In brief - Effects to be felt by providers and consumers of financial services and products
Businesses purchasing financial products or services will be affected by the Future of Financial Advice (FOFA) reforms. The reforms will also substantially impact the providers of such products or services, including those businesses which may not even be aware that according to the definition, they are financial services providers.
Government reforms a response to big financial collapses during the GFC
In July 2013, the government's FOFA reforms will become mandatory for financial services providers. The reforms will impose new obligations on financial services and product providers, while granting greater protections to consumers, so the short answer to the question in the title is "yes". The reforms will impact upon insurance agencies, financial services licensees, mortgage brokers and the clients of those institutions.
The reforms are designed to combat what the federal government perceives as an unsatisfactory financial services regulatory environment. During the global financial crisis (GFC), that environment produced notorious financial collapses such as Westpoint, Opes Prime and Storm Financial.
What do the FOFA reforms aim to do?
The FOFA reforms aim to prevent conflicts of interest in how financial service providers are remunerated. This includes wealth advisers and insurance and mortgage brokers.
The reforms will require financial advice providers to place their clients' interests ahead of their own when providing personal advice to retail clients. This will include advice to small to medium enterprises falling under an asset/income threshold.
Other features of the reforms include the creation of an "opt-in" arrangement allowing consumers (including businesses) to review their financial services every two years, the regulation of financial product types where a commission percentage is charged, and the provision of "low cost" advice to personal and business consumers.
The reforms will also give further powers to the Australian Securities and Investments Commission (ASIC).
FOFA's effects on businesses
FOFA will create greater certainty about the rights and obligations of both those businesses which provide financial products and services and businesses which purchase those services.
The effects of the FOFA reforms will be felt by businesses seeking investment and business loans, choosing corporate superannuation plans for employees, selecting insurance products for business (and employment) affairs, and accepting advice or direction from financial product issuers such as banks, margin lenders, superannuation funds and insurers.
Some likely effects of the FOFA reforms
For consumers, there are likely to be a number of positive and negative effects including:
• a higher standard of care from the lending/financial advisory/insurance advisory institutions that businesses use on a daily basis
• transparency of fees in those institutions
• two-yearly opt-in ability to review how your provider is performing
• likely increased costs passed on to consumers, due to increased costs for businesses dealing in financial products, including greater insurance obligations for such businesses
Are you a provider of financial services?
Some businesses may not even be aware that under ASIC's definition, they are classed as financial services providers. ASIC provides a useful overview of whether you are a financial services provider (and therefore someone who requires a licence) on its FAQ page: Do you need an AFS licence?
In addition, ASIC also sets out Regulatory Guides which explain how the legislation works. For any business unaware of whether its services and products are "financial", ASIC's Regulatory Guide 36 provides helpful direction.
If you are a financial service or product provider, it may be important for you to obtain more detailed advice on how to cope with the legislative changes.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2023.