Questions raised over Government's proposed changes to Future of Financial Advice legislation
Updated
Industry Super Australia, which represents industry superannuation funds, has legal advice showing the Federal Government's planned changes to laws governing financial advice may not be lawful.
The Future of Financial Advice (FoFA) legislation became mandatory for the financial services sector in July last year.
According to the Treasury website, the original objectives of FoFA were to "improve the trust and confidence of Australian retail investors in the financial services sector and improve access to advice".
Just a few months after FoFA was implemented, the Coalition announced plans to roll back elements of the legislation.
Many of the changes would overturn reforms introduced in the wake of the Storm Financial collapse, in which some investors lost their life savings because of conflicted financial advice.
The Government says the package of changes to FoFA would help to implement its election commitment to "reduce compliance costs and regulatory burden on the financial services sector".
One of the proposed changes would water down a key provision to oblige financial advisers to always act in the best interests of their clients.
The Government also wants to remove the "opt-in" requirement, which forces financial advisers to contact fee-paying clients every two years to renew their contacts.
It would also scrap rules requiring financial advisers to disclose how much they charge clients in annual fees.
The Government says the reforms will save $90 million in implementation costs and cut compliance burdens by $190 million per year.
The Government is accepting public submissions on the changes until this Wednesday.
Law firm suggests reforms could be invalid
But Industry Super Australia has sought legal advice on the Government's plans to implement the changes via regulation rather than putting them through parliament.
ISA's advice from law firm Arnold Bloch Leibler suggests the regulations would be legally invalid.
The advice suggests any financial advisers relying on the changes could be left exposed to potential class action challenges in the future.
The law firm's advice, written on February 11 says:
"We consider that such regulations would be invalid and susceptible to challenge in the courts.
"A court declaration of invalidity would operate retrospectively.
"This means, for example, financial advisers who relied on the regulations would be found to have acted unlawfully.
"The regulations would therefore create significant uncertainty and could well become the subject of protracted litigation between financial advisers and their clients, for example, in an investor class action."
A spokeswoman for Assistant Treasurer Senator Arthur Sinodinos says the reforms will be backed by legislation which will be introduced to Parliament in the coming weeks.
"The Government will make regulations to give effect to the amendments to the extent legally possible, to provide certainty to industry as to the intent of the Coalition's reform package," she said in a statement.
"The Treasury has sought and received legal advice on these matters.
"All Commonwealth legislation can be legally challenged, and that is ultimately a matter for the courts."
Storm Financial victim Luke Vogel says the Government has been lobbied by large and powerful financial institutions "who will seek advantage through the rolling back of any legislation".
"In this respect, the purpose of the laws and their implementation will totally miss its targets," he said.
"The legislation was designed to protect consumers and investors so that they could build a future in retirement.
"Legislation prior to the changes had similar altruistic goals, however there are those who seek to dismiss the intent of the laws for the sake of profit or advantage.
"Watering down of the legislation, any legislation at the behest of the large finance and financial services companies, will result in the original intent of the laws being rendered useless and ineffectual."
Consumer group warns reforms could lower standards
Banking and Finance Consumers Support Association president Denise Brailey says the changes mean the laws will not go far enough to protect consumers.
"The laws are delivered in consultation with industry and therefore accommodating the needs of industry," she said in a written statement.
"Initially, commissions which have been discussed as a root evil for the past two decades are still present.
"Advising clients of the costs on any manufactured product is mandatory at the time of purchase, yet Financial Advice being paramount to one's own personal financial well-being, is not being given a comparative status.
"I feel the above point means a 'cutting red tape' approach will mean a lowering of standards."
Alan Kirkland from consumer group Choice says his key concern is that changes to the 'best interests duty' may mean consumers are not protected from poor quality financial advice.
"We urge the Government to reconsider its rollback of reforms to the financial advice industry, and at the very least explore alternate means of protecting Australians from the very real costs and impacts of passive fees and conflicted financial advice," he said.
"We are concerned that exempting general advice from the ban on conflicted remuneration may allow continued bias and mis-selling (sic) in the general advice area.
"We also believe that removing the requirement for clients to actively opt-in every two years if they continue to pay fees ignores a very significant issue of consumer harm."
Financial Services Council backs legislation changes
But the Financial Services Council says as the legislation stands, the risk is that it will not achieve one of its key objectives.
It says if the legislation does not change, consumers will pay too much for advice.
The council's chief executive officer John Brogden writes in Fairfax media today that the two clear objectives are to reduce conflict in advice and to increase the number of Australians who receive it.
"The risk is that FoFA will achieve its first objective but fail to deliver on its second," he writes.
"This would be a disaster for Australians and for an industry that has spent $700 million complying with FoFA and expects to spend another $350 million a year.
"The way the legislation is currently drafted will unnecessarily increase the cost of financial advice.
"Though the best interest duty for financial advisers is a critical development for consumers, in its current form it does not allow them to instruct their adviser to limit the advice they receive to their specific needs at the time."
Know more? Email: investigations@abc.net.au
Topics: regulation, business-economics-and-finance, australia
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