But someone has to pay…

The Labor government has not conducted a regulatory impact statement review which would assess the impact of the reforms on the industry however, as with any significant reforms, there will be costs associated with the implementation of FoFA.  Many in the financial advice industry will need to restructure their administrative and IT systems in order to comply with the requirements and will incur transition costs as a result. It could be seen to be incongruent that one of the key goals of FoFA to expand low cost simple advice however the structural reforms may nullify that goal. In fact the high cost of advice may go even higher and quash this goal altogether.

The Government has recognised the need to minimise ongoing compliance costs as much as possible, and has taken steps to reduce unnecessary red tape.  For example, the opt-in requirement was to apply initially on an annual basis but the Government has decided that the benefits to consumers can be achieved by having them opt in every two years instead.  There is also significant flexibility in the way businesses will be able to apply the reforms.  The principles-based approach to the ban on conflicted remuneration, for example, allows businesses to structure their remuneration arrangements in any way that will not conflict advice, rather than prescribing or prohibiting particular means of making payments. This lack of guidelines puts the onus on advisers to prove that payments are not conflicted.

The ban on conflicted remuneration applies to new clients. Commission on existing business will continue for many years to come. The industry will, however, have to adapt quickly to provide its products at prices that will win new clients: This includes how to provide quality advice at a cost clients will pay and how to charge their fees and commissions from fees without income from shelf-space fees. They will be adjusting products to collect advice fees and provide fee rebates. Strong investment performance will be an advantage in those negotiations. In short, competitive forces will be stronger, without being clouded by commissions. All along the value chain people and organisations will be positioning for competitive strength.

The Future of Financial Advice (FoFA) bans on monetary and non-monetary benefits given to platforms, distributors and advisers place pressure on managers to reduce their fees by the amount they would otherwise have to pay. However, the FoFA reforms might result in managers having to spend more on marketing their brand and products, and so it might be difficult for managers to fully pass on the savings from ceasing to pay any banned benefits;

Every step taken to remain compliant also adds another cost element and new clients will begrudge the increasing paperwork requirements. There is possibly even an element of deterrence in there.

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