By Ms Nicole Wearne, Partner, Norton Rose Fulbright Australia & Mr Steven Donley, Associate, Norton Rose Fulbright Australia
The new Australian government recently set the direction for its pre-election commitment to scale back the former Labor government’s Future of Financial Advice (FOFA) reforms, a move much anticipated by financial advisers, insurance brokers and their insurers.
On 20 December 2013, the Treasury released a consultation draft of the Corporations Amendment (Streamlining of Future Of Financial Advice) Bill 2014 (draft bill), which has the stated aim of simplifying the regulatory obligations and reducing compliance costs for both advisers and consumers.
The draft bill proposes a number of amendments to the FOFA legislation, the most significant of which from a compliance perspective is removing the section 961B(2)(g) “catch-all” component of the best interests duty.
Modification of best interests duty
The current section 961B of the Corporations Act 2001 (Cth) (Corporations Act) imposes on the adviser an obligation to act in the best interests of the client. Subsection 961B(2) prescribes seven steps that the provider must take to discharge its duty. Subsection 961B(2)(g), known as the “catch-all” provision, requires the provider to take “any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances”. Subsection 961E supplements the catch-all provision by prescribing a broad test for determining when a step is in the client’s best interests. The catch-all provision has been criticised as creating compliance costs and imposing too great a burden on financial advisers.
The draft bill proposes to remove the catch-all duty by repealing sections 961B(2)(g) and 961E entirely. According to the explanatory memorandum to the draft bill, the government considers that the catch-all provision hampers provision of low-cost “scaled advice”, that is advice limited to a specific area of the client’s needs. It is proposed that clients will remain adequately protected by the remaining six steps prescribed under section 961B(2).
The draft bill also proposes to clarify and extend the exemptions from the best interests duty granted under subsections 961B(3) and (4) in respect of advice relating to basic banking and general insurance products. This means that the best interests duty will not apply to basic banking product, general insurance products and consumer credit insurance products.
Implications and next steps
At the time that s961B was first introduced, insurers anticipated a likely spike in claims. Some underwriters stopped writing financial advice professional indemnity cover. The proposed amendments are likely to curtail some of those concerns, with a reduction in the types of advice which are subject to the best interests duty.
A draft bill is expected to be presented to parliament shortly.
The new reforms are expected to save the financial industry an estimated A$90 million (US$80.74 million) in implementation costs and reduce annual compliance burdens by an average of approximately A$190 million per year. If the draft bill is enacted in its current form, then financial planners and their insurers should review their arrangements to ensure they benefit from the compliance-cost reductions that are expected to flow from the proposed deregulatory changes.