Relentless industry lobbying may mean FOFA is further diluted to reduce its impact on the conflicts of interest inherent in product sales and distribution networks, according to Brown. “They’ve already achieved much of that outcome by retaining percentage-based asset fees on investment products, retaining commissions on individual insurance policies (which may lead to some financial planners biasing their advice towards selling more life insurance), retaining trailing commissions on existing books of business and successfully pressuring government to move the opt-in (agreeing to pay for advice) to two years, up from the initial one year.”
The next step for the lobbyists is to get rid of the ban on asset fees when gearing is involved, remove the opt-in altogether or make it apply every five years or so, Brown predicts. If the industry manages to achieve those outcomes, FOFA will be impressively bulky, but will mean very little. Despite the good intent by government, the upshot will be no substantial change in behaviour.
Brown’s hopes are pinned on FOFA forcing financial planners to think and act properly out of duty to the industry’s best interests. “But it’s a vain hope for financial advisers when their ability to pay the family bills will continue to depend upon meeting a product sales target on which they will be paid percentage-based remuneration and bonuses,” he admits. And, this will continue to be possible under FOFA. “Of course, that’s the essential problem with FOFA,” Brown says. “While it’s good to have a tight best-interests duty, most advisers will continue to act under the influence of conflicted remuneration because of the political compromises within FOFA, such as asset fees, commissions on life insurance and ongoing trails.”
Is disclosure enough?
Financial Services Council chief executive John Brogden does not buy the argument. He sees APES 230 as being all about competition for business, not regulation. “Accountants are trying to make out their standards are higher than the law. We don’t believe they are,” he says.
In his view, FOFA is a massive set of reforms that more than adequately deals with conflicted remuneration. First, Brogden says clients will have a choice about whether they pay a flat fee or a percentage fee. Second, the percentage fee has to be expressed in dollar terms so consumers understand exactly how much they’re paying. Third, opt-in reform means planners have to check every two years that clients want to continue paying and receiving advice. Also regular fee statements will be issued.
“If they’re not comfortable with that arrangement, they can demand it be changed or walk away,” says Brodgen. “I’ve never understood why there is opposition to properly disclosed fees particularly with the belts and braces of reform that have been put around them.” Brogden insists the changes will ensure people will become more aware of the relationship with their planner.
In theory, this is right, argues Brown. Disclosure (and the consequent right of the client to withdraw) is always the industry’s argument as to why things should remain the same. “It’s been the industry’s argument over the last 30 years for maintaining the status quo!”
