The public debate about the proposed FOFA amendments has come down to a policy decision: is business efficiency compatible with consumer protection?
The issues are whether financial incentives (other than a salary or fee for service) should be paid to people selling retail financial products and whether legislation should specify all the things that such a person must do to ensure they act in the interests of the customer.
Most publicity has been given to the issue of whether the government should explicitly ban commissions for the sale of financial products.
The debate has highlighted the difficulties created by the financial services reforms of 2004 including the difference between providing mere information and general and personal advice and the difference between a business which deals in and advises on its own financial products and a businesses which advises about a third party’s products.
The Senate Economics Committee has recommended that the Government’s Bill to amend FOFA be passed, subject to the Explanatory Memorandum making it clear that it is not the government’s intention to reintroduce commissions (in the sense of a specific payment for a specific sale, as opposed to a general bonus).
The committee recommends that the government consider the provisions governing conflicted remuneration and the best interests duty and redraft them to ensure that there is greater clarity around their implementation.
The committee is in favour of allowing sales bonuses (but not commissions) for staff of financial institutions (but not advisers) for providing information or recommendations general (but not personal) advice about their own products.
The committee referred to the obligations of an AFS licensee to take reasonable steps to ensure that its representatives comply with the best interests duty (section 961B), appropriate advice requirement (section 961G), obligation to warn the client if advice is based on incomplete or inaccurate information (section 961H), and obligation to prioritise the interests of the client (section 961J).
The committee recommends that the Explanatory Memorandum include a paragraph that clearly and unambiguously spells out the best interests obligations—961B(1) and (2), 961G, 961J and 961H—and the level of consumer protection they provide.
The committee also recommends that the government consider closely how these separate obligations work together and whether any further strengthening is required to ensure that a provider cannot circumvent these best interests obligations.
The Government has not announced whether it intends to amend the Bill.
The original purpose of FOFA was “to improve the quality of financial advice while building trust and confidence in the financial advice industry through enhanced standards which align the interests of the adviser with the client and reduce conflicts of interest.”
