Think tank: Talking FOFA at Finsia

WITH THE Future of Financial Advice (FOFA) regime not far off six months since implementation, two of the industry’s leading stakeholders have reflected on the reforms in practice.

Speaking at a roundtable event at the recent Financial Services Institute of Australasia (Finsia) conference at the Four Seasons Hotel in Sydney, Marianne Perkovic, executive general manager, wealth management advice, at the Commonwealth Bank and Louise Macaulay, senior executive leader, financial advisers, at the Australian Securities and Investments Commission (ASIC) went head to head on some of the most topical issues in financial planning.

The two spoke candidly about FOFA’s challenges, benefits and what the industry can next expect on the regulatory front.

Here are some of the highlights:

ON 'THE AIMS OF FOFA'

Louise Macaulay -

When we look at FOFA, we look at what it was aiming to achieve – which was essentially to eliminate inherent conflicts of interest in the industry and prioritise the interests of clients. We want to ensure that advice businesses grasp these essential elements – where they haven’t, that’s where we are concerned.

Marianne Perkovic -

When you peel it back, FOFA was about providing access to advice and making it quality and readily accessible to consumers. There’s no doubt advice is needed and of benefit to consumers…
…the great thing FOFA has done is created a system where advisers that are driven by customer outcomes and quality advice can succeed. It has also pointed out the people that are there for the wrong reasons as well.

ON ‘FOFA PREPAREDNESS’

Louise Macaulay -

Generally, I think licensees have been well-prepared for FOFA – conversations that we have had have led us to believe that some licensees were very busy during June putting things in place in a rush.

But I suspect there were also a few licensees not focused on making themselves FOFA-compliant but on working out how they can continue to carry on in the usual way beyond FOFA, and we have concerns around that.

We have also been hearing that advisers have been slow to give advice post-FOFA – there has almost been atrophy in the market – as they wait to work out the detail around best interests and worry about how they are going to give a piece of advice under the new regime.

Marianne Perkovic -

It’s been a massive three-year project to educate and train up our advisers and get all the systems and processes in place…
… at CBA 12 months ago, we made some major structural changes; previously [the advice] business reported to the product manufacturing business at Colonial First State, but we structurally changed the wealth management business and now we sit alongside product and are independent of that part of the business.

ON ‘GRANDFATHERING’

Louise Macaulay -

[One] concern we are hearing is about advisers being bound to licensees [because] they lose the benefit of the grandfathering provision. And also, ‘what will happen when businesses are sold?’

On the first one, our view on the law as it stands is that where an adviser moves licensee then they will lose those benefits.

In relation to trail commissions, when businesses are sold…our view is that every sale needs to be looked at individually to view the particular agreement underpinning the sale and I expect to be hearing more about this from our new government.

We are also watching closely that clients are not being simply left in existing products which are not right for them in order to take advantage of grandfathering benefits.

Marianne Perkovic -

Grandfathering is holding up a lot of movement…the issue of grandfathering does cause disruption which is not right for the customer. There are licensees out there looking to entice advisers to their licence by offering transition payments to supplement the lost grandfathered revenue – this is not right for the industry or the customer – and we hope this activity dies in a ditch.

We want to ensure that the industry grows – and the way to do that is not through switching licensees but by bringing new advisers into the industry – so we are focusing our efforts instead on bringing in new entrants like graduates into the industry and looking at opportunities to bring in new advisers from accounting backgrounds with the removal of the accounting exemption

ON ‘VERTICAL INTEGRATION’

Louise Macaulay -

Where product manufacturers and dealer groups are integrated and are incentivising for recommendation of a particular product, this can assist in replacing the lost benefits from conflicted remuneration under FOFA in that it gives an avenue for these businesses to grow their client base.

We think there is an inherent conflict in those businesses and we are interested in how those businesses are going to be dealing with that conflict. It seems to us that advisers are more likely to offer products of their parent company, and the relationship between the licensee and the product manufacturer may not always be clear to a client – even where it is in an FSG or SOA, this is a fair way into the advice process.

So I guess there are thoughts going around in our mind and we are certainly interested to see how vertically integrated businesses are operating going forward.

Marianne Perkovic -

The really important thing here is that advice does still need some form of subsidisation, particularly for Australians that have never seen an adviser. This is the group that has not experienced the value of advice, but [which needs] advice. Research continues to say that comprehensive advice generally costs around $2,000 to produce and clients’ appetite to pay for advice is only $200 for that advice. The difference can be borne [more easily] by larger organisations than in a small one, [and] to keep advisers in business some cross-subsidisation is required.

Increasingly you need vertical integration in an advice business; I don’t think you can really have stand-alone businesses anymore because of that cost dynamic.

ON ‘CHURNING’

Louise Macaulay -

We are also embarking on a major surveillance of life insurance advice to review and assess whether advisers are acting in [clients’] best interests when advising around changing policies.

So, obviously, we will be looking specifically at instances of churn, where there is excessive switching between policies in order to maximise upfront commissions and the client is not left any better off.

There are two bases for us undertaking this project: the first is we think there is a risk that advisers might be trying to churn clients in the risk advice sector to replace other commissions that they can’t have access to under FOFA.

And the second thing is that we have seen a lot of issues in the industry relating to advice given around life insurance, including significant amounts of inappropriate advice which has a detrimental impact on consumers.

The bottom line is that while commissions might not be banned for risk advice, the other FOFA obligations such as best interests do apply. We understand policies and that the prices of policies change, but we will be looking for where the clients’ needs are not taken into account and will also be engaging with insurance companies about how they remunerate advisers that are excessively switching the policies of their clients.

ON ‘FEE DISCLOSURE’

Marianne Perkovic -

With the change in government, people in pockets of the industry are suggesting there is the opportunity now to wind back parts of FOFA. We are strongly advocating some of that where we believe it only has increased the cost of providing advice without any customer benefit. FDS is an example.

With fee disclosure statements – while we are absolutely intending to comply with those requirements – when you look at the amount of paperwork that the client already signs – not just from the adviser but from the product manufacturer as well – I find it hard to believe that one piece of paper that outlines all these things is then going to give the client any additional security or comfort.

The only way that customers can really understand what they are getting is for Advisers to spend more time educating them and for the adviser to have proper upfront communication with the client.

The new government has said they will look at winding back the retrospectivity of it – which I think is a good thing for customers, given it has only caused confusion about fees and services.

ON ‘SELF-MANAGED SUPER FUNDS’

Louise Macaulay -

We think they are a very effective retirement saving vehicle for the appropriate person. We are doing a lot of work in this area for two reasons: One is we want to support advisers in this area to ensure good advice is being given. And our other concern – and it is not an idle concern – is that the success of the SMSF sector is attracting unscrupulous operators interested in making a quick buck, or even just [committing] outright fraud.

So those are our priorities – how can we assist SMSF advisers to give better advice? And how can we stamp out fraud and inappropriate conduct? We want to safeguard the reputation of this sector, which is why we established our taskforce.

ON ‘MARKET CONSOLIDATION’

Louise Macaulay -

We are a regulator of licensees rather than of market competition, but there should be a broad industry. Different licensees should offer different services. I hear a lot about people ‘leaving the industry’ but we are not seeing applications from people handing back their licences.

I’ve always been an advocate that the industry needs different advice business models – this will give customers choice. Independents and larger institutions have different value propositions and that will attract different clients. From my perspective, as long as the client is getting quality advice then that is good for them and that’s good for the industry. «