Government's goal remains to reduce red tape

BEFORE Christmas, the Abbott government announced amendments to the former government's regulation of the financial advice industry.

Known as the Future of Financial Advice reforms, the changes were part of the government's long-held commitment to reduce red tape, address concerns from the financial services sector and shield consumers from the escalating cost of advice.

The fast-growing advice industry comprises independent planners as well as those tied to major financial institutions such as banks. The industry super funds also play in this space.

Labor's FoFA package increased regulation in response to high-profile corporate collapses such as Storm Financial, Opes Prime and Westpoint, where issues of conflicts of interest in giving advice and the mis-selling of financial products were highlighted.

Labor enacted a one-size-fits-all maze of further regulation that boosted costs and threatened innovation. The reality is that no amount of legislation will ever be a guarantee against another Storm Financial.

The Coalition supported the FoFA reform process, but sought to cut the costs of implementation and better reflect the differing business models in the sector.

These changes were encapsulated in the 16 recommendations made by Coalition senators in the February 2012 Dissenting Report of the Parliamentary Joint Committee on Corporations and Financial Services Inquiry into the FoFA Bills.

Labor's final package was estimated by the financial services industry to cost it $700 million in set-up costs to comply and $375m in ongoing costs. These numbers were never challenged by Labor.

Such costs are not a free lunch; someone always has to pick up the bill, whether it is consumers through higher charges and/or less access to quality, affordable advice. There is some irony in the fact that the new government is being criticised for doing what it said it would do before the election. The government's critics want to have it both ways. They urge the government to drop policies they do not like and simultaneously excoriate the Commission of Audit, for example, as a Trojan horse for the government to break its election promises.

The Coalition's FoFA changes were well telegraphed before the election as part of its deregulation policy. They will contribute to the Coalition's goal of reducing red tape and compliance costs by at least $1 billion a year.

Treasury's initial estimates are that these amendments will save the financial services industry $90m in implementation costs and reduce annual compliance burdens by an average of about $190m a year. With vigorous competition in the industry, these savings should flow through to consumers. The Coalition plan supports the transparency of fee-for-service arrangements. The ban on commissions and volume-based payments (termed conflicted remuneration) for personal financial advice has been retained, but removed where general or low cost and factual advice about products and services is provided.

There is now clarity around the ability of advisers to limit the scope of advice to a particular area as instructed by the client, subject to meeting the obligation to act in the best interests of the client.

This will promote the provision of low-cost services. A catch-all duty to act in the best interests of the client has been removed because it created uncertainty as to whether advisers had met the test. Under the legislation, advisers must fulfil six specific tests to demonstrate they are acting in the interests of clients.

The Coalition has scrapped the requirement to prepare a fee disclosure statement for pre-July 1, 2013, clients. It was too expensive and some historical data was likely to be unreliable given the age of many legacy systems.

New clients will receive such a statement. In any case, Labor did not apply this requirement to the many existing clients who were paying commissions rather than a fee for service.

The Coalition has also removed the opt-in requirement that mandated clients to complete unnecessary paperwork every two years (originally it was going to be annually) in order to continue their arrangement with their adviser. Labor focused on those customers who were disengaged from the advice process.

The Coalition wants consumers to be fully engaged and drive the advisory process. The changes to FoFA are part of that vision.

Arthur Sinodinos is Assistant Treasurer