Part of the Coalition government’s pre-election promise was to repeal part of the Freedom of Financial Advice laws. This was legislation put in place by the previous Labor government to strengthen consumer protections in the area of financial advice.
But Tim Mackay from financial advice firm Quantum Financial says the repeal of the laws will water down consumer protection in a number of ways.
Under the original legislation, advisers were barred from receiving commissions when they were providing consumers with general financial advice. But this will now be wound back and it is likely advisers will once again be able to receive commissions.
“The re-introduction of conflicted general advice commissions is not in consumers’ interests. Conflicted remuneration erodes the trust consumers have in financial services and also undermines the moves towards professionalism in financial advice,” says Mackay.
“What’s to stop less reputable providers offering generous 10 per cent commissions to sell their products to consumers? Many financial schemes that eventually failed, for instance Timbercorp and Great Southern, offered advisers 10 per cent up front commissions. Do we really want to return to the bad old days?” he argues.
He says the problem is that high commission structures incentivise financial professionals to recommend these products over those that don’t come with such high commissions attached.
“It’s great that the Federal government has recognised the inherent conflicts in the proposed changes by pausing their introduction. If the government listens to consumers and financial planners, they won’t re-introduce conflicted general advice commissions.”
Another of FoFA’s provisions was a requirement for licensed advisers to act in clients’ best interest.
“Some within the industry are very keen to have a checklist of tasks they need to undertake to ensure they meet their legal requirements. In my opinion, it would be a far better approach to reduce red tape and retain high consumer protections by removing the checklist and retaining the best interest duty,” says Mackay.
“That way financial planners will have taken all the steps required in their professional opinion to ensure the advice given is in the consumer’s best interests.”
Another important change under the first iteration of FoFA was the need for new clients to ‘opt-in’ on a bi-annual basis to receive financial advice. That is, they had to actively acknowledge to their adviser that they wished to remain a client. This is also likely to disappear.
Says Mackay: “It is hardly an onerous requirement for an advisor to confirm with clients every two years that they are receiving an adequate service and are prepared to continue paying the fees. Those who rightly fear this reform are advisors who sold a consumer a product many years ago and are still receiving an income stream for minimal work.”
Nevertheless, although the FoFA provisions are certainly going to be less stringent under their new guise, consumers should still feel comfortable that licensed financial advisers have to undertake comprehensive initial and ongoing education and meet strict compliance requirements to remain licensed. Most are reputable and knowledgeable and the idea is to find an adviser you feel comfortable with and that has a good track record and reputation.