Copy right TAFE NSI 2014 Advanced Diploma of Financial Planning The Regulatory Environment If you can’t stand the heat, get out of the kitchen! The Financial Planning Industry in Australia has and continues to be one of the most highly regulated industries in the world. At regular intervals, both sides of politics appear to try to outdo each other, by introducing new regulations Some regulatory reforms have been fairly sweeping (i.e. Wallis Inquiry, where ASIC and APRA were created).

Copy right TAFE NSI 2014 Advanced Diploma of Financial Planning The Regulatory Environment “The only constant is change….” But other regulations appear to be knee jerk and wasteful: For instance, high earners superannuation contribution surcharge in 1997, where employer contributions for “high income earners” was taxed at 30% on entry into the fund and Reduction of the contribution cap from $50,000 to $25,000 Not surprisingly, therefore, it was abolished in 2005 This resulted in significant administrative complexity and almost as much money was spend on compliance and administration, as was received in revenue!

Copy right TAFE NSI 2014 Advanced Diploma of Financial Planning The Regulatory Environment Ad hoc regulations such as these are based on immediate revenue concerns for the government and erode the public’s faith in superannuation. …. They create an administrative nightmare for financial planners, financial institutions, the ATO and other bodies It also results in financial planners expending a large amount of their time and resources on unnecessary compliance, as opposed to focusing on endeavouring to achieve their clients goals and objectives. ….

Copy right TAFE NSI 2014 Advanced Diploma of Financial Planning The Regulatory Environment Time to Learn a new language… Are you ready to look at FSR or its protégé CLERP 6 before FOFA, but don’t forget TASA or AML, because ASIC or FPA will BAN you! Lets look at a couple of major reforms over the last decade….

Copy right TAFE NSI 2014 Advanced Diploma of Financial Planning The Regulatory Environment FSR introduced a single licensing regime for financial sales, advice and dealings in relation to financial products. It insisted on consistent and comparable financial product disclosure, and Covered a wide range of financial products including securities, derivatives, general and life insurance, superannuation, deposit accounts and means of payment facilities. Financial Services Reform Act (FSR): Introduced on 11 March 2002 Was the culmination of an extensive reform program examining regulatory requirements applying to the financial services industry and covers a number of the recommendations of the Financial System Inquiry (FSI). The FSI was a comprehensive stocktake of Australia’s financial system structure and regulation. The broad policy direction for what were known as the CLERP 6 reforms, now contained in the FSR Act, is consistent with the findings of the FSI.

Copy right TAFE NSI 2014 Advanced Diploma of Financial Planning The Regulatory Environment The background to the FSR was the Corporate Law Economic Reform Program (CLERP) which was s part of the federal government’s ongoing program to modernise business regulation in Australia.. It was developed to improve productivity, promote business activity and economic development, based upon principles such as market freedom and investor protection, quality disclosure of relevant information to the market. Prior to CLERP, the regulatory environment had failed to keep pace with changes occurring in financial markets and commercial practices. Liberalisation of world capital markets, in combination with technological developments in the information and telecommunication industries, had fundamentally altered the way business operates

Copy right TAFE NSI 2014 Advanced Diploma of Financial Planning The Regulatory Environment The Rudd/Gillard government has introduced its own plethora of legislative reforms, the most notable of which is FOFA The Fee Versus Commission Debate (to be examined in greater detail in a section) reached a head with high profile corporate collapses such as STORM and Westpoint, which resulted in thousands of investors losing their life-savings…

Copy right TAFE NSI 2014 Advanced Diploma of Financial Planning The Regulatory Environment A prospective ban on conflicted remuneration structures including commissions From the view point of financial planning practice management, it is essential that financial planners are familiar with the new rules and regulations The introduction of a statutory fiduciary duty so that financial advisers must act in the best interests of their clients Increasing transparency and flexibility of payments for financial advice by introducing a two-yearly opt-in arrangement Expanding the availability of low-cost 'simple advice' to improve access to and affordability of financial advice. FOFA – July 2013

Copy right TAFE NSI 2014 Advanced Diploma of Financial Planning The Regulatory Environment Financial advisers now have to product an annual fee disclosure statement (FDS), itemizing fees charged for previous year and proposed fees for the ensuing year. FOFA (continued) Calculations will be hard, because fee information for each client does not reside on one system and currently, no available software can easily amalgamate these systems In many instances, it will be the first time that the client will know what they pay for and the adviser will have to articulate what it is they have done….

Copy right TAFE NSI 2014 Advanced Diploma of Financial Planning The Regulatory Environment Percentage-based fees (known as assets under management fees) will only be charged on un-geared products or investment amounts and only if this is agreed to with the retail investor. Expanding the availability of low-cost 'simple advice' to improve access to and affordability of financial advice. Increasing transparency and flexibility of payments for financial advice by introducing a two- yearly opt-in arrangement FOFA – continued: Strengthening the powers of the Australian Securities and Investments Commission to act against unscrupulous operators. The examination of the need for a statutory compensation scheme for financial services.

Copy right TAFE NSI 2014 Advanced Diploma of Financial Planning The Regulatory Environment Best Interests Duty The introduction of a best interests duty means advisers will be required to act in the best interests of their retail clients and place their clients’ interests ahead of their own when developing and providing personal advice Financial advisers can establish that they have met this requirement by undertaking a number of specified steps to assist in determining what the best interests of the client are. The best interests duty is based on the notion of ‘reasonableness’. For example, advisers are only required to make ‘reasonable inquiries’ to obtain accurate information from the client and conduct a ‘reasonable investigation’ into relevant financial products. This is designed to protect advisers from clients claiming that the adviser should have done something onerous or unreasonable in order to act in their best interests. However, there is no expectation that the client will always receive the “best” advice from their adviser. The word best means different things to different people and different situations The expectation is that the advice will be appropriate to the clients needs and objectives

Copy right TAFE NSI 2014 Advanced Diploma of Financial Planning The Regulatory Environment Opt-in Rules Advisers will be required to request their retail clients opt-in, or renew, their advice agreements every two years if clients are paying ongoing fees. In addition, an annual statement outlining the fees charged and services provided in the previous 12 months must be provided to clients paying ongoing fees. This means advisers will be in regular contact with their clients and will need to demonstrate the value of the services they are providing their clients. ASIC, at its discretion, has the ability to exempt certain advisers from the above requirements

Copy right TAFE NSI 2014 Advanced Diploma of Financial Planning The Regulatory Environment Ban on conflicted remuneration This reform will see the introduction of a ban on conflicted remuneration, including commissions – exemptions will apply for certain situations. This means that licensees and authorised representatives will not be allowed to give or receive payments or non-monetary benefits if the payment or benefit could reasonably be expected to influence financial product recommendations or financial product advice provided to retail clients Volume payments (payments dependent on the total number or value of financial products of a particular class or classes) will be presumed to be conflicted but it will be open to advisers to prove that they are not. This reform will encourage financial advisers to become more client-focused, as more of their fees will be paid directly by the client rather than indirectly through product commissions.

Copy right TAFE NSI 2014 Advanced Diploma of Financial Planning The Regulatory Environment The Government believed that the Benefits of the Reforms could be as follows: The adviser’s interests will become aligned with client interests, leading to more client-focused advice and greater adviser engagement with clients; Clients will be less likely to suffer detriment as a result of excessive fee arrangements or sub- optimal investment strategies; A more competitive advice market; Product recommendations will not be influenced by commissions given to advisers by product issuers; Greater availability of advice Advisers will be discouraged from recommending imprudent investment strategies, for example, strategies that rely heavily on geared or borrowed funds. Less rogue advisers in the industry.

Copy right TAFE NSI 2014 Advanced Diploma of Financial Planning The Regulatory Environment Since most advisers will be employed as salaried Authorized Representatives, they will have to follow their in-house compliance guidelines, but could also be renumerated via “sales” targets Therefore a through knowledge of applicable laws is essential, as is adherence to compliances issues related to Approved Product Lists (APL’s) and Disclosure Requirements When in doubt, check with your supervisor or compliance manager and also confirm important issues via written communication, so that you have a record that can be verified, if necessary, at a future date!

Copy right TAFE NSI 2014 Advanced Diploma of Financial Planning The Regulatory Environment The Financial Planning Association of Australia (FPA) Is the peak body for Financial Planners in Australia Has been pro-active with lobbying the government to implement new changes or roll back other changes that it deems to be unnecessary However, it has also been strict to ensure that financial planners lift their game and its major emphasis has been on raising the educational bar for planners Has pushed for more planners to complete the CFP designation (currently in excess of 5600 in Australia) and to introduce a mandatory degree qualification for all advisers wishing to join the FPA It has also lobbied the government to enshrine the term financial adviser and financial planner in law

Copy right TAFE NSI 2014 Advanced Diploma of Financial Planning The Regulatory Environment In conclusion, the utopia for most advisers and bodies such as the FPA, is where the industry is in a position to self- regulate…. The push towards fee for service and raising the educational bar for advisers will certainly assist this process, but currently self regulation remains a goal that is yet to be achieved…