After numerous catastrophic financial collapses and controversies, the previous Federal Government passed new laws to regulate the financial advice industry, known as the Future of Financial Advice (or FoFA) laws. However, the current Abbott Government wants to dramatically water down those reforms with new regulations, even as they have received advice that they may succeed only in throwing the sector into chaos in addition to ripping the heart out of consumer protections.
When the likes of Storm Financial collapsed, the inherent failings of the financial advice industry could no longer be ignored. Ordinary people, many of them on low incomes, were having their life savings and assets obliterated and new debts created. After a lengthy process, including a parliamentary inquiry, the Gillard Government took the bull by the horns and enacted the Future of Financial Advice (or FoFA) laws.
Principally, the new laws sought to protect clients by putting their "best interests" at the centre of financial advice. No longer could financial planners choose to advise a course of investment or purchase of a product that actually benefitted themselves instead of the client. Other improvements in accountability in the laws involved banning commissions, which only served to give advisors further incentives to act in their own interests instead of the interests of their clients.
Now the Assistant Treasurer Arthur Sinodinos (up until the last election, a senior executive at the NAB) says those laws went too far. Tellingly, he wants to remove the requirement that advisors must put their clients' "best interests" first.
"It seems obvious to us that the clients' best interests should be at the centre of providing financial advice and services," said ASU National Secretary David Smith.
"It seems obvious to us that the clients' best interests should be at the centre of providing financial advice and services," said ASU National Secretary David Smith.
"If this is removed from the financial advice laws, the ASU is concerned that our members and people in general will again be taken for a ride and have their retirement savings leeched away by risky investments with high commissions," he said.
It's not only unions and industry super funds who are crying foul over Senator Sinodinos' proposed amendments. Consumer and senior groups were amongst those who sought the reforms in the first place. Finance commentators have widely stated that there is no question that banks and "commission hunters" will flourish with these changes, not ordinary people seeking to shore up their finances for a long retirement. It is noteworthy that industry super funds have never paid commissions and have always strongly supported the best interests requirement.
The ALP, the original architect of the existing FoFA laws when in Government, has been unequivocal in its criticism of the proposed changes. Shadow treasurer Chris Bowen wrote in the Australian Financial Review that not only is the Abbott Government seeking to undo the new protections in the FoFA laws but is additionally creating new ways for investors to be exploited.
The ALP's FoFA laws have been operating for over six months now, and it is reported in the media that not only has the financial advice industry adapted to the changes, some don't want to go back to the days of lax regulations because it unnecessarily tarnishes the industry's reputation further. This will only result in fewer people using their services. However, there are other vested interests in the industry, including the banks, who seem to be supporting the changes to reduce consumer protections in financial advice, and allow sales advice rather than impartial professional advice.
Senator Sinodinos also wants to reintroduce commissions, creating a number of loopholes that will allow commissions to be paid, including on superannuation. Commissions act to create a situation where a service provider is tempted to give advice based on their own monetary advancement, not the best interests of the person they are advising. In every one of the large scale collapses including Storm and Trio, the advisers were being paid commissions as an incentive to sell the products, with devastating results for the clients, most of whom lost their life savings and their homes.
Even those whose sole investment was their compulsory super fund were not immune from the scourge of commissions with millions of fund holders having ongoing fees extracted from their balances for financial advice they never received.
Even those whose sole investment was their compulsory super fund were not immune from the scourge of commissions with millions of fund holders having ongoing fees extracted from their balances for financial advice they never received. The FoFA laws remedied this by not only banning commissions, but also clamping down on the practice of charging ongoing asset based fees for advice by requiring financial advice firms to seek renewed approval to charge these fees every second year.
The Government has announced that they are going to make these significant changes to the law by making regulations, which means they can avoid parliamentary debate of their controversial changes. To try to head off the Assistant Treasurer from attempting the changes quickly through new regulations, a path which has allowed for little public scrutiny, the industry superannuation umbrella group Industry Super Australia (ISA) commissioned a report from law firm Arnold Bloch Leibler which they have presented to the Senator.
The report argues that the proposed changes would be open to a legal challenge and that High Court precedents indicate they would not stand. Not only that, but the litigation expected would create a chaotic situation where financial planners acting under Senator Sinodinos' regulations could be found to have acted illegally.
Even if Senator Sinodinos decides not to make the changes via regulations, this will not prevent the Assistant Treasurer from seeking to rewrite the laws taking the long route via new legislation, although he will need to wait for the new Senate in order to do so.
"Hopefully by that stage, enough people and organisations, including ethical financial advice firms, will have let the Government know that ripping the client protections out of the FoFA laws is not the way to go – the ASU will certainly be doing that," said David Smith.
As recently as 3 March 2014, noted economics commentator Alan Kohler and his online media outlet Eureka Report (providing specialist news for investors) published a strongly worded open letter to Senator Sinodinos about his proposed changes to the FOFA laws. In it he said "WRONG WAY GO BACK", that commissions must remain banned from the provision of financial advice and that clients' "best interests" should be enshrined. He even asserts that there aren't enough client protections in the existing FoFA laws.
With the weight of criticism from so many sectors bearing down on the Sinodinos reforms, ignoring them and proceeding with the changes will dramatically highlight where this Federal Government has its loyalties, and it's not with the interests of millions of ordinary Australians seeking a better future.
With the weight of criticism from so many sectors bearing down on the Sinodinos reforms, ignoring them and proceeding with the changes will dramatically highlight where this Federal Government has its loyalties, and it's not with the interests of millions of ordinary Australians seeking a better future.
"We hope the Federal Government comes to its senses on the FoFA laws!" said David Smith.
Take action to prevent the gutting of FoFA client protections
We encourage you to contact Senator Sinodinos asking him to reconsider his changes to the FoFA laws. His details are as follows:
Parliament Office:
PO Box 6100
Senate
Parliament House
Canberra ACT 2600
Telephone: (02) 6277 7360
Electorate Office:
Level 28
123 Pitt Street
Sydney, NSW, 2000
Telephone: (02) 9223 4388
Update - 7 March 2014
Following the publication of our item above, the Chair of Industry Super Australia, Peter Collins, also published an opinion piece on this issue: "Could your savings again be in the eye of the Storm?", Working Life, 5 March 2014