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."