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FOFA fiasco: no quick fix for the advice industry

Senator Jacqui Lambie has voted against changes to the Future of Financial Advice reforms. Alan Porritt/AAP

Last week brought the latest instalment in the continuing Australian financial planning industry saga. Senators Jacqui Lambie and Ricky Muir blocked the Abbott government’s rollback of some of Labor’s Future of Financial Advice (FOFA) reforms.

The proposed changes to FOFA watered down some of its more controversial aspects. They included the provisions establishing a “best interests” duty for financial planners and restrictions on conflicted remuneration. Other rollbacks included changes that required fee disclosure statements and the obligation for clients paying ongoing fees to “opt in” by written consent every two years.

The Abbott government maintained the reforms were merely to streamline regulation, prompted by the need to reduce bureaucracy and red tape. However, the recent and continuing financial planning scandals made such streamlining politically unsustainable.
So we are back to Labor’s original FOFA legislation. But where does this leave the financial planning industry and the thousands of Australians in need of financial advice?

There are claims within the financial planning industry the blocking of the regulation will cause further instability. This is as firms scramble to meet the FOFA requirements, particularly those relating to fee disclosure and opt in obligations.

Yet FOFA has been law since 1 July 2013, so it is difficult at first glance to understand why the blocked rollback would significantly impact the industry.

It seems that large sections of the industry have been operating on the basis the coalition’s FOFA rollback changes would become law.

It is a view reflected by the Australian Securities and Investments Commission. It said in December 2013 it would take a “facilitative” approach to FOFA enforcement in light of the proposed changes and would

“not take enforcement action in relation to the specific FOFA provisions that the government is planning to repeal”.

After the reforms were disallowed in the Senate, ASIC said this week it would take a “practical and measured approach” to administering FOFA as it now stands. The regulator says it recognises that compliance with FOFA will require systems changes for many Australian financial services licensees. This facilitative approach to FOFA compliance will continue until 1 July 2015.

It seems unlikely there is any need for panic within the industry as there is still some time before ASIC will enforce FOFA compliance. Nonetheless, those licensees who deferred making costly system changes in line with Labor’s legislation may now find themselves having to make those changes rapidly in a highly uncertain regulatory environment.

In the long run, this situation is likely to lead to less affordable financial advice for Australian consumers.

Despite the reform rollback not going ahead, there still isn’t an easy solution for the financial advice industry. The unchanged legislation now retains greater consumer protection. But it does little to address what many regard as the fundamental cause of the poor reputation of the Australian financial planning industry – the need to raise the professional, ethical and educational standards of financial advisers.

While consumers will get some greater level of protection through increased fee disclosure, this comes at a price. This protection also relies on consumers taking the time to read and understand the disclosures made by their financial planners. Financial planners can continue to give poor quality advice. What will change is increased upfront fees and greater disclosure around these fees resulting in higher costs. There will be less scope for scaled advice which was part of the Abbott government reforms.

FOFA still fails to set educational or professional standards for financial planners. Until industry entry standards are lifted, FOFA will not deliver accessible financial advice for the Australians who need it.

Absent an urgent rethink by the Abbott government on FOFA, after last week’s events it seems the goal of access to affordable and trustworthy financial advice for Australian consumers is more elusive than ever.

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