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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:

  1. 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
  2. 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
  3. 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
  4. 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
  5. 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)

 

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3 Comments
Garry
October 26, 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 26, 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 23, 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.


 

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