Need to use your own words
Write clearly and use plain language
Demonstrate your understanding with examples
Provide appropriate source referencing
Assignment is one question and 2 parts
Maximum total word limit is 2,000
Part 1 Maximum total word limit is 1,500
Part 2 Maximum total word limit is 500
Need to be concise and effective in your answers
The Future of Financial Advice legislation covered several component and areas of financial advice including the following:
Best Interest Duty
Part One Maximum 1,500 words
You are required to explain (in your own words the key element of each of the above 4 components and give background and the rational for the reason there were first introduced and then expand on the recent changes introduced by the current government
Part Two Maximum Maximum 500 words
As a final part of your assignment, you are expected to provide a critique forming your own views and conclusion of the FOFA reform a (including the recent changes). You need to discuss the impact (wether positive and or negative) of the FOFA reform on the following:
Access to Advice
Quality of advice
Meeting the substance of acting in the best interest of the client
your critique need to also address the recent reform to FOFA
In April 2010, the Australian government announced the aim of implementing the Future of Financial Advice. The primary aim of the strategy was to improve access and quality of financial advice offered to Australian consumers. Specific objectives of the FOFA included improving confidence and trust among Australian retail investors venturing in financial service sectors. Secondly, the FOFA ensures that client would benefit from enhanced accessibility, affordability, and availability of quality financial advice. The paper will examine key elements entailed by the program namely opt-in, best interest duty, scaled advice, and conflicted remuneration (Australian Government-The Treasury, 2014).
The component of the Opt-in was set to take effect as 1 July 2013. The component provided that advisers be obliged to offer personal financial advice to their retail clients. The component further stipulates that advisers should consider liaising with client in every two years. The objective is to monitor ongoing services that would need necessary updates. Secondly, the component provides that adviser should be obliged to provide annual disclosure statement showing service information and detailing fee. Thirdly, the component provided that the opt-in requirement apply to new clients after 1 July 2013. Additionally, the new clients are expected to comply with the provision of disclosure statement. Advisers that are subject to approved codes of practice are exempted to the component of opt-in primarily to encourage additional membership. Moreover, the measures do not apply to product fees and ongoing insurance premiums (The Australian Government-The Treasury, 2013).
A close examination of the component implies that the government introduced the component mainly for advisers to manage their clients appropriately more than just formulating a code of conduct. The point is that some client would definitely need to operate with opt-ins while there are those that would not realize potential benefits provided by the component. The adviser would comfortably segment their database and subsequently offer distinct treatment to each segment. Additionally, opt-in is ideal in the sense that it would help strengthening relationship existing between advisers and clients by providing a high level of transparency. Many clients would wish to observe ultimate level of transparency provided by their advisers.
More rationality of introduction of the opt-in is depicted by the fact that the component provides clients with option of simplifying business model by formulating strategies to emanate reputational damage. Therefore, implantation of the opt-in component should be supported by all strongest terms possible if advisers and client would like to achieve some stake in financial dealings.
Best Interest Duty
The component provides that an advisor have an obligation of working for the best interest of their client. The advisor should consider giving priority to the interest of client incase arising between the two. The component further indicates that that an adviser has duty to follow the minimum step to comply with interest of clients. The component further provide that any case related to financial liability accrued to breach of duty will remain with authorized representative or licensee. Individual financial advisers re exempted to take obligations of breach of duty but will be subject to emanating administrative sanctions (The Australian Government-The Treasury, 2013).
The component provides logic sense to financial advisers in the sense that that it would guide the concerned party manage conflicts by disclosing them. In essence, advisers are bound by the obligation of getting into deep of matters that causes conflicts. Secondly, it is apparent that the component would demand advisers to provide appropriate advice to their clients.
Moreover, the component is set in such a way that it would enhance safe harbor for advisers. First, an adviser would be in comfortable to identify financial situation, needs, and objectives of their clients. Secondly, the component will guide advisers in identifying implicit or explicit subject matter sought by their clients. Thirdly, advisers will be able to make decisive decision on whether to inquire to acquire accurate and complete information of clients. There are those circumstances where information pertaining clients may be subject to inaccuracy and incomplete. An adviser will be working for the best interest of the client by inquiring to obtain accurate information to come with a reliable judgment.
The component portrays logic sense in financial dealings involving clients and their advisors as it guides the party to conduct financial objectives through recommending financial products that would meet specific interest of clients. The client would also be in a good position to assess whether information gathered by the adviser regarding financial products would produce the desired objectives.
Furthermore, the component would guide an adviser to base the entire judgment of circumstances that would be relevant to the client. Generally, the elements of component of best interest duty focuses evaluating any relevant steps that an adviser would mind considering to provide financial desires of the clients.
The FOFA component of the conflicted remuneration provides condition in which some benefits become subject to banning. The first provision provides set of fee that should be banned. The fees include volume related shelf-space fees, borrowed funds accessed from asset-based fees, volume based benefits, and product commissions. The payment falls under the category of grandfathering provisions. The component provides that payments to products ranging from wholesale clients, general insurance, life risk insurance beyond superannuation and other prescribed benefits as from July 2013. Volume based benefits such as cases where employers pay employees performance bonus are considered to be among the conflicted remuneration under normal circumstances (The Australian Government-The Treasury, 2013).
The component does not exempt shelf-space fees unless they provide a reasonable platform indicating intentions to represent fees providing fund services provided by fund managers. Alternatively, they should represent logic scale based rebate. In addition, the grandfathering provisions permit payment of asset-based fees provided they are based on non-borrowed portion from an investment portfolio. Additional category falling under the conflicted remuneration includes banning of commission operating under group risk insurance products within entire risk insurance and superannuation. The category took is also subject to provisions of grandfathering that took effect on 1 July 2013. An example of conflicted superannuation products includes bot group and individual risk insurance.
The component also placed ban on benefits of soft dollars that took effect on 1 July 2013. The government indicated that soft-dollar benefits exceeding $300should no longer be accepted by licensees and their representatives especially if it would influence choice of recommendation of financial product. In addition, the ban exists if the benefits influence advice offered to retail clients. However, despite the fact that regulatory guidance remains valid soft dollar benefits that are irregular worth less than $300 will stay acceptable.
The government noted that provision of grandfathering outlines remunerations regarded as conflicted. For instance, conflicted remuneration exists when an adviser possesses an existing right of contracts to accept trail product commissions. Secondly, the government indicated that it granted payment of existing shelf-space between platform providers and fund managers. Thirdly, the asset- based fees remains valid after 1 July 2013 if the fee is set to purchase financial products prior to 1 July 2013. Lastly, the regulatory guidance expect to provide treatment of current payments of volume to dealer groups form the platform providers.
FOFA Scaled Advice
The component of scaled advice entails limited scope that retail clients receive personal advice on a defined area. The component includes guidelines reinforcing introduction of best interest duty component and the fact that there are challenges noted by ASIC. However, the component of scaled advice is regarded as implicit element of reform legislation of FoFA. The primary objective of introducing the component was to enhance provision of financial product advice for retail clients.
The ASIC provided guiding principles related to the component. The first principle stipulates that the entire advice including complex issues should be scaled to some extent. Secondly, the guidelines indicted that advisers or clients are obliged to suggest conditions that can limit the subject matter of the advice. However, the adviser must consider making a decisive judgment when resolving to place the limit of scope of the advice (The Australian Government-The Treasury, 2013).
Further rationality of the guidelines is demonstrated where the guidelines provides that advisers are obliged not to decline the scope of advice when deciding the limit of advice provided to the client. The guideline makes sense in safeguarding the interest of retail clients since some advisers may consider neglecting critical issues pertaining financial dealings.
The component is also essential in the sense that it provides a guideline instructing financial advisers to consider reflecting the nature of issues that they provide to their clients. The guideline clearly reinforces the implementation of the component of best interest duty. Further analysis of the component reveals that the scaled advice can include multiple topics or even a single topic depending on nature of the agreement. Additionally, the component is universal in the sense that it applicable to new, potential, and existing clients.
A critical review on the elements implies that the component of scaled advice contributes significantly into achieving the aim of the Future of Financial Advice legislation despite the fact that it regarded as implicit comment of the FoFa. The comment reinforces the objective of the Australian government in providing quality and affordable financial services. The component will definitely help the government to streamline remuneration arrangements.
Access to Advice
A critical review on the mentioned objectives of implementation of FoFA implies that the Australian government is willing to implement effective changes to retail investors of Australia. The component of Opt-in focuses on providing retail customers improved accessibility to financial advice. The fact that the component aims at establishing relationship between advisers and clients implies that clients would be able to interact closely. Secondly, the component indicates that the FOFA reforms would produce desirable results in the sense that it would enhance transparency in retail investments of Australia. Clients would prefer pooling tier resources in a system that would enhance transparency in matters dealing with dealing with financial products. Additionally, the component would significantly help the Australian investors to realize potential benefits as far as accessibility to financial advice is concerned.
Quality of Advice
The component of conflicted remuneration would help reinforcing the initiative of the FoFa reforms. Close examination of the component indicates that the Australian government is willing to offer high quality financial services through eliminating unnecessary expenses. The government has reviewed that some expenses such as shelf-space fees and product commissions. The decision of banning conflicted remuneration sends a message to retail investors that the Australian government is willing to enhance quality financial services. Investors would wish to see that they make remuneration that are valid and can produce attractive returns. The government has shown interest in providing high quality financial services to investors since the component of conflicting remuneration would provide advisers with rights to establish contract to trail product commission. Fund managers and platform providers will be obliged to provide payment granted by the authority. Consequently, investors would be sure of obtaining the best service provided by fund managers.
The Best Interest of the Client
The elements of the best interest duty would produce a positive feedback to retail investors in Australia. The component provides essential objective that focuses on achieving interest of clients. In other words, client would be sure of obtaining the needed feedback from their advisers since they will be obliged to adhere to their instructions. The fact that the component stipulates that advisers would take responsibility to any breach of duty proves that retail investors of Australia will support the FoFa reforms. Additionally, the implementation of the component of best interest duty will enhance the way the two parties would manage conflicts. In other words, the component will significantly help streamlining objective of the FOFA reforms of providing clients with accurate and complete financial services.
Recent reforms of FoFA
Recently, the Australian government considered amending provisions of FOFA laws including requirements of disclosure. The reform would be of great interest to the financial and clients in the sense that it aims at streamlining the future of FOFA. The reform intends to eliminate yearly fee that certain clients are charged and enhance the elements of best interest obligations. Additionally, the 2014 amendments aim at enabling providers ad clients to establish an agreement on provided scope of advice. A critical review of the July 2014 amendment implies that the FOFA reforms pose a high opportunity of receiving support from the stakeholders (Commonwealth of Australia, 2014).
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