Controversy Over the Coalition’s Changes to Financial Advice Laws

Controversy Over the Coalition’s Changes to Financial Advice LawsChanges to the former Rudd Government’s Future of Financial Advice (FOFA) reforms have been causing a storm of controversy of late. The Coalition government, which recently made the changes, claims they were necessary because the FOFA reforms went too far in their regulation of the financial advice industry.

Opponents claim the changes were made by the Abbott government under pressure from the Big 4 banks and have effectively opened the floodgates for more financial disasters like the collapse of Timbercorp and Storm Financial.

This article looks at what the changes main are, why the current government believes they are necessary and what those on both sides of the argument believe the fallout is likely to be.

The reason for the FOFA reforms

The previous Labor government introduced the FOFA reforms in the wake of a series of financial collapses that saw a lot of small investors lose their homes and nest eggs and seriously damaged investor confidence in the financial advice sector. The aim of the FOFA reforms was to improve that investor confidence and to give investors greater protection from ill-informed or biased financial advice.

Before they went belly up, both Timbercorp and Storm Financial paid financial advisors large commissions to encourage their clients to invest in the two companies. It was this conflict of interest in the advice being given by the advisors to their clients that the FOFA reforms sought to address.

The two main requirements introduced by the reforms were that advisers must act in the best interests of their clients and also that they must contact their clients every two years, advise them of any ongoing fees they are being charged and ask them if they wish to continue paying those fees.

The changes to the FOFA reforms

The Coalition government’s changes to the reforms have now moderated those requirements. They have removed the legal obligation for financial advisors to act in the best interests of their clients, saying this obligation already exists under the Corporations Act. They have also removed the requirement for investors to review their advisors fees every two years.

The third main requirement of the FOFA reforms which bans financial advisors from receiving commissions for giving personal advice, has been moderated by the changes to exclude the term ‘general advice’ from the ban. The government says that advisors can receive some incentive payments for their advice as long as they don’t conflict with their clients’ best interests.

The reaction to the changes

A recent Senate committee report supported the Coalition government’s changes to the FOFA reforms, saying they would provide more certainty for both advisors and investors and would allow businesses to give general advice to their clients about their own products. The Financial Services Council (FSC) has applauded the changes, saying that incentives and commissions are entirely different things and shouldn’t be confused.

Opponents of the changes, including Industry Super Australia (ISP), argue that, unless all commissions and incentives for advisors are banned, scandals such as those involving Timbercorp and Storm Financial will continue to happen.

The Labor opposition says that scrapping the requirement for advisors to inform their clients about fees they are charging them will mean that many people will continue to be charged without their knowledge for services that they may not even be receiving.

The particular FOFA reforms mentioned here were due to become law on July 1st of this year, but the government’s changes have now overridden them. Opponents of those changes are relying on the new Senate to throw them out when it sits, but it remains to be seen whether that will happen or not.