Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 28

FOFA and ASIC’s five red flags

Six weeks into FOFA and ASIC’s Deputy Chairman, Peter Kell, writes about ASIC’s approach to FOFA and surveillance work.

The future of financial advice (FOFA) reforms are now live. Since 1 July 2013, compliance with the FOFA reforms has been mandatory.

The aim of all of us – regulator and industry – is to improve the standards of advice. FOFA provides an opportunity to take a positive step towards improving consumer confidence and trust following the turbulence in the market during the previous decade.

The FOFA reforms focus on improving the quality of financial advice provided to consumers and addressing current issues for consumers such as trust, access and affordability. Promoting the interests of clients through a best interests duty will drive advice that is better focused on the actual needs of the client. The removal of a range of conflicted forms of remuneration will help ensure that the interests of the client are given priority.

These reforms will also improve communication, engagement and transparency between advisers and clients, as well as providing a greater focus on strategic financial advice. The advice industry must increase the level of professionalism and needs to move from a sales-based culture. These are all outcomes that ASIC is very keen to see realised.

Engaging with industry

ASIC has been very busy working to facilitate the smooth implementation of the FOFA reforms.  We have provided information and guidance to industry, through formal Regulatory Guides, presentations and industry liaison. We have devised solutions to some transitional implementation issues, for example in relation to fee disclosure statements, and provided some no action letters.

The success of FOFA relies on the financial advice industry accepting and meeting its legal responsibilities, and applying professional judgement during the implementation phase and beyond. Particularly in the first 12 months, you will need to apply judgement and common sense to smooth out any wrinkles and implement the reforms in a consistent and workable manner. Our guidance takes a common sense and principles-based approach to allow industry space and flexibility to implement FOFA into their business model, noting of course that there will be changes to business models.

ASIC’s approach to surveillance work

In the year ahead we will be conducting both proactive and reactive surveillance activities.

We intend to visit a representative sample of licensees to understand the changes they have made to deal with the FOFA reforms and any challenges they are facing.

We will also be communicating and conducting risk based surveillances on a sample of life insurance licensees to assess the extent of life insurance churn.

We will gather information about these licensees’ understanding of and compliance with FOFA to see whether we need to provide further guidance or assistance to industry.

We consider a strong compliance culture is fundamental to meeting the obligations under the FOFA reforms. If we see a poor compliance culture, it may result in a much tougher regulatory response.

We have also identified some practices which will raise red flags for us when we conduct our surveillances on advice provided after 1 July 2013.  These include licensees:

  • taking advantage of exemptions from the conflicted remuneration provisions - we will be paying close attention to advice which recommends switching insurance products or changing levels or types of cover
  • over-servicing clients - we will be on the look-out for advice providers who put their clients into structures which are more complicated than the client's circumstances demand, and/or which will require more frequent or costly advice than alternative strategies
  • ineffectively managing conflicts of interest created by vertical integration - we will be looking at licensees’ conflicts management arrangements to ensure they are up to date and adequate, and effectively implemented in their day to day business activities
  • keeping clients where they are even if their circumstances or needs have changed - we will pay particular attention to advice provided to clients to remain in existing arrangements and advisers who seek to avoid servicing clients in grandfathered arrangements, for example by not providing periodic reviews even though such reviews were done previously
  • avoiding giving advice – we will be focusing on examples of existing businesses who have changed their business model to offer factual information or general advice only, or product issuers who are planning to sell products on an execution only, 'no-advice' basis. Such businesses need to be very careful that they are not unlawfully providing personal advice or holding themselves out as providing such advice

ASIC's 'facilitative' approach

ASIC has been clear that we are taking a facilitative approach for the first 12 months of FOFA. This means that where we see evidence a licensee has attempted to comply with the new requirements but has inadvertently breached them we will look to work with the licensee to rectify any problems and ensure future compliance. We will also take a facilitative approach where systems changes are underway.

We will not however take a facilitative approach to breaches which occur because a licensee failed to make sufficient effort and devote the necessary resources to prepare for FOFA, or because they or their representatives deliberately organised their activities to avoid or breach some of the requirements of the reforms.

We will also continue to take strong action against breaches which would also have been considered unlawful conduct under the pre-FOFA legislation.

We expect breaches to be reported to ASIC in the usual way, as required by the legislation.  We will be more inclined to work with you in respect of a breach which has been self-reported than one which is reported to us by a third party or client.

We will continue to liaise with industry to enhance industry’s understanding and implementation of FOFA.

See link to FOFA related pages on ASIC’s website

http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/Future%20of%20financial%20advice

 

Peter Kell is Deputy Chairman of the Australian Securities and Investments Commission (ASIC)

 

3 Comments
Garry
October 25, 2013

But of course it is all talk and no action.

For example, what happened with FOFA and ASIC's surveillance with recent insolvency of GTLTradeup Pty that has taken some estimated $5m of depositors cash despite being a licence holder.

Was anyone doing their job as regulators?

Warren
August 25, 2013

From my perspective as the client of a financial planner, the FOFA legislation seems typical of so many government policies that use a sledge hammer to crack an almond. My planner or his staff have to spend an inordinate amount of time preparing documents to comply with this legislation even when I've initiated the meeting with him and I know exactly what I need him to organise for me. I would much rather he spent that time actually preparing the advice he gives me, rather than doing paperwork. And I certainly don't need the reems of paper he then has to give me!

For goodness' sake, can't bureaucrats work out more efficient ways of weeding out the shonks in the industry without making it impossible for the good guys to do their job efficiently? Clients don't benefit from this at all.

Jimbo
August 22, 2013

90% of client's money being invested is directed into platforms which are grandfathered so I don't see it affecting planner revenue much at all. I used to be a bank planner and their revenues have not been affected at all, as they don't call such payments 'commissions' or 'entry fees', they call them 'advice fees'. Apparently this is all legal. Happy days.

 

Leave a Comment:

RELATED ARTICLES

D’oh! DDO rules turn some funds into a punching bag

Authorities reveal disquiet over LIC fees

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

Latest Updates

Investment strategies

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

Planning

Super, death and taxes – time to rethink your estate plans?

The $3 million super tax has many rethinking their super strategies, especially issues of wealth transfer on death. This reviews the taxes on super benefits and offers investment alternatives.

Taxation

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

Shares

The megatrend you simply cannot ignore

Markets are reassessing the impact of AI, with initial euphoria giving way to growing scepticism. This shift is evident in the performance of ASX-listed AI beneficiaries, creating potential opportunities.

Gold

Is this the real reason for gold's surge past $3,000?

Concerns over the US fiscal position seem to have overtaken geopolitics and interest rates as the biggest tailwind for gold prices. Even if a debt crisis doesn't seem likely, there could be more support on the way.

Exchange traded products

Is now the time to invest in small caps?

With further RBA rate cuts forecast this year, small caps may be key beneficiaries. There are quality small cap LICs and LITs trading at discounts to net assets, offering opportunities for astute investors.

Strategy

Welcome to the grey war

Forget speculation about a future US-China conflict - it's already happening. Through cyberwarfare and propaganda, China is waging a grey war designed to weaken democracies without firing a single shot.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.