Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon J. B. Hockey MP)

Chapter 6 Regulation impact statement ^[1]

Introduction to FOFA

What is FOFA?

6.1 Summarily, the Future of Financial Advice (FOFA) legislation-part 7.7A of the Corporations Act 2001 (the Act)-imposes the following standards on providers of financial advice:

•

a best interests obligation that requires advisers to act and provide advice that is in the best interests of their client;

•

an obligation to disclose ongoing fees and charges paid by their client; and

•

a requirement to not accept payments that may influence the advice provided to the client.

6.2 Each of these requirements is discussed in greater detail later in this Regulation Impact Statement (RIS).

6.3 FOFA represents the former Government's response to the recommendations of the 'Ripoll Inquiry', a Parliamentary Joint Committee on Corporations and Financial Services (PJC) inquiry into financial products and services in Australia. The Ripoll Inquiry was set up in 2009 to inquire into, and report on, issues associated with financial products and services provider collapses that occurred in the wake of the Global Financial Crisis (GFC).

6.4 The dual underlying objectives of FOFA are to:

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improve the quality of financial advice;

•

increase trust and confidence in the financial advice industry.

Why is FOFA changing?

6.5 The current 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.

6.6 When the FOFA legislation was first introduced to Parliament in late 2011, Parliament referred the then Bills-FOFA was introduced in two tranches ^[2] -to the PJC; a report on the PJC's inquiry was released in early 2012.

6.7 Alongside the main PJC report was a Dissenting Report by the Coalition members of the PJC (the Dissenting Report). The Dissenting Report contained a number of recommendations to reduce the regulatory burden the 2012 FOFA Bills were predicted to impose on the financial services industry.

Timeline of FOFA

Graphic 1: FOFA history

Graphic 2: FOFA amendments

Overview of the financial services industry

6.8 The financial services industry is an important part of the Australian economy; it currently employs over 400,000 people and is the largest industry in Australia when measured by gross value added (a measure of the economic worth of the goods and services produced) ^[3] . Continued industry growth is expected to be largely driven by Australia's ageing population and the increasing pool of superannuation funds.

Graphic 3: Structure of financial services industry

6.9 Product manufacturers, or fund managers, are responsible for creating and managing financial products. Australia's managed funds industry is one of the largest in the world, and the majority of these funds are attributable to the advanced superannuation system, which encourages employees to save for retirement throughout their working life. The pool of superannuation funds in Australia is roughly the same size as Australia's economy ^[4] .

6.10 Platforms act as intermediaries between product manufacturers and dealer groups. A product manufacturer will typically place their financial products on a platform to make their products accessible to dealer groups. A dealer group is made up of multiple representatives who are authorised by a licensee to provide financial advice under that licensee's financial services licence. In Australia, there are more than 750 dealer groups ^[5] who compare and assess financial products on platforms and select a range of products (commonly referred to as an 'approved product list') for their aligned advisers to offer to their clients. Dealer groups also offer a range of other services, including back-end support and administrative functions.

6.11 Industry estimates indicate that there are around 18,000 financial advisers in Australia ^[6] , who collectively manage over $500 billion of funds under advice and generate over $4 billion revenue per annum ^[7] . Between 20 and 40 per cent of Australian adults use or have used a financial adviser ^[8] .

6.12 The financial advice industry is stratified into three distinct segments: large, medium and small firms. There are five large firms, all of which directly employ over 1,000 financial advisers. These large firms are also financial product manufacturers and offer platform services. Medium sized firms employ between 60 and 1,000 advisers, and small firms employ less than 60 advisers. Many, but not all, of the small and medium sized firms are aligned with one of the larger firms, often using the platform(s) of a large firm to access and manage financial products for their clients.

6.13 The industry is relatively competitive, with around half the market accounted for by the top five firms, and the remaining half occupied by small and medium firms ^[9] . Whilst there are some impediments for consumers switching financial products and advisers, the competitive nature and the need for advisers to act in the best interests of their clients ensures that clients have the ability to switch products and advisers.

Increase in Institutional Ownership

6.14 The introduction of FOFA, along with the impact of the GFC, appears to have had a sizable impact on the industry. The FOFA amendments led many dealer groups to review their remuneration models and business entity structures in light of the shift to fee for service and the ban on conflicted remuneration. The outcome has been that, since 2008, there have been a number of major dealer group purchases, with more than a quarter of advisers changing their home licence since 2008.

6.15 Many of these groups merged with, or were purchased, by wealth management groups, with institutional ownership of the financial advice market now controlling the majority of the market. Five advice conglomerates now control more than half of the advice market.

6.16 Industry consolidation is being driven by the economies of scale achieved by having a large number of advisers within the same group. This includes the opportunity to distribute financial products through a greater number of aligned advisers. ASIC has expressed concerns about the number of the largest dealer groups being owned by product issuers, which may give rise to perceived or actual conflicts of interest ^[10] . In addition, smaller groups which have found it difficult to adapt to FOFA have proven to be easy and desirable targets for larger groups ^[11] . The barriers to entry in the industry relate mainly to holding and complying with licensing requirements, which have increased since FOFA, and achieving a sufficient scale to be competitive ^[12] .

Impact of FOFA

6.17 While the industry was growing rapidly before the GFC, the economic downturn in 2008 and the FOFA amendments have led to a decline in financial adviser numbers. More recently, dealer group numbers appear to have increased and funds under advice have remained relatively stable, especially compared with the decline following the GFC. It is likely that the concentration within the industry and FOFA amendments encouraged advisers to either move to other licensees or to establish themselves under their own licence.

6.18 As revenue has remained relatively steady but compliance and servicing costs increased because of the FOFA amendments, there has been a decline in the industry's performance. AMP, for example, estimated the reduction in embedded value in financial year 2013 because of FOFA at $176 million in respect of anticipated margin impact and the remaining cost of implementing FOFA at $4 million in financial year 2014 ^[13] . The Commonwealth Bank also increased its spend on risk and compliance projects by 24 per cent in 2013 compared with 2012 which was, in part, to satisfy FOFA amendments ^[14] .

6.19 The fall in adviser numbers also implies that the industry has been underperforming population growth. This raises concerns as the industry tries to service more people, particularly amongst the baby boomers heading into retirement. The decline in adviser numbers is also likely to be a reason behind the merger and acquisition activity in the industry, as groups develop alternative pathways for expanding. Industry employment is predicted to remain flat as uncertainty leads to career changes and a pause in recruitment ^[15] .

Driving Efficiencies

6.20 The relative stagnation in the advice industry and the costs associated with FOFA has encouraged advisers and dealer groups to gain efficiencies through software and other tools. Industries servicing the advice industry, including platforms and software providers, have been under increasing pressure to provide these efficiencies.

Platforms

6.21 Platforms are administrative systems used by advisers for their clients. The big four banks plus AMP and Macquarie control most of the market. To capture and retain market share, platforms have been focusing on technological advances such as share trading capability.

6.22 Adviser groups often use a number of platforms to serve different needs, but with consolidation in both the platform and advice industries by leading players, there is an increasing push from these players for their own, or aligned, advisers to use their own 'white label' platforms rather than external platforms ^[16] .

Research providers

6.23 As a condition of their licence, advisers are required to demonstrate why they recommended particular products to their clients. This research often informs the formulation of Approved Product Lists (APLs). Sometimes a second subsidiary list is created from the APL, a Recommended Product List (RPL), which lists the products recommended for advisers to use at that point in time. Almost all licensees outsource this research to external research providers, often to more than one provider ^[17] . ASIC has noted that advisers should perform due diligence on potential external research providers, so that they understand the research provider's business model and can take that into account when providing advice to clients ^[18] . Under FOFA, where an advice provider considers it reasonable to recommend a financial product they must conduct a reasonable investigation into products relevant to the subject matter of the advice and assess the information gathered in the investigation ^[19] .

6.24 There are only around a dozen research providers in Australia. The market is very concentrated, with the top five research providers controlling almost 90 per cent of the market. Fund managers now try to strategically target advisers through the research providers they have contracted. Research providers are therefore important gate-keepers, deciding which products meet the standards required by advisers ^[20] .

6.25 A 2011 ASIC review of the top 20 advice licensees found that despite the median number of products on approved product lists being around 400, there remained a tendency to concentrate product recommendations into a few key products ^[21] . This is relevant to any regulation of the remuneration models used by dealer groups.

Remunerations Models

6.26 Aspects of FOFA, including the ban on conflicted remuneration, the introduction of scaled advice and the best interests duty, have led to a widespread shift to fee for service payments. This shift has been noticed by ASIC, and it was an anticipated consequence of FOFA ^[22] . Some groups, most notably MLC/NAB Wealth and AMP ^[23] , have been moving to a fee for service model for several years, but the trend has become more pronounced since FOFA.

6.27 This shift is evident in two ASIC surveys of licensees conducted in 2011 and 2013. A 2011 ASIC review of the top 20 advice licensees found that the majority remunerated their advisers based on the volume of financial products sold, which included ongoing commissions, up-front commissions and volume rebates ^[24] . In regards to total licensee remuneration, 90 per cent was paid by product providers (including asset-based fees), and only 10 per cent were paid directly by clients ^[25] .

6.28 Significant product concentration was also evident in the fees received by advisers. Ongoing commissions from the top three products recommended by all 20 licensees represented 37 per cent of all ongoing fees. Further, 43 per cent of all up-front commissions were received from the top three recommended products ^[26] .

6.29 In contrast, in a 2013 ASIC review of the top 21 to 50 licensees, 11 received less than 5 per cent of their remuneration directly from clients, two received over 90 per cent of their remuneration directly from clients. On average, approximately 36 per cent of revenue was received directly from clients ^[27] .

6.30 The impact of the proposed reforms on remuneration models within the industry is uncertain at this stage. There has been only limited public comment from the industry on their future plans, although AMP has ruled out reintroducing commission payments on its investment and superannuation products ^[28] .

6.31 The impact of FOFA on the cost of financial advice is not yet evident. It is possible that groups absorbed compliance costs - instead of passing these costs onto consumers - to retain clients and maintain market share. A handful of licensees have been FOFA-compliant for longer than was mandated, giving them the opportunity to transition and spread their compliance costs over a longer time frame.

6.32 In general, ASIC has found that the fees charged for advice can vary significantly across advice providers ^[29] . In 2010, licensees reported an estimate of the cost of providing comprehensive financial advice to a client in the range of $2,500 to $3,500 ^[30] . IBISWorld also reports fees of around $2,500 to receive holistic advice from an adviser ^[31] .

6.33 Importantly, ASIC found that a significant gap exists between what consumers are prepared to pay for financial advice and how much it costs industry to provide advice. This is the case even though high net worth clients often cross-subsidise lower value clients ^[32] . This gap existed prior to the FOFA amendments and would only have been exacerbated by the compliance costs imposed by FOFA, although this is hard to quantify at this stage.

6.34 The FOFA amendments were expected to increase the provision of scaled advice, that is advice limited to a particular product or range of products. The number of advisers providing scaled advice was expected to rise from 2 to 2.5 percent in 2013-14 to between 10 and 15 per cent in 2018-19, as scaled advice is often cheaper to provide than holistic advice under a shift to a fee for service model ^[33] . The proposed explicit provision of scaled advice will further facilitate this growth trend.

Significance of the problem to be addressed

The Ripoll Inquiry

6.35 To understand the significance of the problem to be addressed, it is important to understand the history and context of FOFA. As noted in the introduction, and shown in Graphic 1: FOFA history, the current FOFA legislation was a response by the former Government to the findings of the Ripoll Inquiry.

6.36 The Ripoll Inquiry was set up in 2009 to inquire into, and report on, issues associated with financial products and services provider collapses, such as Storm Financial, Opes Prime, with particular reference to the role of financial advisers; the general regulatory environment for financial products and services; the role played by commission arrangements relating to product sales and advice, including: the potential for conflicts of interest, the need for appropriate disclosure, and remuneration models for financial advisers; and the appropriateness of information and advice provided to consumers considering investing in products and services, and how the interests of consumers can best be served.

6.37 The Ripoll Inquiry released its report in November 2009 and made 11 recommendations for reform. The report commented: 'It is the view of the committee that, if implemented, these changes will act in synergy to provide better outcomes and protections for consumers of financial products and services' ^[34] .

FOFA

6.38 Most of the recommendations from the Ripoll Inquiry were adopted by the former Government and formed the basis of FOFA. In some areas, FOFA went further than the Ripoll Inquiry recommendations and imposed additional requirements not canvassed. Table 6.1 summarises select recommendations from the Ripoll Inquiry that subsequently became part of FOFA, as well as additional measures introduced as part of the original FOFA legislation.

Table 6.1: Select Ripoll Inquiry recommendations and FOFA

Dissenting Report

6.39 Upon introduction to Parliament, the 2012 FOFA Bills were referred to the PJC for inquiry and report. Alongside the PJC's report into the 2012 FOFA Bills was the Coalition's Dissenting Report. The Dissenting Report affirmed the Coalition's commitment to the recommendations of the Ripoll Inquiry, but criticised the former Government's proposed legislation. The Dissent Report comments:

...in pursuing regulatory change the Parliament must focus on making things better not just more complex and more costly for everyone. The Parliament must avoid regulatory overreach where increased red tape increases costs for both business and consumers for little or no additional consumer protection benefit ^[35] .

...

...the Ripoll Inquiry reported back in November 2009 and made a number of well-considered and reasonable reform recommendations ^[36] .

...

...Instead of implementing the very sensible and widely supported recommendations made by the Ripoll Inquiry, the government allowed its Future of Financial Advice reform package to be hijacked by vested interests creating more than two years of unnecessary regulatory uncertainty and upheaval in our financial services industry.

The government's decision making processes around FOFA over the past two years leave much to be desired. There were constant and at time completely unexpected changes to the proposed regulatory arrangements under FOFA right up until the introduction of the current legislation. Invariably this was done without proper appreciation or assessment of the costs involved, of any unintended consequences or other implications flowing from the proposed changes to the changes.

Important financial advice reforms recommended by the Ripoll inquiry have been delayed by more than two years so the government can press ahead with a number of additional contentious changes.

It is the view of Coalition Committee members that the FOFA package of legislation in its current form is:

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Unnecessarily complex and in large parts unclear;

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Expected to cause increased unemployment;

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Legislating to enshrine an unlevel playing field amongst advice providers, inappropriately favouring a government friendly business model; and

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Likely to cost about $700 million to implement and a further $350 million per annum ^[37] to comply with, according to conservative industry estimates.

Based on the evidence provided to the Committee, Coalition Committee members conclude that this will lead to increased costs and reduced choice for Australians seeking financial advice ^[38] .

6.40 The Dissenting Report went further to indicate that FOFA would have a widespread, detrimental effect on the financial advice industry. The Dissenting Report continues:

The Committee received evidence from many industry participants about the very serious detrimental effects the introduction of this legislation in its current form would have on the industry and on consumers. Detrimental effects include high additional costs imposed on industry participants with resulting increased costs of advice for consumers, reduced employment levels in the financial services sector leading to reduced availability and access to affordable high quality advice, as well as a further concentration of advice providers which would lead to an undesirable reduction in competition and choice for consumers ^[39] .

...

Stakeholders argue that FOFA, if passed in its current form, would cause an undesirable restructuring of the financial advice industry, with increased concentration of players in the market and less competition ^[40] .

...

Coalition Committee members consider that the disproportionate increase in costs to the industry and consumers, the reduction in the number of financial advisers in Australia, the associated additional job losses and the further concentration of financial advice services providers will have detrimental impacts on the cost, availability and accessibility of financial advice across Australia ^[41] .

6.41 The Dissenting Report made 16 recommendations that would address the Coalition Committee members' concerns with FOFA.

FOFA today

6.42 There is evidence ^[42] to suggest that some of the concerns raised in the Dissenting Report have eventuated. There has been some evidence-depending on reporting sources-of a decline in adviser numbers in recent years. There has also been evidence of increasing industry concentration-particularly through the consolidation of smaller dealer groups with large institutional advisers; it is reasonable to conclude that such a concentration may result in less competition and choice available to consumers.

6.43 During consultations undertaken on the proposed package of amendments to FOFA, as well as on the draft legislation and regulations, a number of industry stakeholders have indicated that they have incurred, and will continue to incur, significant ongoing costs to satisfy the compliance requirements imposed by FOFA. However, it is currently unclear whether this has translated into higher costs for consumers. Similarly, it is unclear whether FOFA has resulted in reduced availability and accessibility of financial advice. Given the short time since FOFA became mandatory, and given the continuing adjustments that are taking place in the industry, these outcomes may not be known for some time.

Looking forward

6.44 The changes the Government intends to make to FOFA should be considered against the backdrop of an ageing population, declining workforce participation and the need for increased fiscal discipline.

6.45 The Australia to 2050: future challenges report shows that the proportion of Australia's population aged 65 and over is projected to almost double over the next 40 years ^[43] . The increased value of individuals' superannuation and other private assets represent a significant business opportunity for advisers. Superannuation and retirement products currently comprise the majority of the wealth management market, so growth in this area will have a significant positive impact on the industry.

6.46 While there will be an increase in the number of retirees to advise, the number of advisers in industry in recent years has stagnated or declined slightly. Some industry stakeholders have attributed this to increased costs and uncertainty arising from FOFA. Reducing the compliance burden on the industry will free up more resources, and should facilitate job creation and innovation, which will support productivity and result in more efficient processes.

6.47 Higher spending on public health care, pensions and other social services caused by population ageing will also result in higher fiscal pressures on the government. One guiding principle for achieving fiscal sustainability is that government should 'do for people what they cannot do, or cannot do efficiently, for themselves, but no more' ^[44] . Financially self-reliant individuals will reduce the pressures on government spending, and encouraging Australians to take responsibility for their own financial decisions will become increasingly important. The proposed changes to FOFA will foster an environment where affordable financial advice is more accessible, which will encourage wealth creation.

6.48 In summary, the changes to FOFA are an important first step in reducing the regulatory burden on the financial advice industry, and should help in providing the flexibility to take advantage of future opportunities.

Objectives of Government action

6.49 In its pre-election Policy to Boost Productivity and Reduce Regulation, the Coalition committed to amend FOFA to: 'reduce compliance costs for small business financial advisers and consumers who access financial advice' ^[45] . In particular, it indicated that it would: 'implement all 16 recommendations made as part of the Parliamentary Joint Committee inquiry into FOFA' ^[46] .

6.50 Since the election, the Assistant Treasurer has, in a number of speeches, re-affirmed the Government's commitment to: 'reducing the regulatory overreach of FOFA' ^[47] .

6.51 The objective of Government action is threefold:

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Remove the unnecessary burdens imposed on the financial advice industry from FOFA measures that went beyond the recommendations of the Ripoll Inquiry;

•

Properly implement the finding of the Ripoll Inquiry so as to reduce regulatory overreach whilst maintaining the important consumer protection measures introduced by FOFA; and

•

Address other technical and consequential concerns raised by industry.

6.52 A summary of the key proposed changes is presented in Table 6.2. These are detailed further in the 'impact of changes' section later in this document.

Table 6.2: Summary of changes to FOFA

Options that may achieve the objectives

6.53 This regulation impact statement (RIS) assesses the impacts of the Government's proposed amendments based on its election commitment; it does not explore any other options (in accordance with the Office of Best Practice Regulation's (OBPR) guidelines).

6.54 Whilst the Government's election commitment was to implement the 16 recommendations of the Dissenting Report, a number of the recommendations are no longer applicable as changes have already been made to FOFA that achieve the objectives sought, or the recommendations are no longer relevant due to the passage of time.

6.55 As such, this RIS considers the impact of a package of amendments to FOFA, including all of the (still relevant) Dissenting Report recommendations, as well as some additional amendments to address industry concerns.

Impact analysis

Overview of impact on industry and consumers

6.56 The proposed amendments to FOFA seek to navigate the fine line between ensuring that unnecessary and burdensome regulations that drive up the cost of business are removed, whilst ensuring that the consumer protections of FOFA are maintained.

6.57 The proposed amendments to FOFA are deregulatory and will reduce the compliance burden on the financial advice industry. Feedback from consultations and submissions on the draft amendments varied, and ranged from a complete rejection that any changes need to be made to FOFA, through to wholesale support.

6.58 Many industry stakeholders indicated that the proposed amendments will result in a more practical framework for financial planners and their clients. These stakeholders have argued that the changes will: provide clarity to industry, more closely align FOFA with the intentions of the Ripoll Inquiry, and deliver significant cost savings that will ultimately benefit consumers.

6.59 Consumer groups-and some industry stakeholders-are far less enthused. Most of the submissions have argued that the proposed package of amendments go too far in winding back the consumer protections introduced by FOFA. In particular, some stakeholders expressed concern that a number of proposed amendments, including the changes to the best interests duty, the removal of opt-in provisions, and exempting general advice from the definition of conflicted remuneration, will leave consumers vulnerable to poor quality advice by reducing the standard of advice provided. Furthermore, it is suggested that the amendments could reduce the level of trust and confidence in the financial advice industry, all of which runs contrary to the recommendations of both FOFA-as introduced by the former Government-and the Ripoll Inquiry.

6.60 A more detailed analysis of the benefits and costs of each of the amendments are presented below.

Cost savings

Estimates

6.61 Treasury's estimates of the ongoing cost savings are approximately $190 million per year, with one-off implementation savings of approximately $90 million; these estimates represent just over half of the estimated $375 million ongoing costs of complying with FOFA ^[48] . A breakdown of the estimates is presented in Table 6.3.

Table 6.3: Breakdown of FOFA amendment savings estimates

*These estimated cost savings refer only to direct cost savings.

Methodology

6.62 Given the size and disparity of the financial advice sector, and differences in operational aspects and cost structures within the industry, it is difficult to reliably estimate costs and cost savings. Notwithstanding this fact, the Australian Government's Business Cost Calculator was used to produce an estimate of the cost savings from the proposed amendments to FOFA (in accordance with OBPR guidelines) ^[50] .

6.63 For the purposes of calculating the cost savings figures, the financial services industry was split into three segments based on firm size. Adviser groups with more than 1000 advisers were classified as 'large' firms. All adviser groups with less than 60 advisers were classified as 'small' firms, and the remaining adviser groups were deemed to be 'medium' firms.

6.64 Industry data was obtained from all three industry segments through consultations with key industry bodies-these bodies in turn liaised with their membership base-and large industry participants. Industry participants were asked to provide accurate data indicating the cost savings for each of the amendments.

6.65 Firms were asked to identify their cost savings as either 'labour cost savings', which are calculated by reference to the amount of time saved per firm multiplied by a cost of labour, or 'purchase cost savings', which are purchases that the firm would no longer be required to make as a result of the amendments to FOFA. For each amendment, firms provided labour cost savings data on: the number of employees affected, if any; the amount of time that would be saved per employee; and the cost of labour for the affected employee(s). For purchase cost savings, firms provided an estimate of the cost savings that would arise under each of the proposed amendments.

6.66 A bottom-up approach was used to estimate industry savings. The inputs provided from each industry segment were averaged-on a per firm basis-then multiplied by the number of firms in the industry to generate a cost savings estimate for that segment. These segment estimates were added to arrive at a total industry cost savings estimate.

6.67 A detailed breakdown of the cost estimate inputs cannot be publicly released as some of the data was provided on an in-confidence basis. That said, a summary table of average inputs is provided in Table 6.4. As shown, the majority of cost savings are derived from labour cost savings, with relatively small savings from purchase costs.

6.68 As an example, the removal of the 'catch-all' provision within the best interests duty is estimated to save $33.3 million per year. This calculation is based on an average labour cost per person of approximately $62 per hour, and an estimated average time saving of just over 14 hours per firm, per week.

6.69 The average labour cost varies across amendments due to the different wage rates of employees performing different functions. For example, the scaled advice provision has the highest labour cost because this amendment directly affects the time of financial advisers, who are typically on higher wage rates than other staff members in the organisation. By contrast, the opt-in amendment has the lowest labour cost because this function is able to be performed by staff on lower wages: mainly administrative or clerical staff.

6.70 The estimated cost savings, which were calculated using data provided by industry, are based on the assumptions and methodology set out above. It should be noted that industry cannot perfectly foresee the impact of the amendments on their cost structures; therefore, actual cost savings may differ from those estimated in this document: these figures are estimates only.

Table 6.4: Summary of cost savings inputs

Limitations

6.71 Whilst it is anticipated that some of the cost savings to industry will be passed through to consumers, it is difficult to quantify the extent to which this will occur. Cost savings could flow through to consumers either through a reduction in the cost of advice, or through the avoidance of (an otherwise necessary) price increase. It is anticipated that, in any case, the cost of advice under the proposed amendments will be lower than if the amendments were not implemented.

6.72 It is important to note that the Business Cost Calculator only calculates the direct cost savings of the proposed amendments, and does not consider indirect or 'second-round' savings or opportunity cost savings. Whilst some of the amendments, such as those designed to provide clarity to industry, may not result in direct and quantifiable cost savings, second-round or indirect cost savings are likely to arise.

6.73 For example, if an adviser attends a training course to increase their understating of the best interests duty, the cost of that training course would be included in the Business Cost Calculator as it represents a direct cost related to compliance. By contrast, if the adviser were to forego giving advice for a few hours in order to research their best interests duty obligations (that is, at no external cost), the foregone revenue from the advice that could otherwise have been earned is not included as it is an opportunity cost.

6.74 Similarly, the cost savings to consumers is not included in the calculations, as it is a 'second-round' saving; the 'first-round' saving occurs to firms. The impact of the amendments on consumers is discussed in more detail throughout this section.

Stakeholder feedback on estimates

6.75 Treasury's initial impact analysis and cost savings estimates were published in the options-stage RIS, and provided an opportunity for stakeholders to engage with the Government on the impact of the proposed changes. Stakeholders were also provided an opportunity to comment on the RIS during consultations on the draft amendments; these consultations were conducted during February 2014.

6.76 Key industry bodies broadly agreed with the qualitative impact analysis presented in the options-stage RIS. They reiterated their belief that the proposed amendments will reduce the regulatory burden on industry and increase the affordability of financial advice for consumers, whilst also ensuring appropriate protections are in place for investors. They consider that the amendments are necessary to provide certainty to all stakeholders and reduce the unnecessary complexity and burden that is inhibiting their ability to provide cost-effective advice to consumers.

6.77 Industry bodies also agreed with the quantitative analysis of the cost savings presented in the options-stage RIS. No key industry bodies or industry participants brought forward new data or amended their previously provided data for the details-stage RIS.

6.78 Whilst some industry stakeholders indicated that the published numbers appeared conservative, there was insufficient substantive new information to warrant increasing the cost savings estimates for the details-stage RIS.

6.79 Consumer groups did not raise any specific concerns with cost savings estimates calculated except to indicate that the cost savings to consumers should be considered in addition to the cost savings to industry.

6.80 As noted above, whilst this RIS quantifies the direct cost impacts to the industry, there are not expected to be any direct or 'first-round' compliance cost impacts for consumers. Instead, a qualitative explanation of the costs to consumers will be provided in the measure-by-measure analysis below.

6.81 Following feedback from industry and consumer groups, no changes were made to the cost savings as calculated in the options-stage RIS. However, an adjustment has been made to the cost saving estimate for the general advice exemption; this adjustment reflects the revised exemption (see detailed analysis below for further details).

Detailed analysis on Dissenting Report amendments

6.82 As mentioned above, feedback was received on the options-stage RIS as part of the consultations on the proposed FOFA amendments. The primary theme that emerged was that the options-stage discussion of the impacts of each of the proposed amendments was overly technical, and primarily focused on the benefits to industry; many stakeholders felt that the options-stage RIS contained insufficient consideration of the costs to consumers, or that the impact of some of the amendments on consumers was understated.

6.83 This details-stage RIS has attempted to address these concerns. For the purposes of this RIS, the proceeding section presents, for each of the proposed amendments: a technical description of the change; a description of the industry impacts; a description of the consumer impacts; a critical analysis of these impacts and conclusion as to the net impact for each amendment. Any conclusion as to the net impact of the proposed amendments is an 'on balance' assessment.

Remove opt-in requirements

6.84 This amendment removes the requirement for advisers to obtain their client's approval, at least every two years, to continue an ongoing fee arrangement; the opt-in provisions only relate to clients who enter into an ongoing fee arrangement from 1 July 2013. Whilst FOFA became mandatory on 1 July 2013, the effective start date for opt-in is 1 July 2015 as clients only need to opt-in every two years.

6.85 The opt-in requirement was introduced to enable customers to assess the quality of service they receive for the fees they pay. Currently, if a client does not opt-in within 30 days of receiving an opt-in notice, their ongoing arrangement is terminated (termination occurs 60 days after receiving the opt-in notice). Under the proposed amendment, clients will no longer be required to opt-in, and will maintain their existing right to opt-out of their ongoing fee arrangements.

6.86 Industry stakeholders have been largely supportive of this proposed change, although the reasons have varied. Many stakeholders have cited the high implementation and ongoing costs of the opt-in system, which are likely to be passed through to the consumer, as a strong motivation for removing the requirement. These costs relate to implementing and maintaining systems, additional staff involvement, other administrative overheads, and are closely linked to the number of customers; as such, these costs are anticipated to increase over time as client numbers increase.

6.87 Other industry stakeholders have argued that firms in the financial services industry, particularly those who are members of a professional industry association, should be actively promoting client engagement independent of statutory requirements. The argument is that these firms should be engaging with their clients to earn their trust and prove their 'value add'. These stakeholders, therefore, argue that opt-in, of some form or another, is already occurring in many instances, and that the driver of this consumer engagement should come from industry rather than be mandated by government.

6.88 One final, albeit related, argument is that the opt-in provisions impose too high a standard on financial advisers. Whilst these stakeholders laud government attempts to improve consumer engagement, they argue that the provisions that apply to financial advisers are out-of-sync with the rest of the financial services industry: nowhere else is an opt-in requirement mandated. As such, the argument is that the opt-in provisions should be removed and only reinstated as part of a much broader, systemic attempt to ensure greater consumer engagement.

6.89 Consumer groups have argued that opt-in is important to promote client engagement and transparency of fees charged. An ASIC report found that only 33 per cent of clients serviced by the top 20 licensees were considered active ^[57] , which suggests that the majority of clients are inactive or disengaged. For such consumers, the opt-in requirement provides an opportunity to assess whether they wish to continue their arrangement(s) with their adviser, a decision that is aided by the fee disclosure statement-see discussion on fee disclosure statements below.

6.90 Client engagement is considered important in ensuring that clients actively monitor their financial position and are aware of any changes to their account(s). Consumer groups have argued that removing the opt-in requirement will drive up the cost of advice, as advisers will earn revenue from disengaged or 'passive' clients without providing any advice to them. It is argued that if these clients were more engaged, they would be in a better position to weigh up their options and consider switching into a lower cost (possibly fee-for-service) product.

6.91 Some stakeholders have argued that the opt-in requirements are necessary as FOFA has allowed ongoing percentage-based fees to continue to be charged: under FOFA, asset-based fees-which are calculated based on the value of the assets invested with the adviser-are able to be deducted from a client's account on a regular basis, and for an indefinite period of time, as long as the client initially consents to the charges. These stakeholders have argued that these asset-based fees have exactly the same effect as sales commissions, and that, with the removal of opt-in, there will be no mechanism to ensure that ongoing fees are only being charged where ongoing advice, or at least ongoing communication, is being received.

6.92 According to these stakeholders, removing the opt-in requirements will be at a heavy cost to consumers. One submission argued that a 0.5 per cent ongoing fee would equate to a $46,000 reduction in the super balance of an average superannuation member over their working life. Given that, according to these stakeholders, around two million super fund members were paying ongoing fees but were not receiving any financial advice, the removal of opt-in has far reaching consequences.

6.93 The consumer benefits of the opt-in requirements cannot be denied. The opt-in requirements were, and are, a paradigm shift in the battle to increase client engagement. By requiring advisers to seek client approval to continue arrangements, opt-in nudges clients into actively considering whether they are receiving service commensurate to the fees that they have paid and thereby raises the service levels of the industry.

6.94 That said, the opt-in requirement places a disproportionately large burden on financial advisers; a burden not replicated in other areas of, or even outside of, the financial services industry. Whilst there is no doubt that the removal of the opt-in requirement is likely to reduce client engagement, there are a range of other measures within the legislation that are intended to promote client engagement; for example: statements from superannuation trustees, product manufacturers, and fee disclosure statements will provide consumers with information on the fees and charges they are incurring. Furthermore, consumers will continue to be able to opt-out at any time.

6.95 The opt-in requirement was not recommended by the Ripoll Inquiry. The Dissenting Report comments:

The Ripoll Inquiry, having comprehensively considered the state of Australian financial products and services back in 2009, made no recommendation to force Australians to re-sign contracts with their financial advisers on a regular basis ^[58] .

...

There is no precedent for this sort of government red tape in the context of financial services and advice relationships anywhere in the world ^[59] .

6.96 Notwithstanding the consumer benefits that arise from opt-in, the disproportionate treatment of financial advisers relative to the rest of the financial services industry, and the significant ongoing and implementation costs to achieve these measures, indicate that the cost savings to industry outweigh the consumer benefits from the removal of the opt-in provisions.

Limit the annual fee disclosure requirements to be for prospective clients only

6.97 This amendment removes the requirement for advisers to provide a fee disclosure statement to clients who entered into their advice arrangement prior to 1 July 2013. Advisers will still need to provide an annual fee disclosure statement to post-1 July 2013 clients. Fee disclosure statements provide customers with a single statement that shows, for the previous 12 months, the fees paid by the client, the services the client received, and the services the client was entitled to receive.

6.98 Industry has strongly supported the removal of the fee disclosure statement requirements for pre-1 July 2013 clients. Industry stakeholders have argued that it costs significantly more to produce a fee disclosure statement for a pre-1 July 2013 client than for a post-1 July 2013 client ^[60] . These stakeholders have indicated that these costs will be passed onto the client and will reduce the accessibility and affordability of financial advice. They have also argued that collecting the information for fee disclosure statements can be a convoluted process, as the information needs to flow from (often multiple) product manufacturers to licensees, and are then passed onto the relevant adviser(s) before the statement can be created and sent to the client. It is argued that this process can involve a significant investment of time and resources, especially for pre-1 July 2013 clients.

6.99 Consultations have suggested that the higher costs for old clients are primarily driven by the age of systems, which struggle to provide accurate fee information for pre-1 July 2013 clients. As a result, to ensure that fee disclosure statements to pre-1 July 2013 clients are accurate, a significant amount of adviser time is required to quality assure the disclosure statements. The annual cost saving for this proposed amendment is estimated to decrease over time as a greater portion of clients receive fee disclosure statements.

6.100 Consumer groups have argued that the fee disclosure statement is an important source of information, particularly for consumers who may not have the time or skills to collate and fully understand the fees they are paying. It is argued that this amendment adversely affects pre-1 July 2013 clients, who may continue to be placed in ongoing, expensive fee arrangements-even if there are better alternatives available-as they will not have a simple source of information to prompt them to compare their arrangements to others. It is therefore argued that, due to information asymmetry, this amendment would affect the bargaining power of clients when negotiating fee arrangements with their adviser.

6.101 In the absence of fee disclosure statements, pre-1 July 2013 clients will be required to piece together the fee details from multiple statements, often with different cut-off dates, to calculate an annual fee; such an exercise would be beyond the capabilities of many advice clients. Whilst advisers may help their clients complete such a task, it would most likely be at a substantial cost to the client.

6.102 Notwithstanding the benefits to pre-1 July 2013 clients from receiving a single statement outlining the fees they have paid, most of these clients are currently paying conflicted remuneration (in the form of grandfathered commissions) to their advisers rather than a 'fee for service' charge. Conflicted remuneration is not included in the fee disclosure statements, so there may be little additional information obtained by the statements for the pre-1 July 2013 clients. Both pre- and post-1 July 2013 clients will continue to receive other reports that identify the fees paid to an adviser; for example: superannuation and product statements. This, in conjunction with the other client engagement mechanisms, both in the legislation and through the professional conduct standards promoted through professional bodies, should ensure that clients remain engaged and are able to monitor and change their investments when necessary.

6.103 Fee disclosure statements were not included as part of the recommendations from the Ripoll Inquiry. The Dissenting Report comments:

The Ripoll Inquiry made no recommendation to introduce an additional annual fee disclosure statement over and above the current regular statements provided by financial service product providers to their clients already ^[61] .

6.104 In addition, when the requirement to provide fee disclosure statements was first announced, it was only intended to apply prospectively, that is, to post-1 July 2013 clients. The Dissenting Report comments:

...the Committee received strong evidence that based on the various FOFA consultations sessions, it was the industry's clear understanding that the government's proposal to impose an additional annual fee disclosure statement would be prospective-that is, only apply to new and not existing clients ^[62] .

6.105 The rationale was that any 'new', post-1 July 2013 clients, would come under the FOFA compliant products and systems; these products and systems would be specifically designed to facilitate the provision of the fee disclosure statements.

6.106 However, and as indicated by many industry stakeholders, the retrospective application of fee disclosure statements appears overly onerous. When considered in conjunction with the questionable value of the fee disclosure statements for pre-1 July 2013 clients, which do not report conflicted remuneration, it would appear-on balance-that the cost savings to industry outweigh the consumer benefits.

Removal of the 'catch all' provision in the best interests duty

6.107 This amendment removes paragraph 961B(2)(g), which is known as the 'catch all' provision, from the best interests duty. Subsection 961B(1) imposes a requirement on advisers to act in the best interests of the client in relation to the advice provided. Subsection 961B(2) then provides a series of steps that an adviser can follow to prove that they have discharged their duty to their client. Paragraph 961B(2)(g) is the last of the steps and states that an adviser must prove that they have 'taken any other step [in addition to the six preceding ones] that ... would reasonably be regarded as being in the best interest of the client'. The intention behind the catch all provision was to make the best interests duty flexible and principles-based, thereby avoiding legislation becoming overly prescriptive. Subsection 961B(2) is often called a 'safe harbour' as it provides protection for advisers looking for certainty in satisfying their duty.

6.108 The proposed removal of paragraph (g) has been supported by industry, which has expressed concerns that the current provision is unclear due to its open-ended nature and has created significant legal uncertainty on how advisers can actually satisfy the best interests duty. Industry has noted that the current drafting of the best interests duty has led to advisers spending more time than otherwise necessary documenting the advice they have provided to their clients to demonstrate compliance with the best interests duty. As such, industry stakeholders claim that the catch all provision renders the safe harbour protection of subsection 961B(2) unworkable. They believe that removing paragraph 961B(2)(g) will ensure that section 961B(2) functions as a true safe harbour, as the remaining six steps are more objective.

6.109 By contrast, some stakeholders have likened removing paragraph (g) to a repeal of the best interests duty. Consumer groups have argued that the catch all provision is the most important part of the best interests duty, as it makes the duty flexible and principles-based. They argue that removing the catch all provision could lead to consumers receiving lower quality advice as it weakens the best interests duty by reducing it to a 'tick-a-box' exercise for advisers. Consumer groups have argued that, under a modified best interests duty, an adviser could satisfy the remaining six steps of the best interests duty but still not provide advice that is in the best interests of their client.

6.110 Some stakeholders have also raised concerns that this amendment, which they argue is likely to lead to an increase in the prevalence of poor advice, will result in an increased risk of financial scandals resulting in consumer losses.

6.111 At the time the original FOFA legislation was being drafted, many stakeholders indicated that, in introducing a best interests duty, only subsection 961B(1) was required. However, concerns were expressed that, without any additional guidance, subsection 961B(1) alone would cause confusion, and it would be left to the courts to provide guidance on how advisers could satisfy their best interests duty.

6.112 In response to this uncertainty, subsection 961B(2) was inserted. This subsection was never intended to be a safe harbour; rather, it was included to provide the guidance advisers were seeking on how they could satisfy their best interests duty. Because this subsection was not intended to be an exhaustive list, paragraph (g) was inserted to ensure the subsection remained flexible. However, over time, perception of this provision has changed, and it is now commonly accepted to be a safe harbour; even ASIC, in its regulatory guides, refers to subsection 961B(2) as a safe harbour ^[63] .

6.113 The proposal to remove the catch-all provision is intended to properly implement the recommendations from the Ripoll Inquiry. The original Ripoll recommendation was to include a fiduciary duty for financial advisers to place their client's interests ahead of their own; there was no requirement that this duty be open ended. As such, subsection 961B(2) without paragraph (g) achieves this aim. The Dissenting Report comments:

The best interests duty is an important and central part of the FOFA changes. Coalition Committee members support the introduction of a statutory best interests duty for financial advisers into the Corporations Act ^[64] .

...

However, we are concerned that the 'catch all' provision contained in section 961B(2)(g) would create uncertainty for both clients and their advisers and leave the legislation subject to potentially protracted legal arguments. We therefore recommend that this clause be removed ^[65] .

6.114 Whilst a best interests duty without paragraph (g) will lower the standard required of advisers, the concerns expressed by consumer groups appears to be disproportionate to the change. The remaining steps in subsection 961B(2) still set a high standard, it just does not require an unending set of actions. When considered in conjunction with other measures-the requirement that advice be appropriate for the client, that advisers must place their client's interests ahead of their own, and the duty to warn clients if information is based on incomplete or inaccurate information-the amended best interests duty will still ensure that clients continue to receive advice that is in their best interests.

6.115 As such, the cost savings to industry appear to outweigh the consumer impacts.

Explicit provision of scaled advice

6.116 This amendment allows clients and advisers to explicitly agree on the scope of any scaled advice provided, whilst still ensuring the advice is appropriate for the client.

6.117 Whilst scaled advice is not specifically defined in the Corporations Act, it is usually referred to in the industry as a targeted form of personal advice; personal advice is advice that considers the financial objectives, situation, and needs of a person. All personal advice is 'scaled' or 'limited in scope' to some extent: advice is either less or more comprehensive in scope along a continuous spectrum. For example, scaled advice may cover a specific area of a client's needs such as insurance or superannuation, and can be contrasted to holistic advice that usually considers all of the client's financial needs.

6.118 The limited scope of scaled advice usually makes it much cheaper than more fulsome personal advice. This is due to the fact that an adviser needs to consider fewer of the client's circumstances, needs and objectives to provide the advice. As holistic personal advice can often be expensive, scaled advice is an affordable avenue for many consumers seeking personal advice.

6.119 This amendment has been welcomed by industry, which has argued that the best interests duty does not give them confidence that scaled advice can be provided. This uncertainty has led to advisers performing more work than necessary to ensure compliance with the best interests duty. In particular, it has resulted in advisers considering all of their client's circumstances when providing scaled advice, rather than only considering their relevant circumstances; this has had the effect of making scaled advice more expensive than otherwise necessary. Industry has indicated that advisers, in some instances, have not been providing scaled advice at all.

6.120 Consumer groups have raised concerns that this amendment could allow advisers to avoid certain obligations imposed by the best interests duty thereby affecting the quality of advice provided to consumers. These stakeholders are particularly concerned that customers could be left vulnerable to poor quality advice, as the amendment could allow an adviser to agree a scope of the advice that may not be in the best interests of their client. This concern is particularly salient for clients who: have low levels of financial literacy, place a great deal of trust in the knowledge and experience of an adviser, and are likely to agree to suggestions from an adviser on the scope of the advice they are to receive without appreciating the implications of what they have agreed to.

6.121 For example, a client may go to an adviser seeking information about their finances. Due to the prohibitive cost of a holistic financial plan, a client may agree-perhaps at the advisers suggestion-to limit the scope of the advice to a particular area, and only consider the products offered by the adviser's employer.

6.122 The concern some stakeholders have with the example above is that the client may need urgent advice on one particular area, but may not actually receive this advice as it has been scoped out. If the client is not told about this other advice area, then the client may not fully appreciate that they are missing out on advice that may be better for them. Furthermore, by limiting the advice to products offered by the adviser's employer, the client may not be informed about alternate investments that may actually be more suitable for their particular circumstances.

6.123 Concerns have also been expressed that this amendment could reduce the number of products offered in the industry, as advisers become incentivised to offer scaled advice on more costly, and hence lucrative, financial products.

6.124 As with the changes to the best interests duty, the proposal to allow clients and advisers to explicitly agree on the scope of scaled advice is intended to properly implement the recommendations from the Ripoll Inquiry, and is closely linked to change to the best interests duty. The Dissenting Report comments:

One way of ensuring that clients are able to access affordable and appropriate financial advice would be to allow advisers and their clients to limit the scope of the advice to a series of discreet areas identified by the client rather than to mandate a full financial plan in every case.

This concept of focusing advice to areas specifically identified by a client has become widely known as 'scalable advice'.

Numerous submissions to the Committee expressed concern that the wording of the best interests provisions in the proposed legislation does not allow for scaled advice to be provided ^[66] .

6.125 There is some debate within industry as to whether the current legislation actually permits scaled advice to be provided. Whilst there is currently no explicit provision that allows the client and adviser to agree a scope of advice, a number of advisers are already providing scaled advice and have not incurred the problems expressed by industry stakeholders. As such, whilst the concerns raised about advisers inappropriately agreeing a scope of advice is possible under the proposed amendment, it may already be possible under the current arrangements.

6.126 It is doubtful whether the dire outcomes indicated by consumer groups will eventuate. The FOFA provisions relating to the appropriateness of advice, and requiring an adviser to place their client's interests ahead of their own, will ensure that, even if the adviser agrees a scope that is inappropriate to the client, they will not be able to provide advice that is inappropriate.

6.127 As such, the cost savings to industry outweigh the consumer benefits.

Commissions on life (risk) insurance provided within superannuation

6.128 The Government originally proposed amendments to expand the range of circumstances under which commissions may be paid on life (risk) insurance products provided within superannuation to include circumstances where personal advice has been provided on these products.

6.129 Through consultation on the proposed amendments and broader industry engagement, the Government has become aware that, whilst the life insurance industry as a whole remains well capitalised and profitable, in relation to certain business lines there are grounds for concern regarding the long term sustainability of some current industry practices, including in relation to remuneration.

6.130 In light of these concerns, the Government intends to undertake a separate process to engage with the life insurance industry on these issues. In order to ensure that the industry's regulatory environment is not subject to further change while this process is underway, the Government does not propose to progress amendments to the treatment of life (risk) insurance at this time.

Exempt 'general advice' from 'conflicted remuneration'

6.131 This amendment exempts general advice from conflicted remuneration under certain circumstances. Currently, the conflicted remuneration provisions capture both general and personal advice; conflicted remuneration cannot be paid on either type of advice. This amendment will allow conflicted remuneration to be paid on general advice under certain circumstances; conflicted remuneration on personal advice will continue to be banned.

6.132 The Government originally proposed to exempt all general advice from the definition of conflicted remuneration. This approach was outlined in the options-stage RIS published by the OBPR in January 2014. Feedback on this proposal was received as part of consultation on the draft amendments.

6.133 Many industry stakeholders support the originally proposed amendment as they believe the current ban on conflicted remuneration captures activities that were not the primary focus of FOFA-the ban currently captures employees such as website designers or general information seminar providers who are not in product sales related areas. Industry argue that they are currently required to maintain complex systems when providing general advice to ensure compliance with the existing conflicted remuneration provisions. These systems are costly to implement and maintain.

6.134 Industry stakeholders have also argued that allowing benefits to be paid on general advice will ensure the provision of more general advice. These stakeholders believe this is a positive outcome for society as general advice often serves to inform and educate, and is a way for consumers to receive financial advice they might otherwise not have access to.

6.135 By contrast, consumer groups believe that exempting general advice from the definition of conflicted remuneration may have a significant negative impact on consumers, and the financial advice industry as a whole.

6.136 These stakeholders agree that excluding general advice from the definition of conflicted remuneration will ensure the provision of more general advice. However, they suggest that it will also result in the industry moving towards general advice models, and may lead to an overprovision of general advice relative to personal advice as advisers would be incentivised to earn conflicted remuneration through general advice based sales.

6.137 These stakeholders argue that there is a significant consumer detriment involved as many consumers do not understand the distinction between personal and general advice. As a result, they may make financial decisions that are not appropriate for them if they mistakenly rely and act on general advice thinking it to be personal advice.

6.138 Stakeholders also argue that the amendments may adversely affect the reputation of the industry by effectively allowing commissions to be re-introduced and could lead to doubt in the minds of consumers as to whether the advice they have received-whether personal or general-is conflicted.

6.139 General advice is one of two forms of financial product advice; the other is personal advice. Financial product advice is defined as a: 'recommendation or opinion that influences a person into making a decision on a financial product ^[67] ' (emphasis added). Whilst general advice, unlike personal advice, does not consider the financial objectives, situation and needs of a person, it still influences a person's decisions. It was for this reason that both general and personal advice were included in the ban of conflicted remuneration.

6.140 The argument that general advice is provided to inform and educate, rather than to persuade and influence, is problematic for two reasons. Firstly, as defined, general advice does influence (or could reasonably be expected to influence) a person's choice. If the advice were truly factual, and couldn't reasonably influence a person's choice, then it wouldn't be financial product advice and thus payments in relation to it would not be conflicted remuneration. However, all general advice, no matter how informative, is-at some level-designed to influence a decision, usually to acquire a product or service from the provider of the general advice; if not, there would be no incentive for the provision of the general advice.

6.141 Secondly, there are many instances where general advice, and only general advice, is used to market and influence sales. Evidence suggests that complex products, such as exchange-traded options strategies-which have high returns but also high risks-are exclusively sold through general advice channels.

6.142 Further, general advice is often misunderstood and confused with personal advice. Whilst general advice does not consider the personal circumstances of the client, and whilst a general advice warning is required to be provided-which states that the advice given does not consider the personal circumstances of the client-many people ignore the warning and mistake general advice for personal advice. This is particularly the case where face-to-face contact is involved. A person attending a seminar who speaks to the presenter and tells them about their financial position could easily be confused into thinking that any answer to questions may have taken into account the personal circumstances disclosed when it has not.

6.143 In response to consumer and stakeholder concerns that the original amendment was too broad, the government has decided to restrict the operation of the carve-out. The revised general advice exemption will exempt benefits from the definition of conflicted remuneration if the following conditions are satisfied:

•

general advice is provided by an employee;

•

the employee has not given personal advice to the person receiving the general advice in the past 12 months; and

•

general advice is in relation to a product issued or sold by the employer.

6.144 The imposed conditions will restrict the general advice exemption to employees who have not provided personal advice to the person receiving the general advice in the past 12 months.

6.145 This amendment alleviates the unintended consequences of the original general advice ban without providing too broad an exemption. Website designers, people giving seminars, and other employees who are involved in the preparation of general advice, but who do not provide personal advice, will now be able to utilise the general advice exemption. However, advisers who provide personal advice as well as general advice will not be able to utilise the exemption. As such, this amendment removes the unintended consequences whilst still allowing consumers who receive personal advice to remain confident that their advice is in no way influenced by conflicted remuneration.

6.146 Further, this amendment discourages a move into a general advice model. Given that the exemption does not apply if both general and personal advice has been provided, and given the significant upfront and ongoing training costs advisers incur to skill themselves to provide personal advice, it is unlikely that advisers who currently provide personal advice would move to a general-advice-only model.

6.147 To address concerns over sales of complex products, the Government has asked ASIC to monitor the use of the conflicted remuneration provisions as they relate to general advice on complex products. ASIC will provide a report to the Government in the next 12-18 months.

6.148 The revised general advice exemption is more restricted than originally proposed; accordingly, the consumer impacts are reduced, although not entirely mitigated. Given the narrower application of the exemption, and given the ongoing monitoring of the use of the provisions in relation to complex products, it would appear-on balance-that the cost savings to industry outweigh the consumer impacts.

6.149 A note on the cost impacts: consultations with stakeholders indicate that the restrictions on the general advice exemption will affect some of the firms in the small and medium segments but none of the large firms. Estimates of the extent to which the small and medium segments would be affected varied; as such, a conservative approach has been adopted when calculating the adjustment to the cost savings.

6.150 The restrictions in the exemption means that, where employees provide general advice only, separate systems no longer need to be maintained to ensure compliance with the conflicted remuneration provisions. As large firms separate advice streams - that is, employees who provide personal advice do not concurrently provide general advice - these large firms will be able to realise all of the cost savings estimated from the originally proposed amendments.

6.151 Whilst many of the small and medium firms have, similarly, separated their advice streams, not all of these firms have done so. Consequently, some of these firms will not qualify for the general advice exemption with the new restrictions. As such, these firms will be required to maintain systems to ensure compliance with the ban on general advice; these firms have been excluded from the cost savings estimates. The cost savings estimates in Table 6.3 have been updated accordingly.

6.152 The restriction on the general advice exemption has resulted in a reduction in the ongoing cost savings estimates of approximately $1.6 million per year; the consumer protections achieved by the restrictions are, therefore, large relative to the reduction in cost savings. The design of the restrictions, which addresses the unintended consequences created by the current conflicted remuneration provisions but avoids the pitfalls from providing too broad an exemption, means that most businesses do not need to incur additional compliance costs. As such, the consumer consequences of the original proposal can be minimised at negligible incremental cost to business.

Clarify the exemption from the ban for execution-only services

6.153 This amendment broadens the existing execution-only exemption from conflicted remuneration. The current exemption permits conflicted remuneration on execution-only services where no advice has been provided to a client by a licensee, or representative of that licensee, in the previous 12 months. This amendment will permit conflicted remuneration if no advice has been provided by the individual receiving the benefit for the execution service (as opposed to the licensee or representative employing the individual). Linking the provision of advice to an individual rather than a licensee or representative (usually a group entity) provides a more direct link between the provision of advice and the execution service.

6.154 Industry has supported this amendment as it enables benefits to be earned on legitimate execution-only services. Industry groups have argued that the drafting of the provision makes it complex and difficult and costly to comply with. They believe that execution-only transactions are not accompanied by any advice, and hence are typically at the request of the client. As such, they believe that there are benefits associated with allowing conflicted remuneration on these transactions. This amendment provides clarity to advisers; the current legislation has had the unintended consequence of rendering advisers unable to receive conflicted remuneration despite there being no conflict of interest.

6.155 Some stakeholders have expressed concerns that financial advice firms will be able to give advice in one part of the business, and then execute the transaction in another part of the business so that conflicted remuneration can be earned. They have argued that this would result in extra charges for clients, whose investment returns would suffer as a result.

6.156 This situation is unlikely to occur given the anti-avoidance provisions within the Corporations Act 2001, which prohibit firms from restructuring their business models purely to circumvent the application of certain parts of the legislation. As such, the benefits to industry outweigh the consumer impact.

Training exemption

6.157 This amendment broadens the training exemption in relation to non-monetary benefits to cover all training relevant to conducting a financial services business. Currently, the exemption states that only training relevant to the provision of financial product advice is excluded from conflicted remuneration.

6.158 Industry has supported this amendment, as it allows them to use the training exemption for a wider range of activities, including administrative, dealing or trading activities. It is argued that the amendment will assist businesses in improving their productivity, and should raise the standard of advice being provided to consumers.

6.159 This amendment is not expected to have any material impact on consumers.

Amendments to volume-based shelf-space fees

6.160 This amendment clarifies the drafting of the ban on volume-based shelf-space fees to clearly define the benefits the ban intends to capture. In particular, it clarifies that incentive payments between fund managers and platform operators to give preferential treatment to certain products on the platform 'shelf'-which could potentially influence advice provided to the client-are prohibited.

6.161 Industry has supported this amendment. They have argued that the current drafting of the legislation has unintended consequences that adversely affect firms in the industry, and that the amendment would clarify the operation of the law.

6.162 Consumer groups have argued that this amendment could result in advisers being influenced in their provision of advice. For example, advisers could place their clients in more costly products in order to earn a volume-based bonus through the platform. They believe that this would reduce the quality of advice provided to consumers and also be detrimental to their investment returns, as the volume-based fees are 'built in' to the cost of their financial product(s).

6.163 This amendment simply clarifies the benefits the ban intends to capture. It does not change the existing law, other than to make it clearer to understand. As such, this amendment is not expected to have any material impact on consumers.

Clarify the definition of intra-fund advice

6.164 Intra-fund advice is defined in the Superannuation Industry (Supervision) Act 1993 (SIS Act) but is not specifically mentioned in FOFA. This amendment cross-references the definition of intra-fund advice from the SIS Act in the FOFA legislation. Intra-fund advice is a type of scaled advice provided by both retail and industry superannuation funds to their members. The advice is simple in nature and solely related to the member's superannuation products.

6.165 This amendment clarifies the operation of the law and does not have any direct impact on consumers.

Other changes

Grandfathering existing remuneration from the ban on conflicted remuneration

6.166 This amendment broadens the circumstances under which conflicted remuneration can continue to be paid (that is, grandfathered). As long as a client maintains their interest in a financial product, the proposed amendment will allow advisers to move licensees and continue to access grandfathered benefits; currently, any move after 1 July 2013 causes grandfathering to cease.

6.167 Industry has supported this amendment. It is argued that the amendment promotes greater competition between licensees and allows advisers to move between firms more freely. Most industry stakeholders argue that the current grandfathering provisions have reduced adviser movements in the industry and have effectively 'frozen' the market; few advisers are willing to move licensees at all due to the loss of grandfathered benefits. Whilst the amendments allows grandfathered benefits to continue for a longer period of time, it is anticipated that industry will transition to a fee-for-service model as advisers cannot receive conflicted remuneration on arrangements entered into with new clients, and existing clients are likely to be transferred into new products/arrangements over time.

6.168 Some stakeholders are concerned that the grandfathering provisions will lock clients indefinitely into products that pay conflicted remuneration. They say that advisers will have no incentive to move their clients out of these products, because they would lose their benefit payments if they did so. These stakeholders believe that these clients will be adversely affected as conflicted benefits erode their investment returns over time, whereas these clients would have the opportunity to consider better alternatives if the grandfathering arrangements were not in place.

6.169 Despite these concerns, advisers will still be bound by the best interests duty, which will force them to consider whether their client's investment options are best suited to their financial needs, objectives and circumstances. The amendments to grandfathering will help the industry transition to a fee-for-service model and relieve the problems associated with the labour market 'freeze' which is currently discouraging advisers from moving between licensees.

6.170 There are also technical amendments to clarify that:

•

when a financial planning business or client book is sold, the rights to the grandfathered benefits can be transferred to the purchaser, who will then receive the ongoing benefit;

•

when an employed adviser becomes a self-employed authorised representative within the same licensing group, the adviser can continue to receive grandfathered benefits; and

•

when a client switches from a superannuation product to a pension product, and both are offered under a multi-product offering, grandfathering will not cease in relation to that client's investment.

6.171 These minor technical amendments provide certainty and clarity to industry.

Explicitly recognise that a 'balanced' remuneration structure is not conflicted

6.172 This amendment clarifies that benefits paid under a 'balanced scorecard' arrangement are not conflicted remuneration. Balanced scorecard benefits are calculated by reference to both volume-based and non-volume-based factors. When FOFA was introduced, it was envisaged that payments made under a balanced scorecard approach would be able to rebut the presumption that volume-based benefits were conflicted.

6.173 Some industry groups have supported this amendment as it provides certainty for employers when paying bonuses under these arrangements. They argue that allowing a 'low' benefit to be paid to employees is consistent with the intent of the legislation, as it will not influence advice in a way which is detrimental to consumers.

6.174 Some consumer groups do not support this arrangement, as they believe that the bonus payments will influence the advice provided by advisers. It has also been argued that this amendment will favour larger firms, providing an incentive for employees to work for large firms, and that this will drive further consolidation in the industry.

6.175 This amendment clarifies that benefits that are already being paid-benefits that are currently allowed under FOFA-are permitted. As such, this amendment is not expected to have any material impacts on consumers.

Include consumer credit insurance in the basic banking carve-out

6.176 This amendment broadens the existing basic banking exemption to include consumer credit insurance. The exemption covers front-line bank employees who typically provide advice on basic banking and general insurance products; these employees were not the target of FOFA.

6.177 Consumer groups believe there to be a risk that conflicted basic products will be packaged with exempt products in a way that maximises the benefits being paid to the adviser.

6.178 This minor amendment clarifies the operation of FOFA. Consumers generally understand that these are basic financial products, so this amendment is not expected to have a material impact on consumers.

Allow bonuses to be paid in relation to revenue that is permissible under FOFA

6.179 This amendment permits payment of performance bonuses that are calculated by reference to remuneration that is exempt from the ban on conflicted remuneration. For example, an employer will be allowed to pay an adviser a bonus calculated by reference to the fee-for-service revenue the adviser generates in a given period. Currently, such a bonus may be banned as it is volume-based, even though the fee-for-service revenue it is based upon is not banned.

6.180 Industry has supported this amendment. It is argued that this amendment will assist industry in shifting to a fee-for-service model-one of the objectives of FOFA-and removes an inconsistency between earning permissible revenue and receiving a bonus on permissible revenue.

6.181 Consumer groups have argued that any bonus payments paid in relation to permissible revenue would like to influence the advice provided by advisers.

6.182 Whilst there is a likelihood that prices may rise as a result of bonus payments, the fact that this amendment will assist industry in shifting to a fee for service model outweighs any consumer concerns.

Amendments to the FOFA stockbroking exemptions

6.183 This amendment clarifies the existing stockbroking-related carve-outs under FOFA, including providing for the application of the brokerage fee exemption to products traded on the ASX24 (the ASX24 is a 24-hour platform for derivatives trading run by the ASX) and the broadening of the stamping fee exemption for initial public offering (IPO) arrangements.

6.184 These amendments are minor and clarify the operation of the legislation - stockbroking was not the intended target of FOFA and stockbroking-related activities have been largely carved-out of the reforms.

6.185 Consumers will not be materially impacted by this change.

Other minor technical amendments

6.186 The other minor amendments are:

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amendments to ensure that the wholesale and retail client distinction that currently exists in other parts of the Act also applies to the FOFA provisions; and

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amendments to clarify that the client-pays exemption operates to allow clients to direct product issuers-such as superannuation trustees or responsible entities of managed investment schemes-to deduct payments from the client's funds, or funds the client is beneficially entitled to.

6.187 These proposed changes are purely consequential and provide clarity to the operation of the law.

Specific impact on small businesses

6.188 As a result of these deregulatory amendments, small businesses are likely to be able to spend more time on their core business of providing financial advice to consumers and less time on compliance-related activities. This should result in both cost savings and revenue growth opportunities, both of which should increase the competitiveness of small businesses in the industry.

6.189 As noted earlier, the market is broken into small, medium and large firms. Small businesses, for the purposes of this analysis, are considered to employ fewer than 60 advisers. For the smallest firms, compliance requirements typically come with significant opportunity costs: small businesses have fewer staff available to dedicate to administration and compliance, and any time spent on compliance is time not spent providing advice, and hence earning fees.

Impact on Government

6.190 The impact on Government will be relatively small and non-ongoing. In the short-term, implementation costs will be incurred to draft the legislation for the proposed amendments, and to make changes to the regulations. ASIC's role as the industry regulator will continue, albeit under the new rules and regulations.

Consultation

6.191 Since the Ripoll Inquiry was initially commissioned in February 2009, extensive consultation has occurred with key stakeholders through submissions, consultation groups, public information sessions, consultation papers and meetings with stakeholders. Further consultations occurred in 2012 when the 2012 FOFA Bills were referred to the Parliamentary Joint Committee for Corporations and Financial Services (PJC) for inquiry and report.

6.192 In developing the proposed package of amendments, the Government conducted targeted consultations with a number of stakeholders, including the Association of Financial Advisers, the Association of Independently Owned Financial Professionals, the Australian Bankers' Association, Choice, the Financial Planning Association, Financial Services Council, Industry Super Australia, the Property Council of Australia and the major wealth management companies.

6.193 On 29 January 2014, the Government released, for a three-week consultation period, draft regulations and legislation to enact its proposed reforms to FOFA. Around 50 submissions were received as part of this process, from a range of stakeholders including industry associations, consumer groups, financial planning practices, consultants and individuals. A wide range of views were expressed in the submissions, which provided comment on the amendments, the options-stage RIS and other related issues outside the scope of the amendments. For the large industry associations and consumer groups, submissions were consistent with previously expressed views. The submissions also yielded a number of technical suggestions to ensure that the legislation and regulations achieve the desired policy outcome.

6.194 Treasury also conducted additional stakeholder consultations as part of the consultation period on the draft amendments. Many of the concerns and comments canvassed throughout the consultation period have been considered and incorporated into the final amendments. In particular, this consultation drove the decision not to proceed with the proposed amendments to commissions for life (risk) insurance and the changes to the exemption for general advice from the definition of conflicted remuneration. The information received through these consultations has also been considered in the preparation of this document.

6.195 With regard to the options-stage RIS, Treasury has fully complied with the RIS requirements.

Conclusion

6.196 The proposed amendments to FOFA are deregulatory and are anticipated to result in savings of approximately $90 million in implementation costs and an average of approximately $190 million in ongoing costs per year. These savings are expected to flow through to consumers and increase the affordability of financial advice.

6.197 As discussed in this document, there are risks involved with these amendments. In particular, some stakeholders consider that the amendments compromise consumer protections, and will undermine the goals of FOFA. The Government, however, is committed to maintaining the important consumer protections introduced by FOFA, and these amendments reflect that commitment. The amendments will result in substantial cost savings and increased certainty for industry whilst maintaining the high standards expected by financial advisers, so that consumers of financial products and services remain protected against poor quality advice. On balance, the amendments will be beneficial for stakeholders of the financial services industry and promote the facilitation of high quality and affordable financial advice.

Implementation and review

6.198 The package of amendments will be implemented through legislation as well as regulations. To ensure the amendments are processed as soon as practicable, interim regulations will be made where legally possible; these interim regulations will be subsequently amended through legislation, and will be repealed once the legislative amendments have been passed. Those amendments best addressed through regulations will remain in place.

6.199 The Government anticipates that the legislation will be introduced into Parliament in the 2014 autumn sitting period, for passage in the winter sitting period.

6.200 Regulations are anticipated to be made by the end of March 2014. As with all regulations, there is a risk that the regulations will be disallowed. If this were to occur, the law would revert to the existing requirements and may cause regulatory uncertainty for industry.

6.201 A post-implementation review will commence within five years of these amendments being implemented.