Andrew Starke welcomes the latest proposed changes to Future of Financial Advice (FoFA) legislation in FINSIA News:
Changes… outlined by the government on Friday have generally been well received, with many in the industry now hoping for final clarity on a process that has been running since the Labor Government revealed the proposed reform package in April 2011…..First and foremost, the changes outlined by the government on Friday ensure a clear ban on commissions after it had previously left the door open via the so-called ‘Wolf of Wall Street’ clause within general advice. Any possibility of a return to commissions on investments or superannuation products has now been ended.“This response removes all doubt that commissions will be introduced in the provision of general advice. The government will define and ban commissions in black letter law” said John Brogden, CEO of the Financial Services Council FSC. “The changes outlined by the government also maintain a detailed and comprehensive best interest duty requiring a financial adviser to act in the best interests of their client.”
Best interest clarified
While the perceived watering down of the best interest duty has attracted a great deal of attention in the mainstream press, Brogden said this should be put in perspective. Prior to FoFA, financial advisers simply had to offer ‘appropriate advice’ while they now need to comply with a raft of regulation. “There are six separate duties in the Corporations Act that require a financial adviser to act in the best interests of their client. In addition, there are six specific steps that must be met by an adviser when providing advice that codifies the best interest duty,” Brogden said. “The government has made one minor change to the best interest duty by removing an unnecessary ‘catch all’ provision. This change will actually clarify the best interest duty and remove any ambiguity for a financial adviser to always act in a client’s best interests.” The FSC has legal advice from leading commercial counsels Ian Jackman SC and Gregory Drew which it said confirms that the removal of ambiguous ‘catch-all’ phrase will not dilute the obligation of an adviser to act in the best interest of their client……The Australian Bankers’ Association ABA also welcomed the announcement and said the amendments would preserve the original intent of the law while correcting the current overreach and broader uncertainties.
What puzzles me is:
- How an overriding provision — that advisers act in the best interests of their clients — can be “ambiguous”?
- How removal of the overriding provision helps to clarify the situation? and
- Why, if legal advice confirms that removal of the ‘catch-all’ phrase “will not dilute the obligation of an adviser to act in the best interest of their client”, should it be removed?
Major banks have spent billions of dollars buying up financial planning firms in order to secure distribution of their investment products. Christopher Joye at AFR puts it in a nutshell:
The big vertically integrated institutions (mainly the four majors and AMP), which now control 70 per cent of planners, want these tied distributors to have the freedom to recommend in-house platforms, super funds and investments without being hampered by a catch-all best interests duty.
An overriding provision would certainly not be in the banks’ best interests.
Read more at "Highly unlikely to ever see a Storm again".
Surely companies (including financial advisers) exist to act in their own best interest, not someone else’s. If the adviser doesn’t share the same risk as the client, he’s just a guy in a suit spinning a yarn. Their interests can’t possibly be aligned if the adviser takes profit on the client’s capital rather than the client’s investment gain. I would be more inclined to pay a commission (but only a commission) on profit returned from good advice, and nothing on loss from bad advice.
The cow won’t milk if the farmer doesn’t feed it.
The basic principle of a fiduciary relationship — whether with your accountant, lawyer or financial adviser — is that if there is a conflict of interest, they are required to put their client’s interest ahead of their own. An obligation to act in (what is reasonably considered) the client’s best interests goes further: it requires the adviser take reasonable steps to establish what is the best course of action available to the client and to recommend that — not merely avoid a conflict of interest.
I agree a system can be constructed with good rules, regulations and intentions, but plenty of folks lose their dough anyway. In the engineering/construction world, hard experience has shown that real safety is achieved only if you design out the hazard completely. If that can’t be sensibly achieved, strong insurmountable barriers are erected to separate human from hazard. The last line of defence (and by far the weakest) is to rely on people to follow the rules.
Forgive me, I’m in a grumpy mood.
Hi Frank, I hope its nothing serious.
Ever read A Demon Of Our Own Design by Richard Bookstaber? How complex safety systems can create far bigger problems (e.g. Chernobyl, Wall Street) when they do fail. The key to sound financial regulation is simplicity.
Thanks Colin,
Nothing a glass of SSB won’t fix. No I haven’t seen the book. Just read the blurb on Amazon. Will download it and have a read. The world of finance (money in general) has always been a mystery to me. I guess the fact that the book predates the GFC means others didn’t heed its message. Funny that. There are some very insightful Americans who can almost see into the future but can’t change it. By the reviews, Richard Bookstaber is one of them. The movie ‘Seige’ is another example. It was uncomfortably predictave of a 9/11 type event. Aaron Sorkin’s West Wing is another. About all that Sorkin got wrong was the ethnicity of the newly elected President (Latino instead of African American) but he got the Congressional dysfunctionality and teh foreign policy messups spot on. Then again, if enough monkeys type on enough typewriters…
Good discussion. All the best.
I wrote Layers of Complexity after reading Bookstaber’s book.
Yes, I remember reading it (now, after having re-read it!). It is a good piece of writing and worth re-reading. Do you ever wonder if “yesterday’s blogs” ever get re read by others in the search for wisdom? I used to read and contribute to Alan Kohler’s blogs/newsletters, but being in WA, I would see them two, sometimes three hours old, and they’d be well commented upon by then. Some of the comments were incredibly knowledgeable and insightful, but it was far too populated for yet another comment – like trying to recite poetry to a footy crowd. I’d like to think someone’s clever algorithm trawls these blogs for the wisdom of the ages, but then, who reads history anymore?
Well, must get back to finishing The Stone Foundation. It’s my last book. My ten year attempt at being an overnight success ends this year.
P.S. Absolutely beautiful day in Perth today. Wouldn’t be dead for quids.