Concluding what has been a drawn-out consultation process, the last major piece of FOFA guidance appeared last month, Chris Kennedy writes
In early March, the financial services industry finally received the last two key pieces of Future of Financial Advice (FOFA) guidance – one covering codes of professional conduct, the other on conflicted remuneration.
Questions have been raised on how a code of professional conduct would obviate the need for opt-in since the surprise measure was included in FOFA regulations at the last minute – right before the reforms passed a parliamentary vote one year ago, on 22 March 2012.
Since then, there has been considerable speculation not only over what those codes would require but also who would be qualified to operate them, with many anticipating that larger bodies would simply implement their own codes.
Australian Securities and Investments Commission (ASIC) representatives refused repeatedly to rule out the possibility, so it came as a surprise to some when Regulatory Guide 183: Approval of financial services sector codes of conduct (RG 183) stated that “single entity” codes would not be permitted.
RG183, released on March 1, also provided for the development of limited codes – for the purposes of FOFA only – offering a checklist of code content that “obviates the need” to comply with the opt-in requirement.
One aspect of the guidance that did not come as a surprise, however, was the requirement that FOFA-specific codes, whether limited or otherwise, would need to achieve essentially the same policy objective as opt-in: that is, to promote client engagement and ensure clients do not pay ongoing financial advice fees when they are receiving little or no service.
ASIC has repeatedly advised that this would be the case. This led many within the industry to suggest over the past year that it may in fact be easier to simply comply with opt-in requirements rather than take on a new code of conduct with essentially the same requirements.
The guidance was welcomed by Financial Planning Association (FPA) chief executive Mark Rantall, who said the approach was a sensible “solution to the opt-in dilemma” while adding that the FPA had never supported licensee codes because the monitoring aspects would be too complex.
He added, however, that the FPA would also continue to push for full code approval.
The RG183 announcement on March 1 was followed on March 4 by Regulatory Guide 246: Conflicted remuneration (RG 246), outlining the ban on conflicted remuneration.
While RG246 contained no major surprises, much of the industry was able to breathe a sigh of relief on reading the relatively generous grandfathering provisions.
The guidance stated that any benefits being received under existing contractual arrangements can continue, provided those contracts are not changed to the extent that they could be considered new arrangements.
At about the same time, draft Treasury regulations relating to the grandfathering of conflicted remuneration were released for consultation. The most significant outcome of this, both for platforms operators and advice groups, was the postponement – in some circumstances – of the grandfathering cut-off date from 1 July 2013 to 1 July 2014.
For platform operators, this includes new clients coming onto the platform but does not apply to arrangements with financial services licensees entered into after 1 July 2013.
According to an analysis by Hall & Wilcox Lawyers, the delayed compliance date should give platform operators and fund managers more time to implement the “substantial systems changes to be able to identify and segment ‘grandfathered’ clients from new clients after 1 July 2014”.
It should also come as welcome relief to licensees that were still struggling to determine how they were going to implement the grandfathering provisions by 1 July 2013. On the basis of the draft Corporations Regulations, they will now only need to have their distribution arrangements in place by that date, Hall & Wilcox said.
However, the ASIC guidance also contains a warning to advice groups that the regulator is more likely to scrutinise financial product advice to retail clients if the licensee or its representatives receive a grandfathered benefit as a result.
RG246 was warmly welcomed by the Industry Super Network (ISN), which said the draft regulations struck a good balance between allowing an appropriate transition for the financial advice industry while ensuring new clients would be afforded higher protection.
It would also help the financial planning industry to progress towards being recognised as a true profession, the ISN stated.
The Association of Financial Advisers (AFA), however, raised concerns that ASIC’s approach could be bad for adviser productivity.
“There remain a number of areas of uncertainty where it will be difficult for the industry to develop firm implementation plans,” AFA chief executive Brad Fox said.
“We still harbour significant concerns about the ability of the financial advice industry to retain appropriate incentive schemes to promote both good advice and adviser productivity.”
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