Paying the high price of financial planning 'opt in'

With the Gillard Government believed certain to impose client 'opt in' arrangements on financial planners, Mike Taylor writes that some serious questions are being asked about how the Government intends to fund what is emerging as a complex and expensive exercise.

Despite the best efforts of the key financial planning organisations, the draft legislation evolving out of the Future of Financial Advice (FOFA) reforms will contain a strict ‘opt in’ provision, the only question is whether it is one year, two years or three years.

While organisations such as the Financial Planning Association (FPA), Association of Financial Advisers (AFA) and the Financial Services Council (FSC) have all argued that an opt in is unwarranted and runs counter to all other business practice in Australia, they are each likely to accept a three-year opt in as palatable in adverse circumstances.

With the Industry Super Network, the Australian Council of Trade Unions and CHOICE jointly imploring the Government to impose a hard-line annual opt in, financial planners may even have to accommodate a two-year cycle.

The financial planning industry is opposing the opt in arrangements not only because such legislation would make financial planning the legal exception rather than the rule in corporate Australia but also because of the administrative burden it will impose on financial planners.

Those planners most strongly opposed have pointed to the time and resources necessary to not only ensure all clients are contacted regarding their planning requirements each year but also to extract a formal, written undertaking from those clients.

Other planners have suggested this burden is not unduly onerous in circumstances where planners should be reviewing each of their clients annually in any case.

But what few people have discussed is the degree to which such a regime will test the resources of the Commonwealth and how it might ultimately affect the Federal Budget.

According to one senior industry representative, no one from the Government has been able to inform the industry how, precisely, the Commonwealth intends to police the proposed opt-in arrangements or which department or agency would have responsibility.

However, what is clear is that for the opt in arrangements to be more than just lip service they would require oversight by an independent agency, with the Australian Securities and Investments Commission (ASIC) or the Australian Taxation Office (ATO) seeming the most likely candidates.

The problem for the Government in utilising the services of either ASIC or the ATO is that either or both would require substantial funding to achieve any meaningful outcomes. What is more, that funding would need to be permanent and more substantial than that provided to ASIC in handling the Westpoint collapse.

Despite some significant increases in resources and funding over recent years, ASIC is still stretched trying to perform many of its statutory tasks and it would arguably need to establish and staff a new division to handle the opt in arrangements.

The same goes for the Australian Taxation Office, which has faced some of the greatest challenges of any government department over the past two decades as it has sought to accommodate multiple Government policy changes as well as take on regulatory responsibility for the burgeoning self-managed superannuation funds sector.

It is, of course, possible that the Government will look to achieve its objectives by imposing a new levy on the financial planning industry or extending the levy arrangement already utilised to fund the financial services regulators — the Australian Prudential Regulation Authority (APRA), ASIC and the ATO.

An extension of the existing financial services levy arrangements would, at least, mean that industry superannuation funds would be contributing to the cost of the regime they have lobbied so strongly to achieve.

However, the creation of a new levy would appear highly punitive to the financial planning industry in circumstances where planners would not only need to foot the costs associated with a greater administrative burden but also the regulatory costs.

In a very real sense, therefore, the Government will need to explain not only how its opt in arrangements will work but also how it means to supervise those arrangements and fund that supervision.

The Assistant Treasurer, Bill Shorten, would be well aware that negotiating the passage of legislation through the Parliament that deals with fiduciary duty and the rules around opt in will be relatively easy when compared to negotiating legislation that relates to a draw-down on the Budget or the imposition of another ‘great big new tax’.

Any imposition of a levy or tax on the financial planning industry to fund the regulatory cost of opt in would likely see planners passing on those costs to their clients and inevitably carries with it the accusation that the Gillard Government had been responsible for increasing the cost of financial advice.

The cheapest and simplest option for the Government is simply to demand that financial planners maintain a client register that is compulsorily lodged with a regulator every year, two years or three years. The question will be, however, how often and how carefully those registers will be checked.

Opt in is fast emerging as a Government policy that looks easy in theory but will prove both difficult and expensive to implement in practice.