Frequently Asked Questions
The following page contains general information about the Future of Financial Advice reforms.
More detailed information for consumers:
More detailed information for financial advisers:
The Future of Financial Advice Reform Package
The Future of Financial Advice (FoFA) reforms focus on improving the quality of financial advice, particularly product recommendations, and expanding the availability of more affordable forms of advice. The reforms will ultimately improve investor protection and instil confidence in the financial advice industry.
The FoFA reforms include a number of key components.
Best interests duty
The introduction of a best interests duty means advisers will be required to act in the best interests of their retail clients and place their clients’ interests ahead of their own when developing and providing personal advice.
Financial advisers can establish that they have met this requirement by undertaking a number of specified steps to assist in determining what the best interests of the client are.
If advisers seek to establish that they have met the best interests duty by taking the steps referred to above, they must also take any other reasonable steps (in addition to those specified) if it would have been in the best interests of the client to do so at the time the advice was given.
The best interests duty is based on the notion of ‘reasonableness’. For example, advisers are only required to make ‘reasonable inquiries’ to obtain accurate information from the client and conduct a ‘reasonable investigation’ into relevant financial products. This is designed to protect advisers from clients claiming that the adviser should have done something onerous or unreasonable in order to act in their best interests.
Opt-in and fee disclosure
Advisers will be required to request their retail clients opt-in, or renew, their advice agreements every two years if clients are paying ongoing fees. In addition, an annual statement outlining the fees charged and services provided in the previous 12 months must be provided to clients paying ongoing fees. This means advisers will be in regular contact with their clients and will need to demonstrate the value of the services they are providing their clients.
As an alternative, the Australian Securities and Investments Commission (ASIC) has been given the power to exempt advisers from the opt-in provisions where they are bound by a code of conduct, approved by ASIC, which achieves the same outcome.
Ban on conflicted remuneration
This reform will see the introduction of a ban on conflicted remuneration, including commissions.
This means that licensees and authorised representatives will not be allowed to give or receive payments or non-monetary benefits if the payment or benefit could reasonably be expected to influence financial product recommendations or financial product advice provided to retail clients. Exceptions to the ban on conflicted remuneration are provided in certain circumstances.
Volume payments (payments dependent on the total number or value of financial products of a particular class or classes) will be presumed to be conflicted but it will be open to advisers to prove that they are not.
This reform will encourage financial advisers to become more client-focused, as more of their fees will be paid directly by the client rather than indirectly through product commissions.
Ban on soft-dollar benefits
This reform will see the introduction of a ban on non-monetary (‘soft-dollar’) benefits given to advisers who provide financial product advice to retail clients. There are exceptions to the ban for benefits such as (subject to qualifying criteria):
Through these reforms, the Government is also facilitating the expansion of limited or scaled advice both within and outside of superannuation.
Scaled advice is advice about a specific area of an investor’s needs, for example insurance, or about a limited range of issues. This in contrast to traditional ‘holistic’ advice where advice is provided on all aspects of the client’s financial circumstances in a full financial plan. It is expected this will enable consumers to access beneficial advice at an affordable cost.
In summary, the benefits of the reforms are:
- adviser interests will become aligned with client interests, leading to more client-focused advice and greater adviser engagement with clients;
- product recommendations will not be influenced by commissions given to advisers by product issuers;
- clients will be less likely to suffer detriment as a result of excessive fee arrangements or sub-optimal investment strategies;
- a more competitive advice market;
- greater availability of advice;
- advisers will be discouraged from recommending imprudent investment strategies, for example, strategies that rely heavily on borrowed funds;
- a reduction in product fees which will result in significant savings for consumers; and
- less rogue advisers in the industry.
Consumers are the primary focus of the reforms and the Government believes that consumers will greatly benefit from a structural change in the financial advice industry in a way that will outweigh the implementation costs to industry. Overall, the quality of financial advice will improve, leaving Australians better equip to make decisions about their finances.
The reforms commenced on 1 July 2012. In order for the financial services industry to transition to the new regime more smoothly, the reforms will be voluntary until 1 July 2013. That is, businesses that choose to comply with the reforms at any time from 1 July 2012 will have the opportunity to elect to do so. The reforms will then be mandatory from 1 July 2013. These measures will allow the industry sufficient time to implement the reforms, such as making changes to their administrative and IT systems.
The opt-in provisions will only apply to ongoing fee arrangements entered into after an adviser becomes subject to the FoFA reforms. However, the requirement to send clients an annual fee disclosure statement will apply to all clients (new and existing clients) in an ongoing fee arrangement after the adviser becomes subject to the FoFA reforms.
From 1 July 2013, all advisers will have to act in their clients’ best interests when providing advice and no adviser can put their own interests ahead of their clients'. Advisers who voluntarily elect to comply with the reforms before 1 July 2013 will need to comply with the duty from the date they become subject to the reforms.
For constitutional reasons, the legislation that will implement FoFA cannot, in most cases, ban payments made under arrangements or contracts which are entered into before the reforms commence. This means, for example, that commissions which are currently being paid by product manufacturers to advisers in relation to clients’ existing investments will not be banned and can continue to be paid after the adviser becomes subject to the reforms.
Where an adviser voluntarily elects to comply with the reforms after 1 July 2012, that adviser is only permitted to receive conflicted remuneration, such as trail commissions (ongoing commissions paid by product issuers to advisers), under arrangements entered into before the formal decision to comply. All other advisers will only be permitted to receive conflicted remuneration paid under arrangements entered into before 1 July 2013.
The reforms only apply to financial advice provided to retail clients. A retail client is someone who is not classified as a wholesale client, that is, they have not met the income or wealth tests in the Corporations Act and have not been assessed as being an experienced investor.
The best interests obligation, opt-in and fee disclosure requirements apply only to personal advice provided to retail clients (advice on products tailored to an individual’s personal circumstances). The ban on conflicted remuneration will apply to both personal advice and general advice (advice on products not tailored to an individual’s personal circumstances). Exceptions to the measures are provided in certain circumstances.
The legislation has been passed by both Houses of Parliament and received he Royal ASsent on 27 June 2012.
The Corporations Amendment (Future of Financial Advice) Bill 2011 was introduced into the House of Representatives on 13 October 2011 and includes the opt-in provisions, and the enhancement to ASIC’s powers. The Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 was introduced into the House of Representatives on 24 November 2011 and includes the best interests duty and the ban on conflicted remuneration.
Both Bills were referred to the Parliamentary Joint Committee on Corporations and Financial Services (PJC) and the Senate Economics Committee (SEC). The PJC reported on 29 February 2012 and the SEC reported on 14 March 2012, both recommending that the Bills be passed.
For those seeking more information on the FoFA reforms, the financial adviser FAQs and the consumer FAQs provide further details including what financial advisers will have to do to comply and how the reforms will impact consumers.
Copies of the FoFA Acts and the accompanying Explanatory Memoranda are available on the Australian Parliament House website.
- The Corporations Amendment (Future of Financial Advice) Bill 2011, which contains the opt-in and fee disclosure provisions.
- The Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, which contains the ban on conflicted remuneration and the best interests duty.
In addition, ASIC provides information on its website on the FoFA reforms and when relevant Regulatory Guides will be updated to reflect the changes.