We have advocated and embraced much of the Government’s proposed reforms to financial advice. From the outset we endorsed the guiding principles of the Future of Financial Advice (FoFA) package. The Government has always acknowledged the reforms need to strike a balance to improve transparency and professionalism and at the same time ensure the affordability and accessibility of financial advice. When announcing the reforms last year, then financial services Minister Chris Bowen said: “Financial advice must be in the client’s best interest – distortions to remuneration, which misalign the best interests of the client and the adviser, should be minimised.” He went on to say: “In minimising these distortions, financial advice should not be put out of reach of those who would benefit from it.”
This clearly recognises that there is a balance that needs to be struck. We believe that balance can be struck in a way that ensures: • greater power in the hands of consumers; • transparency in the cost of advice for consumers; • a higher quality of advice; and • higher standards and professionalism for financial advisers. The foundation of these reforms is a new best-interest duty for financial advisers, requiring them to put the interests of their clients ahead of their own. This legal and ethical framework almost has unanimous support. However, other proposals fail to strike the necessary balance. The Government has proposed an annual renewal requirement for financial advice and a ban on volume-related payment. Both measures have a simplicity about them which is undoubtedly attractive at first. Unfortunately, it is their very simplicity that drives perverse outcomes which are contrary to consumers’ best interests.
The introduction of an annual renewal requirement will actually undermine the strength of the FoFA reforms by reducing consumer protection. It will result in financial advice skewed towards short-termism and create a fast food style of advice industry – one that provides the McDonald’s equivalent of advice and churns through customers as quickly as possible. A superior outcome is the introduction of a three-year renewal framework where consumers can opt-out and cease paying for advice at any time. This framework would be supported by the requirement for advisers to provide consumers with an annual statement outlining their fees and services over the past year and for the next 12 months. On the matter of volumerelated payments, the financial services industry acknowledges that some practices need to change – volume-related payments that distort advice and are not in the best interest of consumers should be banned.