Freeze the FoFA amendments

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The proposed amendments to the FoFA legislation are retrogressive in relation to advances being made in the Australian financial planning industry, according to a Sydney professor.

Jerry Parwada, associate professor and head of the school of banking and finance at the University of New South Wales (UNSW), outlined his concerns about the FoFA exposure draft in a submission to the Treasury.

In an interview with Wealth Professional, the professor said that the FoFA amendments are too concerned with specific provisions, and the proposed changes should be put on hold until after the Murray inquiry is complete.

“My concern at a broader level is that they’re focused on answering questions that were raised in specific legislation. By virtue of pure timing, they happened to have occurred around a political change. In that context, what you have is a focus on answering concerns –rightly or wrongly – made by various lobby groups,” Parwada said.

“We have these amendments, and then separately we have the Murray inquiry which will undoubtedly touch on the financial industry, and then you have the overhaul of the way ASIC regulated entry requirements at an educational level.  Everything is happening at the same time and I would argue at a policy level that policy makers should take a broad overview. You can’t look at these changes in isolation – this is a big concern. Why not freeze the changes until someone looks at the implications of what’s happening in this industry.”

Within the proposed FoFA amendments, Parwarda said he disagrees with the removal of three specific provisions:  obtaining the client’s written consent to the fee arrangements, making an annual disclosure of fees collected and significant variations in previously advised fees, and obtaining written consent from the client on a biennial basis to continue the agreed fee arrangements.

He argues that although the regulatory changes are intended to save millions of dollars, the reality might not be so rosy when you compare the estimated costs with the dead weight costs that would be incurred by inattentive investors whose fee arrangements become redundant but are perpetuated in the absence of periodic opt-in arrangements.

“If you admit that the average Australian investor is not very financially literate or they are time poor, removing the opt-in arrangements means you are very likely to have a cost and we have seen this in anecdotal evidence,” he said. “It’s important we don’t take our relationship with [clients] for granted. If we are professionalised, we shouldn’t fear having this relationship with periodic checks.”
Parwada also argues that the opportunity for the phased introduction of a fee-for-service regime that would bring planners in line with other professionalized undertakings such as accountancy has been missed, and it could have brought Australia in line with world competitors like the UK.

“We have a coveted place in the world of investments, and the broader world and competitiveness needs to be assessed."
  • GAB on 3/03/2014 4:36:06 PM

    Well one of my clients who had (had) life cover in her industry super fund and doesn't pay nasty commissions to an adviser, now has no Death or TPD cover in her super fund. Mysteriously cancelled, but then replaced with more expensive (a lot more expensive) cover under MySuper which the client apparently opted out of paying...probably got confused between opt-in and opt-out. Who has to fix up this mess? That would be me...the nasty crooked financial adviser.

    If we have to start dishing out opt-in and opt-out letters to be signed...well I can see no end of nightmares for everyone.

  • James Smith on 3/03/2014 4:11:34 PM

    Associate Professor, agreed that policymakers should take a broad view. Perhaps you could assist by having your department research the following:
    1. Compare and contrast the consumer protection provided by the financial planning industry compared to the direct to market investment and insurance soliciting ?
    2. Evaluate the cost of regulation in the financial planning industry and in what areas can productivity gains be made to make the cost of financial advice more cost effective.
    3. What was the process undertaken by the labor government to consult with the industry in formulating FOFA policies. Encourage students to interview a broad range of participants. How did this process impact the outcome ?
    4. How much wealth was destroyed by member switching in their super accounts during the GFC ? Please refer the Dalbar studies and assess whether the outcomes were any different. What are the key learnings and how should these learnings impact the regulation of super funds and their advertising.
    5. Consider how the value of financial advice can be measured. Include interviews with clients in advice relationships and compare and contrast with the opinions of those not in an advice relationship.

  • Spin Doctor on 3/03/2014 2:03:18 PM

    What Parwarda fails to acknowledge/understand is that FOFA was ill conceived because it failed to listen to feedback from the industry ( the consultative process was a sham ) as it was driven by ideologies and the specific business objectives of one sector of the industry. In assessing FOFA it is important to also acknowledge both the industry fund objective to drive consumers into lower cost accounts and also the trade off this involves such as less active funds management, less service, an absence of advice and little if any accountability for individual outcomes. This approach is clearly not the panacea and the assumption that consumers are not intelligent enough to make their own decisions is hardly representative of the market that we operate in (making the FOFA regulations a costly overkill ). Sadly the FOFA voice is more a reflection of the single minded determination of one market participant to get what they want rather than the pursuit of meaningful improvement for the whole industry as asserted by Perwarda This was demonstrated by the lack of meaningful consultation, the reluctance to address the lack of transparency and accountability in the governance of industry funds and the bias in allocation of default mandates to them. Its ironic that the academics and journalists mount their arguments for the need for greater professional behaviour in financial advice based on this type of spin.

  • Merv Gay on 3/03/2014 1:46:48 PM

    Well,"areyoukidding" is a person of contradictions, (You're really Bill Shorten, aren't you?) You say the "old guard" are polluting the industry, yet for the last 10 years the image of financial planners is at the bottom. Since the image was pretty good 10 to 15 years ago, it's not hard to see how the "image" fall came about. Perhaps if the "young guns" observed that they are the ones going to jail, and there's rarely a complaint about the "old guard" then they'd realise where the problems are. If only the young could get rid of the "old" they'd have no problems - what a nuisance we are.....

  • areyoukidding on 3/03/2014 11:27:54 AM

    How could any professional in our industry say that "we were doing it pretty well"...billions lost through advice and product failures over the last decade...conflicts of interest and jailed advisers everywhere one looks and vested interests holding onto the old world and refusing to move on...when are the rest of us going to understand that the old guard are at best holding the rest of the good practitioners back. At worst they are polluting the industry for all of us...if you don't believe me let me ask yourself...have any of the consumer surveys done in this country over the last 10 years ranked financial planners any higher than at the bottom of the professional scale? an industry we have a massive public image problem and FoFA could have gone someway toward righting this in the minds of the investing public.

  • Merv Gay on 3/03/2014 10:43:07 AM

    Would all Professors just go about their business of "professing" and leave us to look after our business of growing our clients wealth and protecting them from unseen emergencies. We were doing it pretty well Professor until Two Bits Shorten and his Union Buddies sought to rip people off.....

  • Keith L. on 3/03/2014 10:21:43 AM

    One would expect an associate professor and the head of a University School of banking and finance would have a far better understanding of human nature that Jerry Parwada demonstrates in his article.
    I have great trouble getting people to return pre-populated forms on important matters such as binding nomination of beneficiary so my expectation that people will return opt-in forms is absolutely zero.
    This of course would mean people who should be receiving advice would not receive it and planners who had provided advice to clients on a pro bono basis would not be paid for the work that they have done in the past.
    Sorry Gerry, FO FA is politically motivated rubbish and it has to go and it has to go as soon as possible.

  • Paul levy CFP JP on 3/03/2014 10:07:22 AM

    All of the current rhetoric is irrelevant and impotent.
    Nothing meaningful will improve our industry or public perception until we professionalise intelligently.
    The ONLY way we can hope to professionalise and improve adviser knowledge and attitude, across the board, is by installing a system of apprenticeship. 3 or 4 years of guidance, mentoring by and apprenticeship to a CFP or AFA equivalent culminating in every adviser becoming a CFP or AFA equivalent is the only way we can hope to become a real profession.
    There is very little point comparing us or our industry to accountants, lawyers, plumbers or doctors until we, like those professions and trades, instal a system of apprenticeship.
    FOFA or any amendments to FOFA do not solve the core issues. It is obvious to me, after 38 years of financial planning, that catch all regulations are nothing more than knee jerk reactions implemented and designed to temporarily satisfy political and public perception after something dreadful happens like , Storm Financial.
    We cannot continue like this. "Searching for any port in a storm" only diverts the attention from the real issues, causes additional costs and confusion (as is the case right now post FOFA) and disrupts the process of the thousands of honest, hard working advisers whose primary goal is to help Australians who are in desperate need of our services, guidance and advice.
    It is time to get real. It is time to get serious.
    Increase the entry education requirements and install a system of apprenticeships and stop FOFERING around!

  • Jo Tuck on 3/03/2014 10:04:59 AM

    It is not the "fear of periodic checks" it is the enormous amount of time and cost to do this. Don't worry - there are still millions of people in industry funds who can't even see where their money goes unless they read the annual report from cover to cover.

  • Investor on 3/03/2014 9:52:02 AM

    FOFA is rubbish. Get rid of it now!

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