. Now the ban was going to be limited to group life only, and insurance for default superannuation funds,” the AFA submission said.

“Whilst this was a positive change, as it removed the ban on retail-advised superannuation insurance, it still left the issue of advised group insurance arrangements, where commissions were to be banned,” it said.

The AFA then went on to point out that when the draft FOFA Tranche 2 Bill was released on 28 September 2011, there was no mention of the 1 July 2013 commencement date for the ban on commissions for group life and default fund insurance arrangements.

“This was another case of the legislation process driving uncertainty and anxiety for the industry,” it claimed. “The draft Tranche 2 legislation also failed to address the application of broader grandfathering arrangements.”

The AFA quite appropriately pointed to the manner in which Shorten had approached the delivery of the FOFA bill via two tranches, and the manner in which this had served to generate uncertainty and an element of distrust.

“Trust is critical to ensure that all that is promised is delivered,” it said. “When FOFA is split up and certain things are left out, trust is seriously impacted.”

There are many players in the financial services industry who would argue that trust has been in short supply for some time where the Government’s approach to FOFA is concerned – and that deeds will ultimately mean more than the minister’s words.