Jerry Parwada

Tomorrow will be a historic day in terms of financial advice, one that is likely to reinforce the perception of a crisis of trust and confidence in Australia’s financial planning industry.

It is when the government will implement the Future of Financial Advice (FOFA) regulations, which govern financial planners. These could force two rounds of changes, creating greater uncertainty in the market.

By rushing the FOFA changes, the government foregoes the potential benefits of having the current Financial System Inquiry take a holistic view to cleaning up the financial planning industry for the future benefit of all Australians.

Instead, the federal government should halt legislative changes impacting relations between financial planners and investors until the conclusion of the inquiry, scheduled for November 2014.

No less than 25 of the submissions to the inquiry are from associations, consumer groups and firms that have significant exposure to the financial planning business sector or its customers, the retail investors. This number does not include the many regulators, research centres, and policy think tanks that may well have expressed opinions on the financial planning industry.

Clearly, a significant component of submissions to the inquiry will cover FOFA-related issues. Expediting the government’s proposals means that any recommendations made by the inquiry that affect the financial planning industry will trigger another major change to the legislation and regulations governing the sector, creating greater uncertainty to a market that is particularly vulnerable to falling participation rates by the public.

Is it not better to take advantage of the timing of the inquiry to give the financial planning industry a thorough review? FOFA issues may appear politically isolated, but financial planners’ fiduciary duties to investors and the fairness of fee and commission arrangements in the industry are at the heart of the integrity and safety of the whole industry.

It’s really disappointing to see the government come out with a change to financial sector operations when they have said there would be a moratorium on that during the course of the Financial System Inquiry. It would have been good to see them defer this and put it into the mix.

Indeed, at this stage it would be a shame to reduce the impact of FOFA. For example, under the new moves, a large fund management group could refer people from personal to general advice within the same company. Second, the FOFA changes mean that complex products could have commissions on them; this could be seen as a step backwards, and is something the Financial System Inquiry has been looking at in depth.

In support of this move, Minister for Finance Mathias Cormann has said that incentive payments related to the provision of general advice are not conflicted remuneration – in other words, it is not expected to influence the choice of financial product.

However, the Financial System Inquiry is right now looking at ways in which the four main banks may be able to get around the banning of commissions by, for example, offering bonuses to bank tellers even if they don’t get a direct cut of the product they are effectively selling.

So, why not let the Financial System Inquiry conduct a thorough review of these issues, and actually come up with some moves that reduce red tape without impacting on the quality of advice to clients, and ensure they are better served?

All parties on either side of the FOFA debate would be hard pressed to refute the common perception that there is a crisis of trust and confidence in the Australian financial planning industry. Education and accreditation standards are being debated. Solutions to this crisis need better treatment than targeted interventions by the incumbent government.

Associate professor Jerry Parwada is head of the school of banking and finance at the Australian School of Business and an expert in funds management.