More planner compliance paperwork looms
While much attention has been directed towards the interim findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, policy specialists within the financial services industry have been focused on a more immediate concern, the impending passage of the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018.
The legislation has significant implications for the financial services industry because it will ensure that the manufacturers of financial products have to accept substantial responsibility for their offerings alongside the distributors such as dealer groups and individual financial planners.
Just as importantly, the legislation will deliver the Australian Securities and Investments Commission (ASIC) something which it has long sought - product intervention powers.
One of the first acts of Stuart Robert as the new Assistant Treasurer was to make the second-reading speech for the Bill in which he asserted the design and distribution obligations were “designed to ensure that financial products are targeted and sold to the right customers”.
“This will be achieved by requiring issuers of financial products to identify target markets for their products, having regard to the features of products and consumers in those markets. Issuers will also be required to select appropriate distribution channels and periodically review arrangements to ensure they continue to be appropriate,” the minister said. “In addition, distributors of financial products will need to put in place reasonable controls to ensure products are distributed in accordance with the identified target markets.”
At the time of writing the legislation is currently the subject of an inquiry by the Senate Economics Legislation Committee and financial planners would do well to familiarise themselves not only with the final shape of the Bill but the submissions which are being received by the Senate Committee.
They would also do well to read the submissions received by the Treasury on the basis of the department’s exposure draft of the legislation.
What those submissions validate is that the legislation, while primarily aimed at product manufacturers, will have the effect of imposing another layer of compliance for financial planning firms and planners.
It is a measure of the impact of the legislation that the Association of Financial Advisers (AFA) used its submission to Treasury to point out that financial planners will be classified as “distributors” and therefore be obliged to take on an additional regulatory burden.
The AFA used its submission to argue that the legislation did not need to be applied to low-risk products, while ASIC itself told the Treasury it would be inclined to welcome the widest possible reach for the legislation.
The AFA said the costs of the legislation would need to be passed on to consumers in the medium to long term “and therefore we do not accept that this is in their best interest for consumers with respect to low risk products”.
“The impact of this legislation will be greatest with respect to the record keeping obligations,” it said. “This will have a particularly big impact upon those who have been classified as distributors, including financial advisers.”
At the heart of the AFA’s concerns was that it was the product manufacturers (“issuers”) who would decide what information needed to be recorded and how it was provided and this was likely to give rise to uncertainty and cost for distributors.
“We question the intent to apply the provisions of this legislation to virtually all financial products. From our perspective it would seem to make greater sense and be more practical to limit the application of this legislation to higher risk investment products.”
For ASIC, the legislation represents a substantial and strategic extension of its regulatory powers and one for which it lobbied hard, not least to expand the Bill to cover self-managed superannuation funds (SMSFs) and training.
From the regulator’s perspective, it appears to view the Bill as an extension of the Future of Financial Advice (FoFA) legislation, having stated to Treasury that “while the 2012 Future of Financial Advice (FOFA) reforms have achieved significant changes in the advice area, regulation around the design and distribution phases (unless advice is provided) is not subject to similarly focused regulation”.
“This is despite the fact that there are many products that are distributed without advice and that the quality of the design and distribution phases also independently impacts outcomes for consumers, whether or not advice is provided,” it said.
It remains to be seen whether the Senate Economic Legislation Committee will see fit to amend the bill, but irrespective of the outcome financial planners should brace themselves for another round of non-discretionary paperwork.
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