The rollback of financial advice reforms recently proposed by the Federal Government puts the financial security of hardworking Australians at risk.
The Future of Financial Advice reforms (FOFA) were developed in the wake of the global financial crisis which saw the collapse of Storm Financial. Investors lost their life savings because of conflicted financial advice given by Storm Financial. Slater and Gordon witnessed the destructive impact of conflicted financial advice first hand, and assisted hundreds of Storm Financial clients in the wake of the collapse.
The FOFA reforms were also designed to protect Australians from financial advice motivated not by what the client’s investment objectives were, but by the commission the financial advisor stood to gain. The collapse of managed investment schemes including the Premium Income Fund, LM Investments and Basis Capital saw thousands of Australians lose their life savings.
Why were so many retirees and ordinary Australians investing their hard earned money in these schemes?
Because their financial advisor recommended that they do so. In many instances, the recommendation to invest in these schemes was motivated by the healthy commission paid by the schemes to advisors – for example, LM investments paid an upfront commission to advisors who sold their clients into the scheme and not necessarily because the scheme was in the investors’ interests.
So what are the key financial advice provisions that the Government wants to reverse?
- Watering down the “best interests” obligation, which required financial advisors to always act in the best interests of their clients. While many Australians assume that their financial advisor is acting in their best interests, that is too often not the case. Slater and Gordon have acted for thousands of clients affected by bad financial advice where the advice given was never going to help them get ahead and secure their financial future. For decades, the US has imposed a requirement on its financial services sector that advice be suitable or reasonable for a client.
- Remove fee disclosure requirements, which required financial advisors to disclose what fees would be charged to their clients. Although the cost of products and services in other industries must be disclosed to consumers – including by airlines, utilities providers, supermarkets, lawyers - the Government does not consider the same obligation should apply to financial advisors.
- Remove the “opt in” requirement. The “opt in” requirement meant that financial advisors could not continue to charge an annual fee to their client unless the client agreed to continue paying. If the “opt in” requirement is removed, clients who move overseas, or become unwell, or who don’t have time to review their affairs, may continue to be charged a fee for financial advice received many years previously.
- Exempt “general advice” from a ban on conflicted remuneration. This means that financial advisors can still sell products to their clients, and be paid a commission on the sale, under the guise of “general advice”. The financial product issuers – often big banks – only make money when their investment products are sold. While the Financial Planning Association banned its members from accepting commissions well before FOFA (back in 2009), the Government does not consider sales and commission motivated advice to be on the nose. The FPA focuses on financial planners as professionals rather than sales agents.
Most Australians will need financial advice at some point in their life – particularly later in life and as a result of amassing compulsory superannuation over their working lives. Most ordinary Australians have little or no financial knowledge or understanding of financial markets and products, or have no time between work and family commitments to understand financial products or markets, and tend to rely on and trust their financial advisor.
Despite the widespread harm and risk associated with bad financial advice, the Government considers it reasonable to wind back the FOFA reforms designed to protect consumers and all in the interests of “cutting red tape” for the industry.
The contents of this blog post are considered accurate as at the date of publication. However the applicable laws may be subject to change, thereby affecting the accuracy of the article. The information contained in this blog post is of a general nature only and is not specific to anyone’s personal circumstances. Please seek legal advice before acting on any of the information contained in this post.