FOFA changes: what’s in store for brokers?

In line with commitments given prior to the 2013 Federal election, the Federal Government has announced changes to the Future of Financial Advice (FOFA) legislation.

Most of these changes affect financial planners and investment advisers with limited application to general and life risk insurance advisers.

The key changes relate to the following areas:

• Removing the “opt-in” requirement for financial advice – unlikely to affect insurance brokers
• Annual fee disclosure – unlikely to affect insurance brokers
• Removing ‘catch-all’ from the best interests duty – will affect all insurance brokers
• Scaled advice changes – will affect all insurance brokers
• Exempting general advice from conflicted remuneration – will affect life risk insurance brokers;
• Grandfathering provisions to be amended to allow advisers to move between licensees while continuing to access grandfathered benefits –  will mostly affect life risk insurance brokers.

NIBA understands the Government intends to have legislation drafted by early February, and aims to have the amendments passed by the middle of the year. However, the ALP and Greens have indicated they may well oppose the changes, so passage of the amendments is unclear at the present time.

NIBA will continue to monitor developments, and will carefully review the draft legislation when it is available. NIBA will consult with Members on any issues that may arise that are likely to affect insurance brokers.

Proposed changes in detail 

The proposed changes and potential impact on insurance brokers are summarised below. Most changes have a limited impact on members as NIBA was able to successfully limit the application of the FOFA legislation when first released.

Ongoing fees opt-in

“Remove the opt-in requirements so that advisers no longer need to seek their client’s agreement regarding ongoing fees every two years.”

This would not affect most insurance brokers as the ongoing fee requirements don’t usually apply to them in any case.

Annual fee disclosure

“Remove the retrospective application of the fee disclosure requirement, so that advisers will not need to provide fee disclosure statements to clients who entered into a fee arrangement before the mandatory 1 July 2013 commencement date of FOFA.”

This would not affect most insurance brokers as the ongoing fee requirements don’t usually apply to them in any case.

Best interests duty catch-all provision

“Remove the catch-all provision (s961B(2)(g)) so that advisers can be certain they have satisfied their obligations under the best interests duty.”

The provision currently provides that the provider must only provide the advice to the client if it would be reasonable to conclude that the advice is appropriate to the client, had the provider satisfied the duty under section 961B to act in the best interests of the client.  The change will not affect the limited best interests obligations that apply when the advice is given solely in relation to a general insurance product.

The change will, however, ease the compliance burden where advice is given in relation to life risk products, or products that include both general insurance and life insurance components. The changes will not affect an insurance broker’s continuing general law obligations in relation to the provision of appropriate personal advice to clients.

Scaled advice

“Clients and advisers will be explicitly allowed to agree on the scope of financial advice to be provided, whilst ensuring advice is still appropriate for the client.“

This will be of some advantage to insurance brokers but NIBA will carefully consider the exact terms of the proposal to ensure it does not create an uneven playing field.

Conflicted remuneration changes

Currently the conflicted remuneration ban – monetary and non-monetary (only applies if you are giving personal advice or general advice to retail clients). The monetary ban is not applicable to general and life risk insurance (BUT applies to a group life policy for members of a superannuation entity or a life policy for a member of a default superannuation fund life risk).

A group life policy for members of a superannuation entity is the product that is issued to an RSE licensee of a registrable superannuation entity, or a custodian in relation to a registrable superannuation entity, for the benefit of a class of members of the entity.

A life risk insurance product is a life policy for a member of a default superannuation fund if:

  • the product is issued to an RSE licensee of a registrable superannuation entity, or a custodian in relation to a registrable superannuation entity, for the benefit of a person who is a member of the entity; and
  • the person has not given written notice to an employer of the person that the fund is the person’s chosen fund, but the employer of the person makes contributions to the fund for the benefit of the person.

The non-monetary ban is not applicable to general insurance but catches all life risk insurance (subject to some carve-outs).

Additional changes

In addition to the above, the Government is proposing the following changes:

Life insurance inside super

“The ban on conflicted remuneration will only apply to commissions on risk (life) insurance products inside superannuation in circumstances where no personal financial advice about these products has been provided i.e. where automatic coverage is provided inside a default (MySuper) superannuation fund.“

General advice

“Benefits relating to the provision of general advice will be exempted from the ban on conflicted remuneration. “

Currently the ban catches general advice as well as personal advice. This is a significant change but as the ban only applies to life risk insurance as explained earlier, this change will only affect life risk insurance remuneration.

Execution-only exemption

“Introduce a causal link into the exemption so that benefits are permitted where no advice has been provided to the client by the individual performing the execution service (as opposed to the licensee or authorised representative more broadly) in the previous 12 months.“

This will not be likely to be of relevance to insurance brokers.

Training exemption for non-monetary conflicted remuneration

“Broaden the existing training exemption, that provides for training in relation to providing financial product advice as a permitted non-monetary benefit, to include other forms of training that are relevant to conducting a financial services business.“

This change will only affect life risk insurance brokers caught by the non-monetary conflicted remuneration ban.

Volume-based shelf-space fees

“Amend the drafting of the ban on volume-based shelf-space fees to clarify that incentive payments between fund managers and platform operators for preferential treatment of certain products on the platform “shelf” are banned.”

This will not be likely to be of relevance to insurance brokers.

Define intra-fund advice

“The definition of intra-fund advice will be referenced in the FOFA provisions.“

This will not be likely to be of relevance to insurance brokers.

Grandfathering

“Amend the existing grandfathering provisions, that exempt certain benefits under pre-existing arrangements from the ban on conflicted remuneration, to allow advisers to move between licensees and to continue to access grandfathered benefits in certain circumstances.”

This will benefit insurance brokers caught by the conflicted remuneration ban which will typically only be life risk insurance brokers.

Conflicted remuneration

“Amend the conflicted remuneration provisions to:

  • allow for the payment of benefits under “balanced” remuneration structures;
  • expand the basic banking exemption to include all simple (i.e. “Tier 2”) banking products; and
  • permit the payment of performance bonuses that are calculated by reference to remuneration which is exempt from the ban on conflicted remuneration.”

This may benefit some life risk insurance brokers that are caught.

Stockbroking

“Amend the existing stockbroking-related exemptions to

  • clarify the application of the stamping fee exemption to initial purchasing offer arrangements; and
  • clarify the application of the brokerage fee exemption to products traded on the ASX24.”

This is likely to be of limited application to insurance brokers.

Minor technical amendments

“A number of minor amendments will be made to address technical issues including clarification of the client-pays exemption and consequential amendments to the application of the wholesale and retail client distinction under FOFA.”

As noted above, NIBA will consider the draft legislation once released and consult with members on any concerns that may arise.