Businesses purchasing financial products or services will be affected by the Future of Financial Advice (FOFA) reforms. Here, James Stanton explains the effects that will be felt by providers and consumers of financial services and products.
The government reforms are a response to major financial collapses during the GFC. In July 2013, the government's FOFA reforms will become mandatory for financial services providers, imposing new obligations on financial services and product providers, while granting greater protections to consumers. The FOFA reforms will impact on insurance agencies, financial services licensees, mortgage brokers and the clients of those institutions.
They FOFA reforms are designed to combat what the Federal Government perceives as an unsatisfactory financial services regulatory environment. During the GFC, that environment produced notorious financial collapses such as Westpoint, Opes Prime and Storm Financial. The 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 SMEs 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
The FOFA reforms will create greater certainty about the rights and obligations of both businesses that provide financial products and services and businesses that 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.
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?
ASIC also sets out Regulatory Guides explaining 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.
James Stanton is a solicitor in the insurance team at Colin Biggers & Paisley.
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