FOFA questions continue to trouble planners

The FOFA legislation once heralded was a long time coming – and with its implementation date has also arrived a raft of questions as to how parts of the legislation will work in practice. Jason Spits reports that a number of headline issues have been settled, but significant areas of concern remain.

Any sense of relief financial planners may have felt around 30 June this year could be considered false comfort.

While it was possible to breathe a sigh of relief as the end of the financial year fell on a Sunday, it was followed by a new week that began with the start date for the Future of Financial Advice Reforms (FOFA). Some thought the hard work had been done. 

In a sense they were right: the hard work of preparing for FOFA was over, but the hard work of operating under new legislation that lacked regulatory clarity had begun. 

It is this lack of regulatory clarity behind the FOFA legislation which is keeping many busy as they seek answers, while others wait for answers to ensure their first actions under a new regime are the right ones. 

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Yet it has not taken long for a key issue of concern – grandfathering – to move quickly to the fore, with BT Financial Group head of technical advice Bryan Ashenden stating planners are struggling to work under what seems to be two differing sets of requirements. 

Ashenden said that previous advice handed to the sector indicated that financial planning advice given to an existing client would be covered under the grandfathering provisions, but questions around platforms and shifting clients have raised new concerns. 

“We are still trying to work out where grandfathering will apply, particularly when a client moves within a planning practice or within a licensee. We are also curious as to how it will work when it comes to signing existing clients to a new investment platform,” Ashenden said. 

“Other parts of FOFA legislation are clear, and opt-in is an example where the definition of a new client has been made clear. But under the grandfathering requirements, is an existing client signed to a new platform to be regarded as an existing or new client?” 

Mulitport technical services director Phil La Greca, who also chairs the Small Independent Superannuation Funds Association (SISFA) policy committee, said this issue of platforms and grandfathering also applied in the self-managed superannuation sector (SMSF), which was working to clarify how these funds are regarded under FOFA. 

“Grandfathering in SMSFs is an issue as it also relates to conflicted remuneration, and FOFA had made a distinction between how this should be treated on structures that are investment platforms and those that are not,” La Greca said. 

“An SMSF is an administration platform, but does that equal an investment platform for the purposes of FOFA? Once we have clarity around this we can see whether grandfathering will apply to SMSFs.” 

Financial Planning Association (FPA) chief executive Mark Rantall said grandfathering had become a wider issue and was impacting internal client and adviser business as well as business succession and continuity. 

“Questions still remain around the sale of a planning business outside the current licensee structure, and the transfers of volume payments if an adviser goes to another licensee,” he said. 

Rantall said the FPA was actively working with Treasury to find a solution, as was the Association of Financial Advisers (AFA), which had warned planners to be cautious in changing licensees. 

AFA chief executive Brad Fox said the interpretation of the grandfathering guidelines released on 28 July – which meant planners could not change licensees and keep grandfathering arrangements for existing clients – went against FOFA’s original intentions to make the financial planning industry more competitive. 

However, Premium Wealth Advisers chief executive Paul Harding-Davis said some damage may already have been done, with some planners holding back or cancelling moves to buy books of business from other planners or migrating to other licensees. 

In those areas where planners are able to act, Ashenden said there are still many who are tentative about what should be done – with Fee Disclosure Statements (FDS) raising the most questions. 

“FDS is a real practical application of FOFA at work on the planner’s desktop, and they are asking if they are getting the right information into each FDS. They are questioning what should be disclosed and ensuring they are crossing every T and dotting every I,” Ashenden said. 

“We have gone from a period of asking how it will be done to now doing the work; and planners want to get it right, so the level of questions is high. Even though ASIC has indicated it will take a consultative approach in the first year, planners still want to get it right from the outset and make it part of their processes.” 

Planners have been given a break with the Tax Agents Services Act (TASA) implementation date being moved out by a year to 1 July 2014, but some aspects of the Act do not sit comfortably with the planning sector. 

Both Rantall and La Greca see aspects of the competency requirements for planners as not necessary, with the FPA working to gain relief from these aspects for planners. 

“The commercial law requirements are not applicable to financial planners and we are also concerned about the retrospective nature of some of the other requirements, as well as the possible overlap in standards between the Tax Practitioners Board and the Australian Securities and Investments Commission (ASIC) in this area,” Rantall said. 

La Greca said issues of competencies also had wider implications, with education requirements for advising on SMSFs still unclear under Regulatory Guide 146. 

“We are still unsure as to what competency levels will be required for different activities, and just because someone knows about superannuation, can we assume they are able to advise on self-managed superannuation?,” La Greca said. 

Rantall does not see churn – despite being caught up in the FOFA noise – as a FOFA-related issue, but rather as one that needs to be tackled while operating under the new regime. 

“The problems around churn have been simplified and summarised in that one word, while overlooking wider issues in insurance,” he said. 

“There is a wider issue of sustainability in insurance which needs to be tackled by looking at lapse rates and why they occur, and then looking at churn rates as a subset of this issue.  

“At present we have yet to fully research the details behind these events, but we see this as the place where we can begin to address the issue of churn.” 

The financial services sector is also well aware that much of its concern comes at a time of flux in the Australian political scene, and that in the lead-up to the FOFA start date it was likely that the next government would come from the opposition benches. 

However, with parts of the FOFA legislation and Kevin Rudd’s push to become Prime Minister both getting across the line in the same 24 hours, a change of government may not be as certain as many first believed. 

As Prime Minister, Rudd has also changed the holders of relevant portfolios. Chris Bowen took on the role of Treasurer from Wayne Swan and David Bradbury became Minister Assisting for Financial Services and Superannuation, taking over from Bill Shorten. 

This switch prompted the Shadow Assistant Treasurer, Senator Mathias Cormann, to accuse the Federal Government of downgrading the Financial Services and Superannuation portfolio, while confirming that if it wins government the Opposition would remove the opt-in requirement, refine the ban on commissions on risk insurance inside super, streamline fee disclosure statement requirements and improve the best interests duty. 

Rantall said that until the election had been decided, his association would continue to focus on what it felt should have come to pass and what has yet to be decided.

He said the FPA had committed itself to ensuring suitable outcomes around legislative ‘enshrinement’ of the term ‘financial planner’ for its members, as well as reinforcing the connection between professional codes of conduct and professional association membership. 

“Enshrinement will only go through in this Parliament if it is recalled, but we would look at restarting the process in the House of Representatives in the next Parliament if required,” Rantall said. 

“As part of that work, we see that codes of conduct and association membership are closely linked with enshrining the term ‘financial planner’ under law.” 

Ashenden said he did not believe the financial planning sector was putting on the brakes during this time of flux, but had instead slowed down – if indeed it had picked up speed prior to 30 June. 

“Planners and licensees want to be sure of what they are doing in the new environment and want to get it right. A negative result, even if from a misinterpretation of the FOFA regulations, is a negative outcome for the client and runs counter to the stated outcomes of FOFA,” Ashenden said. 

“However, the planning sector is also watching what is going on in Canberra, and until we get through the election and know who will be in government and setting policy there will not be the same level of conviction in the changes taking place.” 

It seems it is not for nothing then that ASIC has indicated it will adopt a consultative process over the next 12 months. It will be difficult enough already to regulate the industry it is currently working with in order to shape and implement the regulations that will give life to the FOFA legislation.