28 May 2010

Dear Investor,


In a recent edition of Investment News, we discussed the Ripoll committee and its analysis of financial services in Australia. As we identified, the Federal Government announced its response over the ANZAC Day weekend. In this edition of Investment News, we consider the government's proposed reform package in more detail.

Key principles

The reform package was announced by Chris Bowen, Minister for Financial Services, Superannuation and Corporate Law. According to Mr Bowen, the reforms are governed by two overriding principles:

  1. financial advice must be in the client's best interests; and
  2. financial advice should not be put out of reach of those who would benefit from it.

In adapting these principles into law, Mr Bowen announced a number of individual changes to the financial services regulatory regime.

Changes to remuneration structures

As of 1 July 2012, all commission payments from financial services businesses or volume-based payments relating to sales targets will be banned. Furthermore, 'assets under management' fees (where advisers receive payments based on the amount of investor funds they are managing) will be limited to ungeared products or investment amounts.

The purpose of these reforms is to remove the potential for financial advice to be influenced by the differing levels of commission fees available to advisers or by the need to meet sales targets. Clearly, Mr Bowen is seeking to move financial advisers towards an industry model similar to that of accountants or lawyers.

'Product neutral' adviser charging regime

However, the changes to financial advisers' remuneration models are not limited to a mere banning of commission payments. They will also be required to agree their fees directly with clients and disclose the charging structure up front. Mr Bowen foreshadowed that the details of the charging regime would be finalised after industry consultation.

A statutory fiduciary duty

Mr Bowen indicated that the government would impose a statutory fiduciary duty on all financial service providers and their authorised representatives, requiring them to act in the best interests of their clients and prohibiting them from placing their own interests ahead of those of their clients. This duty will be slightly qualified by a 'reasonable steps' qualification, so that advisers are not required to individually assess every available product in the market for every single client.

Although this was recommended by the Ripoll committee, it is not clear that imposing a 'fiduciary duty' will result in any substantial change to the law or will have the effect desired by the government. In this regard, it will be critical to consider the precise wording of the proposed legislation.

Accountants and self-managed super funds

Until now, accountants have been permitted to provide advice on the establishment and closing of self-managed super funds without holding an Australian Financial Services Licence. Mr Bowen indicated that the government was concerned that this was not appropriate and the exemption for licensing requirements for accountants in these circumstances would be removed - possibly to be replaced by alternative arrangements.

Intra-fund advice

The simple advice that can be provided within a superannuation fund will be expanded to new topics to facilitate simple, single issue, personal advice. The new topics include:

  1. transition to retirement;
  2. intra-pension advice;
  3. nomination of beneficiaries;
  4. superannuation and Centrelink payments; and
  5. retirement planning.

Simplifying disclosure requirements

Building on the efforts of the government's Financial Services Working Group, Mr Bowen announced that Financial Services Guides will be improved so as to better disclose restrictions on advice, potential conflicts of interest and remuneration structures. The areas identified as needing attention include making the disclosures concise and engaging, focusing on the key information that could affect an investor's decision and using clear and unambiguous language.

Enhance the powers of ASIC

The corporate regulator, ASIC, will have its powers strengthened in relation to the licensing and banning of individuals from the financial services industry. In both cases, ASIC will be able to have regard to a broader range of matters in making its decision.

Definitions of sophisticated investors and retail clients

There will be a review as to whether the current definitions of 'retail client' and 'sophisticated investor' are achieving their desired ends. However, Mr Bowen indicated that the distinction between a retail and a wholesale client must remain relevant, because unsophisticated investors clearly need extra protection.

Review of professional standards

An expert advisory panel will be established from members of industry, academia, professional associations, consumer representatives and ASIC to review professional standards in the financial services industry. The panel will consider conduct and competency standards, possibly including recommendations for an industry code of ethics.

Statutory compensation scheme

A further review will be commissioned to report on the need for, and costs and benefits of, a statutory compensation scheme.

Final comments

Many of the proposed reforms arise straight out of the Ripoll inquiry. However, others (such as the outright ban on commissions) go further than the inquiry was prepared to recommend. As with most such reforms, any real improvements to the industry will arise from carefully targeted and drafted legislation. As the old saying has it, the devil is always in the detail.

Best regards,
Chris Andrews


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Chris Andrews
Head of Funds Management

t  +61 3 8610 2811
e  candrews@latrobefinancial.com.au

Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.

La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.

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