FOFA - Shorten's bitter harvest

While many in the financial planning industry support the broad, original thrust of the Future of Financial Advice changes, Mike Taylor writes that the manner of their introduction has already left a sour taste in many mouths.

There are those who suggest the Assistant Treasurer and Minister for Financial Services, Bill Shorten, believes his style has much in common with that of former Prime Minister and Australian Council of Trade Unions secretary Bob Hawke.

On the available evidence, the similarities between Shorten and Hawke are limited to the fact that they are of similar height, have law degrees, became national trade union leaders and then entered Federal politics.

Hawke cut his teeth as an industrial relations negotiator in the hard days of the 1970s when strikes could be long and punitive and when peace deals were hammered out in smoke-filled rooms and honoured on handshake.

Shorten comes from a different era - the post-Hawke industrial relations era when, clearly, different rules and a different culture apply.

There were no smoke-filled rooms as representatives of the financial planning industry sought to negotiate a reasonable outcome with the Federal Government around the Future of Financial Advice (FOFA) changes, and if there was a handshake it was clearly not honoured.

When Shorten on 13 October rose to deliver his second reading speech with respect to the Corporations Amendment (Future of Financial Advice) Bill 2011 he knew it contained something that would surprise and annoy the representatives of the financial planning industry.

That “something” was an annual fee disclosure requirement – “the annual disclosure obligation (that) will apply to all clients and advisers”.

The moment those words left Shorten’s lips in the House of Representatives he was seen by many as having confirmed the worst accusations of his harshest detractors in the financial services industry – that he has, from the outset, been about prosecuting the agenda of the Industry Super Network (ISN).

There were those who had argued that the allegations directed towards Shorten were more anecdotal than definitive and could not ultimately be justified by the facts. The best these defenders could offer in the wake of the minister’s second reading speech was that, perhaps, the annual fee disclosure obligation represented a bargaining chip which might ultimately be discarded.

Whatever the case might be, there can be no doubting that when the requirements around the annual fee disclosure obligation are taken together with the two-year “opt-in”, the cost impacts far exceed the $11 per client estimate of actuarial consultancy, Rice Warner.

That is because under the arrangements as outlined in the legislative documentation, financial planners would not only need to provide extensive detail and documentation around disclosing the fees they charge in any one year, they would also be required to forecast to the client what they believe they’ll be likely to charge in the upcoming year.

From a negotiating point of view, the inclusion of the fee disclosure obligation represented a major victory for the ISN and for consumer group Choice – both of which lauded the content of the minister’s speech.

The change more than offsets any feelings of victory the financial planning industry may have felt about the initial proposal for an annual “opt-in” being turned into a two-year “opt-in”. The fee disclosure requirement also went some way towards undermining the perceived value of the grandfathering arrangements around volume rebates.

Many financial planners who read Shorten's second reading speech will not be impressed with his statement: "I would (also) like to emphasise that the Government undertook a thorough, methodical and open-minded process with industry, consumer advocates and financial services experts."

“While parties started in significantly different places, I believe that through persistence and negotiation effort we were able to arrive at a destination that has prompted widespread support from the industry, the experts and consumer groups,” the minister said.

While no one will question the fact the Government did, indeed, consult all the major stakeholders, there is a clear perception in the financial planning industry that the minister listened most to the ISN and that, ultimately, it is the industry superannuation funds which will benefit most from the changed environment.

When Money Management late last week conducted a roundtable of senior financial planning industry officials, it became clear the Government had lost a large measure of their trust that it was committed to a balanced outcome.

Both the chief executive of the Association of Financial Advisers, Richard Klipin, and the managing director of dealer group Matrix, Rick Di Cristoforo, made clear that in circumstances where the FOFA legislation was to be handed down in three tranches, Shorten had sown the seeds of serious doubt.

Di Cristoforo said if the minister had been prepared to inject the fee disclosure element into the first tranche, then it would be an open question about what might be contained in the subsequent legislative tranches.

What also became clear from the roundtable was that after more than two years of debate – extending from the Ripoll Review through to the introduction of the first bill to the House of Representatives – the Government had not succeeded in removing industry uncertainty.

It became clear that as the industry moves to put in place the commercial and legal mechanisms necessary to implement the FOFA changes, they are doing so with an eye to the inevitability of further changes and amendments if and when the Government loses office.