Response to ABC Fact-check on the Government's proposed changes to FOFAPosted June 02, 2014
2 June 2014
Dear Mr Skelton,
I write in response to your publication today in relation to the Abbott Government’s changes to the Future of Financial Advice (FOFA) reforms and the ‘verdict’ that I was “scaremongering” with respect to changes to conflicted remuneration provisions bringing back commissions that financial advisers could receive before FOFA was introduced.
I note that the ABC Factcheck has not been in contact with my office about this story for the last two months. I respectfully submit your article contains errors of fact, omission and interpretation.
As my office conveyed to you in responding to your query, it is not necessary to take my word for the assertion that the proposed changes will re-introduce commissions in a way which increases the likelihood of consumer loss and return many aspects of the pre-FOFA regulatory environment. This is also the view of many key stakeholder groups, including some which represent financial planners. It is also the view of many respected commentators. For example, I would draw your attention to the views of ABC Finance Presenter, Alan Kohler, who wrote on 26 March:
Acting Assistant Treasurer Mathias Cormann should do much more than tweak the amendments to the Future of Financial Advice legislation after he consults “in good faith”; he needs to rethink the Government’s whole approach to the subject.
Under the cover of streamlining the laws and removing red tape to lower cost, the Government is proposing eight changes to the law that will allow banks to once again use licensed financial advisers to sell investment products while pretending to provide independent advice. …
These amendments add up to the comprehensive return of disguising sales as independent advice, which the advisers themselves have been trying to get away from.
Not only does it make them feel grubby and deceptive to pretend to be advising when they are actually selling stuff on commission, they know that fewer and fewer people will get advice if they can’t trust it.
Your piece asserts, wrongly, that “conflicted remuneration will still be banned for personal advice”. This is incorrect. The fact that the Government’s proposed changes allow balanced scorecard arrangements to operate means this is a falsehood.
Again, this is not just my view, but the view of a series of stakeholders who represent financial planners and consumers.
On Thursday 22 May 2014, the Senate Economics Legislation Committee conducted a one day hearing into the Government’s legislation changes.
Given the ‘verdict’ on scaremongering, I think it’s important to remind you of the strong and clear stakeholder views on issues relating to the Government’s changes and the potential implications of them for Australian investors.
Mr Mark Rantall, Chief Executive Officer, Financial Planning Association of Australia:
“the FPA strongly opposes any possible reintroduction of commissions for financial product advice on superannuation or investment products. There are several risks which are associated with commissions for general advice. Firstly, we are extremely wary of general advice business models which encourage a complementary sales model of financial product issuance and distribution. The conflicted remuneration which drives these business models poses a real risk of product misselling to retail investors and was rightly banned by the future of financial advice reforms. Secondly, commissions incentivise the provision as a general advice as a form of consumer education or a replacement for personal advice. General advice is inappropriate for that purpose as it makes it more difficult for consumers to distinguish personal financial advice from marketing material or product sales. Thirdly, commission payments have also eroded public confidence in our financial system. Australians will not have the confidence in our financial system as long as providers of products or advice are exposed to perverse incentives such as commissions. Finally, allowing superannuation investment commissions to be paid on general advice has the potential to shift licensees and representatives away from the provision of personal advice in order to earn commissions. As long as the differences between general advice and personal advice are insufficiently clear to consumers, general advice will be perceived as a less costly form of personal advice. This perception of general advice influenced by the perverse incentives created by commissions increases the risk to consumers and being sold inappropriate high-risk tier one products.” (Emphasis added).
Mr Ian Kirkland, CEO, consumer group CHOICE:
“we are concerned about the watering down of the best-interest obligation, the changes to rules about conflicted remuneration, the removal of the requirement that clients opt in to fees and the removal of the requirement for annual fee disclosure statements for arrangements commenced prior to 1 July 2013. We see these things as pretty basic consumer protections and, indeed, signs of basic good practice in business that any financial adviser should be happy to sign up to. We have noted the costs to industry that have been spoken about. We feel that the costs to consumers also need to be considered—and these are best demonstrated by some of the significant collapses and crises that we have seen where consumers have lost millions and millions of dollars. That is what happens when financial advice goes wrong. In short, we think FoFA was an important step forward. We would be deeply concerned about any winding back of the protections that were brought in through FoFA and we would encourage the committee to recommend that these amendments be abandoned.”
Mr Richard Webb, Policy and Regulatory Analyst, Australian Institute of Superannuation Trustees:
“Mums and dads expect advice from advisers and they expect sales from sales people. Investors have an understanding of the difference between those two terms. We note that the Cooper review wrestled with this and concluded that:
… commissions should be banned on all insurance products in super, including group risk and personal insurance. Trustees will continue to be able to offer life, TPD and income protection insurance in MySuper and choice investment options …
“This was on top of the Ripoll report, which recommended banning commissions on financial products entirely at paragraph 6.56. If it is still the case that banks wish to provide conflicted remuneration to their sales staff, the answer is not to allow advice to be carved out.”
Ms Robbie Campo, Deputy Chief Executive, Industry Super Australia:
“Industry Super Australia is concerned that the measures proposed in the bill being considered by this inquiry will significantly dilute key consumer protections in financial advice law and therefore increase the likelihood and impact of future financial advice scandals.
“The general advice exemption, obviously, has attracted much criticism. The rhetoric offered in support of creating this exemption talks about the need to ensure that people can access assistance and advice, particularly from bank tellers. But, in our view, this is not really what this exemption is about. There is already a complete exemption for basic banking products in the FoFA legislation. Therefore, what we are talking about is allowing commissions and other forms of conflicted remuneration to be paid on complex products, including superannuation but also others like managed investment schemes and leveraged products, which have been the subject of many previous inquiries due to the consumer losses that have ensued.”
Ms Josephine Root, National Policy Manager, Council of the Ageing Australia:
“In our submission, we outline our concerns around the weakening of the best interest test, the removal of the requirement to have clients opt in every two years, the allowance of scaled or scoped advice and the move to allow commissions for more general advice products. No doubt there will be some questions on our views.
“We believe the cumulative effect of these changes is to seriously weaken the reforms, giving less consumer protections and ultimately undermining confidence in the financial advice sector. We are concerned that people will opt out of getting financial advice and, therefore, not get the maximum benefits that they could and in the long term be a cost on the taxpayer and government because they will move to not having sufficient funds in retirement.”
I would appreciate you publishing this letter as part of the report on the Government’s changes to FOFA. Given the importance of this issue to many hundreds of thousands of consumers, I will also be releasing this letter publicly.
Add A Comment