The paper, titled ‘Amending s923A for the Post-Future of Financial Advice (Fofa) Era’, is a joint initiative by the industry body and former regulatory investigator and current industry consultant Brett Walker, according to local publication IFA.
Its release follows the regulator’s clarification last June of its reading of Section 923A of the Corporations Act (s923A), which outlined the circumstances in which advisers can use terms such as “non-aligned” or “independently-owned”.
What’s in a name?
The white paper focuses on the conditions under which financial advisers can use the terms ‘independent’, ‘impartial’, ‘unbiased’ or ‘non-aligned’ in describing their services and advice.
It’s an issue that regulators from Singapore to South Africa are grappling with as they seek to make the industry more transparent and fit for purpose.
The relevant section of the Australian Corporations Act states that only planners and businesses that do not receive commissions, volume-based payments or other gifts or benefits, and which have no conflicts of interest or influence from any product issuer, can use such terms.
The impact of Asic’s interpretation of the Act as set out last year would be that any advice firm or adviser who does not comply completely with these provisions must remove or amend references to the terms from any websites or documentation provided to clients by the end of this year.
The AIOFP-Walker white paper argues that the provisions of the Act outlining the legal definition of independent advice – which was drafted and enacted back in 2001 – “need adjusting” to better reflect the realities in the financial advice landscape since the government pased its Future of Financial Advice (FOFA) reforms.
It also argues that “consumers need market clarity on advice choice decisions and protection from product failure”, and that the current legislation does not aid consumer understanding.
One of the key problems with the current provisions of section 923A is that it places “unrealistic parameters” on advisers, the paper argues. These have allowed the major financial institutions to “suppress competition” from the “genuine independently-owned advice sector”.
The paper points to hidden agendas from industry associations representing the institutions as an influence on the Corporations Act and section 923A.
“The un-commercial parameters of s923A and this ‘masquerading strategy’ of institutionally-aligned advisers has created the very confusing outcome for consumers where most advisers ‘look the same’ – we contend this is an intended and engineered outcome by the institutional and institutionally-aligned associations to assist their members,” the document states.
It also argues that the Fofa reform legisation has a loophole enabling costs for self-managed super fund (SMSF) administration and establishment to not be perceived as conflicted remuneration, unlike other platform and investment product revenue.
SMSFs are a superannuation trust structure that provides financial remuneration to its members – who are also trustees of the fund – in retirement.
“We are not advocating a return to platform rebates, we are just pointing out the inconsistencies in Fofa’s application and why SMSF structures can compromise the parameters of s923A,” the paper clarifies.
Lastly, the document argues that a more common sense and a commercially realistic approach to the definition of independence would have broad consumer benefits, including adopting an Oxford Dictionary definition of terms such as “independence”, “rebate” and “commission”.
“A measure like s923A, if maintained as it currently is, will drive more confusion not less when consumers look to find an adviser with their best interests at heart.”
What is FOFA?
The “Future of Financial Advice” reforms were set out in legislation originally introduced by the Federal Labour government in July 2012 to provide consumers with protection from deficient financial advice and, along with that, improve trust and confidence in the financial services sector.
It was the equivalent of the UK’s Retail Distribution Review (RDR), and became mandatory on 1 July 2013.
The main objectives of the legislation are best interests duty; ban on conflicted forms of remuneration; ongoing client engagement and fee disclosure requirements; and changes to ASIC’s licensing and banning powers.