Revised Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon J. B. Hockey MP)General outline and financial impact
Outline
The Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014 (Bill) implements the Government's election commitment to reduce compliance costs imposed on the financial services industry by amending Part 7.7A of the Corporations Act 2001 (Corporations Act). Part 7.7A is also referred to as the Future of Financial Advice (FOFA).
FOFA was announced by the former Government in April 2010, and introduced to Parliament in 2011. FOFA was the former Government's response to the 2009 Inquiry into Financial Products and Services in Australia by the Parliamentary Joint Committee on Corporations and Financial Services (PJC Inquiry), which was established to inquire into, and report on, issues associated with financial product and services provider collapses that occurred in the wake of the Global Financial Crisis.
The underlying objective of FOFA was to improve the quality of financial advice whilst building trust and confidence in the financial advice industry.
The FOFA amendments commenced, on an optional basis, from 1 July 2012, and became compulsory from 1 July 2013.
The Government agrees with the policy intent of FOFA, but considers that the legislation has-in parts-placed an unnecessarily heavy compliance burden on the financial services industry. When the Corporations Amendment (Future of Financial Advice) Bill 2012 and the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2012 (2012 FOFA Bills) were introduced into Parliament, they were referred to the Parliamentary Joint Committee on Corporations and Financial Services (the Committee).
The Committee delivered its report on the 2012 FOFA Bills in February 2012; the report included a Dissenting Report by Coalition members of the Parliamentary Joint Committee (the Dissenting Report). The Dissenting Report put forward 16 recommendations for changes to FOFA, reflecting the Coalition's concerns that the 2012 FOFA Bills were too complex, costly to implement and created unnecessary red tape.
In July 2013, the Coalition released its Policy to Boost Productivity and Reduce Regulation, in which it committed to reduce compliance costs for small business, financial advisers and consumers who access financial advice, by implementing the recommendations from the Dissenting Report.
The amendments in this Bill reduce compliance burdens whilst maintaining consumer protections.
On 20 December 2013, the Assistant Treasurer, Senator the Hon Arthur Sinodinos AO, announced amendments to FOFA. The amendments implement the Government's election commitment to reduce compliance costs for the financial services industry.
On 19 March 2014, the Bill was introduced into Parliament as part of the Government's Autumn Repeal Day; the Bill was referred to the Senate Economics Legislation Committee (the Senate Committee) on 20 March 2014. In line with the referral, the Acting Assistant Treasurer, Senator the Hon Mathias Cormann, announced on 24 March 2014 that the accompanying FOFA amendments would be put on hold while the Committee considered the Bill and to enable the Government to consult further in good faith with all relevant stakeholders.
Since March, the Government has undertaken additional targeted consultation with: the Association of Financial Advisers; the Australian Bankers' Association; CHOICE; the Council of the Ageing; the Financial Planning Association of Australia; the Financial Services Council and a number of its members; Industry Super Australia; and National Seniors Australia.
Based on these consultations a number of refinements to better target certain FOFA provisions have been made.
The Senate Committee released its report on the Bill on 16 June 2014. Overall, the Senate Committee found that the proposed amendments achieve a proper balance between providing adequate consumer protection and sound professional and affordable financial advice. The Senate Committee recommended that the Bill be passed after the Government give consideration to two recommendations.
The Government agrees with these recommendations and has responded by introducing Parliamentary amendments to the Bill. Changes have also been made to the explanatory memorandum to address the Committee's recommendations. These changes are reflected in this document.
On 15 July 2014, the Government announced a number of changes to the Statement of Advice requirements to incorporate additional improvements agreed with the Palmer United Party and the Australian Motoring Enthusiasts Party.
The Bill includes the following key amendments to FOFA:
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- removing the need for clients to renew their ongoing fee arrangement with their adviser every two years (also known as the 'opt-in' requirement);
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- making the requirement for advisers to provide a fee disclosure statement only applicable to clients who entered into their arrangement after 1 July 2013;
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- removing paragraph 961B(2)(g), the 'catch-all' provision, from the list of steps an advice provider may take in order to satisfy the best interests obligation;
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- better facilitating the provision of scaled advice; and
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- providing a targeted provision that permits benefits on general advice in certain circumstances; payments commonly known as commissions are not permitted.
Further, the Bill includes amendments to the Statement of Advice requirements that:
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- provide for additional disclosure and information in the Statement of Advice in relation to existing rights of the client and obligations of the provider of advice;
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- ensure that any instructions for further or varied advice from the client are: documented in writing; signed by the client; and acknowledged by the providing entity, or an individual acting on behalf of the providing entity; and
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- require that the Statement of Advice be signed by both the provider of the advice and the client.
Time sensitive amendments were reflected in the Corporations Regulations to the extent allowed under the relevant regulation-making powers. These amendments include: the removal of the opt-in requirement; changes to fee disclosure statements; removal of the catch-all provision; the facilitation of the provision of scaled advice; and changes to conflicted remuneration. These amendments will subsequently be repealed once the Bill receives the Royal Assent.
Consultation: The Government has undertaken extensive consultation on the amendments to FOFA.
Consultation on an exposure draft Bill and Regulation was conducted for three weeks in February 2014. Various consultation meetings were also held. A total of 57 written submissions were received.
Further targeted consultation was also undertaken whilst the Committee was conducting its inquiries into the Bill.
These consultations have informed the final position of this Bill.
Date of effect: The amendments commence upon the day after this Bill receives the Royal Assent.
Proposal announced: The amendments to FOFA were announced on 20 December 2013 by the Assistant Treasurer, Senator the Hon Arthur Sinodinos AO.
Refinements to FOFA were announced on 20 June 2014 by the Acting Assistant Treasurer, Senator the Hon Mathias Cormann.
The amendments to Statements of Advice were announced on 15 July 2014.
Financial impact: This Bill has no significant financial impact on Commonwealth expenditure or revenue.
Compliance cost impact: The amendments have no compliance cost impact; they are deregulatory in nature.
Regulation impact statement
A details-stage regulation impact statement (RIS) for the amendments to FOFA has been prepared and can be found in Chapter 6.
Information gathered through the consultation process has been used to inform the details-stage RIS.