John Collett Sydney Morning Herald 20 December 2013
Just when consumers thought the bad old days of financial planning were almost over, comes the neutering of Labor’s hard-fought reforms.
Under the Future of Financial Advice reforms planners would have been put under a legal obligation to act in their clients’ best interests. The weakening of the obligation is the most worrying of the government’s proposed amendments.
The obligation gives consumers comfort that advisers will act only in their best interests. The government wants clients to be able to sign a contract with the adviser to limit the best interest obligation to the advice being given.
Many of the worst financial planning disasters have been where the financial planning firm offered only one type of advice – such as borrowing to invest in shares or to invest in property.
Under the government’s proposal, advisers could continue to give this one-size-fits-all advice, while having the client agree to limit the scope of the best interest obligation to that advice instead of covering their overall financial position.
Clients are unlikely to fully understand the implications of what they are signing.
It would be like going to visit a doctor about a specific health issue. You would expect the doctor to ask relevant questions about your health that may have a bearing on the specific health issue. You would not sign a document saying the doctor can only be held liable for advice concerning the specific health problem that prompted the visit.
To push the analogy a bit further, imagine a home owner engages an architect to draw up plans for a house extension. The home owner would not expect to sign a contract where the architect is not liable for any structural problems in the rest of the house that are caused by the extension.
Limiting the legal obligation would make it much easier for advisers and bank tellers to flog financial products. The banks and insurers, which employ more than 80 per cent of financial planners, have lobbied hard for the watering down of the legal obligation. They know the legal obligation, as written, would have disrupted sales-orientated financial planning.
The reforms followed a parliamentary inquiry into financial advisers and painstaking negotiations and compromises to get the legislation passed by parliament.
The inquiry itself was prompted by a string collapses over many years, including Storm Financial, involving planners and the role of commissions that have cost investors, mostly retirees, billions of dollars.
While the planned change to the best interest obligation is the biggest concern, there are other proposed amendments that, if passed by parliament, would reduce consumer protection.
The government wants to remove the need for “opt-in” from the legislation. This is where the adviser is required to contact clients every two years to ask them if they still want to receive the advice.
If the adviser does not hear from the client, the relationship and any fees paid to the adviser would end.
Many clients pay for the advice automatically out of the money they have invested with the adviser. The problem with that is the adviser could continue to be paid even if the client is receiving no advice.
The government also wants the ban commissions to apply only to personal advice and not to “general” advice.
Winding back the reforms is not in the interests of consumers nor is it in the interests of financial planning profession.
The public is wary of seeking advice after the financial planning scandals. A survey carried out on behalf of the Australian and Securities and Investments Commission, released in September, that included the opinions of ordinary investors, found only 23 per cent of respondents said planners were ‘‘operating with integrity’’.
The Future of Financial Advice reforms would have helped increase trust. What we have here in the government’s proposed amendments is the interests of the powerful overriding the interests of a disengaged public.
It is a Christmas present from the government to the banks and insurers. The main justification by the government is that the changes will save the banks and insurers millions of dollars in the costs of complying with the reforms.
That would make advice cheaper and more accessible for consumers. Do not be surprised if the supposed cost savings accrued to the banks and the insurers instead.
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