What every financial adviser needs to know about FOFA
There are terms hidden in the upcoming Future of Financial Advice (FOFA) legislation that every financial planner must be familiar with.
Over the last year or so, I have read the Future of Financial Advice (FOFA) Bills, the Acts, the draft and settled regulations, the consultation papers and numerous commentaries. During the coming months there will be more as further regulations are made, regulatory guides settled and guidance provided.
I have also attended numerous forums where the issues and challenges of FOFA have been discussed, debated, welcomed and whinged about. Welcome to my life!
FOFA is now with us, so what does it all mean?
FOFA, of course, stands for the Future of Financial Advice. The driver for reform was a combination of the fallout from the global financial crisis and in particular, financial advice disasters such as "the one size fits all" type model.
While disclosure remains a key plank of FOFA with the introduction of fee disclosure statements and renewal notices, the key thrust of the best interests duty and ban on conflicted remuneration is mandating the manner in which conflicts of interest are to be managed.
These changes are brought about by inserting, amongst other things, Part 7.7A by means of two Acts of Parliament which are helpfully titled the Corporations Amendment (Future of Financial Advice) Act 2012 and the Corporations Amendment (Further Future of Financial Advice Measures) Act 2012. In addition, there have been, and will be, regulations released which will add further detail to the legislation.
What are the key elements of FOFA?
There are four big-ticket items. These are:
-
An increase in the Australian Securities and Investments Commission’s (ASIC's) powers – this occurs in two ways.
The first is the change in wording from "will" to "is likely to" (eg, ASIC may ban a person if "ASIC has reason to believe that the person is likely to contravene a financial services law").
The second is the extension of the civil penalty regime to licensees and authorised representatives for a range of contraventions of the FOFA provisions – a bit more on that later. - The best interests duty obligation imposed on the provider of personal financial product advice to retail clients.
- A ban on conflicted remuneration being monetary and non-monetary benefits given to a licensee or representative who provides financial product advice (personal and general) to retail clients which could reasonably be expected to influence the choice of financial product recommended or the financial advice given.
- On-going fee arrangements requiring the provision of fee disclosure statements and renewal notices to retail clients receiving personal advice.
When does all this start?
For most businesses, the commencement date will be 1 July 2013. However, there are two caveats to this.
The first is that, if you wish, you can "opt-in" earlier by advising ASIC. This also triggers immediate compliance with the new requirements, many of which are still to be determined!
I am aware of at least three organisations that have chosen to do so.
However, while this may suggest a willingness to embrace the new FOFA world, I can't help asking why you would choose to "go early"; particularly given that so much of the new world remains uncertain.
For example, licensees are prohibited from receiving conflicted remuneration.
Product providers are prohibited from paying conflicted remuneration. If a licensee has opted-in, what happens to the remuneration which no longer can be accepted by that licensee but which can still be paid by the product provider who has yet to opt-in?
The prevailing sentiment that I hear "around the traps" is that very few licensees are considering opting-in earlier than 1 July 2013. I think that is sensible.
However, the decision not to opt-in does not mean that you can sit on your hands until 1 July 2013! More on that later.
The second caveat is that some of the provisions are operational now; for example the changes to ASIC's powers.
What are some of the new terms with which you will need to be familiar?
There will be a raft of new terms that you will need to get your head around. Having said that, once you do, much of the impact of the FOFA reforms will fall into place. Here is a list so you can start your homework now:
-
Civil penalties – FOFA is a civil penalty world; not criminal.
This may seem like a good thing, which in a sense it is. But because the standard of proof is less (no longer guilt beyond reasonable doubt), it is not unreasonable to expect ASIC to be active in bringing civil penalty proceedings against licensees and authorised representatives for breaches of the best interest duties, failure to provide disclosure statements, accepting conflicted remuneration, etc.
While not criminal, the penalties can still be hefty – up to $1 million for a company licensee or corporate authorised representative! - Fee disclosure statement
- Renewal notice
- On-going fee arrangement
- Fee recipient
- Disclosure day
- Responsible licensee; and so on.
Is it time to get out of the financial services industry?
Of course, this is a matter for each adviser but I would hope that FOFA is not a deal breaker.
Yes, there will be significant and challenging adjustments to be made, systems to be developed and training required, but it should be manageable; particularly by an industry which in the last decade or so has had to address PS146, Y2K, GST, FSR reform, privacy, AML/CTF and so on.
Regulatory fatigue? Well, perhaps a little, but I would hope not enough for this to be the straw that breaks the camel's back!
Oh and yes, it will also be an opportunity to review the way you do things.
For example, have a look at the numerous examples of Statements of Advice in ASIC's Consultation Paper 183.
They are relatively short and in a letter format. Now, there's an idea!
This is something we (Holley Nethercote - Compact) have been "banging on about" since 2004.
Will it change the way that advice will be given?
Yes...and no. What is different? Section 945A has been replaced with an obligation that the advice must be in the best interests of the client.
The new section 961B replaces the (a) and (b) of 945A(1) with a series of steps which, if discharged, satisfies the best interests obligation.
While advice providers will need to consider strategies to “prove” that the “safe harbour” steps have been addressed, the real challenge in these steps is left to the last step which is "take any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client's relevant circumstances."
The requirement to act in the best interests of the client takes it beyond the requirement that we have been used to; namely, that the advice must be appropriate to the client.
This is because best interests is coming from a higher ethical stance – something approaching a fiduciary duty. It places a responsibility on the advice provider to be totally upfront with the client and to place the client's interests first.
What has not changed? Section 961G requires that the advice must still be appropriate, as is the case now under section 945A.
The definition of financial product advice which we have come to know and love stays the same, as does personal advice and general advice – the latter helpfully remaining as all financial product advice which is not personal advice!
Also, the importance of determining the scope of the advice remains the linchpin of the advice process. FOFA describes this as "the subject matter of the advice", which must be ascertained after identifying the client's financial circumstances, needs and objectives.
This does not require a full fact find at this stage. A searching, detailed and targeted fact find comes later when the adviser is required to ascertain "the client's relevant circumstances".
The warnings in relation to incomplete and inaccurate information from the client remain.
What should you be doing now?
1. Your highest priority now should be to consider how you are going to address the fee disclosure statement requirement which applies to existing clients as well as new clients post-1 July 2013.
If you are unsure of the date on which your current on-going fee arrangement commenced, then the disclosure date will be deemed to be 1 July 2013.
You then have 30 days from that date to provide the disclosure statement to the client. In that disclosure statement, you will need to set out the fees that have been paid by the client in the previous 12 months, the services received by the client in the previous 12 months and the services to which the client was entitled under the arrangement.
If you don't start working these out now, July 2013 is going to be a frantic time for you and your office.
Remember too, that disclosure statements are required to be provided to all existing clients on on-going fee arrangements. The failure to provide a disclosure statement is a civil penalty provision and the on-going fee arrangement is deemed to be terminated.
The latter is the case whether the failure is by the current fee recipient or a previous fee recipient – mental note: if buying a book from another licensee/representative, ensure the due diligence process checks that all clients have received fee disclosure statements when they should have!
It is also a civil penalty contravention to continue to charge an on-going fee after termination of the arrangement.
2. You will also have to look at your remuneration structures and determine what forms of remuneration will be considered to be conflicted remuneration.
Remember the test is “could reasonably be expected to influence” and not a subjective “does this actually influence me?” test.
Also the prohibition applies to remuneration given to the provider of financial product advice (ie, both personal and general advice).
I anticipate (and hope) that there will be considerable guidance in this area.
3. Remember that risk management framework that you put in place to get your licence?
You may visit it regularly but I know many licensees don't. How about revisiting it and using the framework to risk manage FOFA?
When I say risk manage, I don't just mean identify the adverse outcomes that FOFA might present to your business.
There are also opportunities that FOFA might throw up which you don't want to miss. The risk of missing such opportunities is a risk that should be managed.
Finally, get a handle on the FOFA world. The ASIC website has a dedicated FOFA site and the industry associations will be providing valuable resources to their members. Licensees and compliance professionals will also be providing regular updates on developments.
It is not business as usual, but my expectation is that it is manageable. You have to do just that – manage it. Oh, and did I forget to mention other regulatory changes that are on the horizon such as APES 230, limited AFSLs, the "wholesale client" definition review, the...?
Tim Nethercote is the founding partner of Holley Nethercote Commercial Lawyers.
Recommended for you
The FSCP has announced its latest verdict, suspending an adviser’s registration for failing to comply with his obligations when providing advice to three clients.
Having sold Madison to Infocus earlier this year, Clime has now set up a new financial advice licensee with eight advisers.
With licensees such as Insignia looking to AI for advice efficiencies, they are being urged to write clear AI policies as soon as possible to prevent a “Wild West” of providers being used by their practices.
Iress has revealed the number of clients per adviser that top advice firms serve, as well as how many client meetings they conduct each week.
