The Reforms

The FoFA reforms include a number of key components.

Best interests duty The introduction of a best interests duty means advisers will be required to act in the best interests of their retail clients and place their clients’ interests ahead of their own when developing and providing personal advice.ASIC’s proposed guidance on the best interests duty covers the following areas:

  • acting in the best interests of the client
  • satisfying the ‘safe harbour’ for the best interests duty – including providing guidance on each element of the safe harbour
  • providing appropriate personal advice; and
  • prioritising the interests of the client.

The proposed guidance is in the form of an update to Regulatory Guide 175 Licensing: Financial product advisers—conduct and disclosure (RG 175).

Financial advisers can establish that they have met this requirement by undertaking a number of specified steps to assist in determining what the best interests of the client are.

If advisers seek to establish that they have met the best interests duty by taking the steps referred to above, they must also take any other reasonable steps (in addition to those specified) if it would have been in the best interests of the client to do so at the time the advice was given.

The best interests duty is based on the notion of ‘reasonableness’. For example, advisers are only required to make ‘reasonable inquiries’ to obtain accurate information from the client and conduct a ‘reasonable investigation’ into relevant financial products. This is designed to protect advisers from clients claiming that the adviser should have done something onerous or unreasonable in order to act in their best interests.

Opt-in and fee disclosure Advisers will be required to request their retail client’s opt-in, or renew, their advice agreements every two years if clients are paying ongoing fees. In addition, an annual statement outlining the fees charged and services provided in the previous 12 months must be provided to clients paying ongoing fees. This means advisers will be in regular contact with their clients and will need to demonstrate the value of the services they are providing their clients.While a client can terminate and ongoing agreement at any time, it is assumed that if they do not actively renew the agreement within the renewal period they have chosen to opt out of the ongoing fee arrangement.As an alternative, the Australian Securities and Investments Commission (ASIC) has been given the power to exempt advisers from the opt-in provisions

Many in the financial services industry breathed a sigh of relief when the government recently removed the opt-in requirement under the Future of Financial Advice (FOFA) bills for financial planners and other industry members where they are bound by a code of conduct, approved by ASIC, which achieves the same outcome.  This needs to be done by 2015 and gives ASIC new powers and formalises professional standards.

Ban on conflicted remuneration This reform will see the introduction of a ban on conflicted remuneration, including commissions.This means that licensees and authorised representatives will not be allowed to give or receive payments or non-monetary benefits if the payment or benefit could reasonably be expected to influence financial product recommendations or financial product advice provided to retail clients. Exceptions to the ban on conflicted remuneration are provided in certain circumstances.Consultation Paper 189 Future of Financial Advice: Conflicted remuneration gives guidance on the practical application of the provisions and how they will be administered. ASIC has made it clear that it will look to substance, rather than form, when determining a breach (so simply renaming a banned commission will not pass the test).

Volume payments (payments dependent on the total number or value of financial products of a particular class or classes) will be presumed to be conflicted but it will be open to advisers to prove that they are not.

This reform will encourage financial advisers to become more client-focused, as more of their fees will be paid directly by the client rather than indirectly through product commissions.

The ban excludes commissions on general insurance products, life insurance product not bundled with a superannuation fund, individual life policies that are not connected with a default superannuation fund and execution-only services.

Asset based fees are also banned on a geared asset. If it is not immediately apparent that the asset is geared it is expected that reasonable enquiries are made to obtain complete and accurate information from the client.

Ban on soft-dollar benefits This reform will see the introduction of a ban on non-monetary (‘soft-dollar’) benefits given to advisers who provide financial product advice to retail clients. There are exceptions to the ban for benefits such as (subject to qualifying criteria):

  • information technology support or software;
  • education and training; and
  • benefits that are below $300 in value.
Scaled advice ASIC’s proposed guidance on scaled advice will apply to all industry sectors, including super, financial planners, and banks and insurers, and includes practical guidance and examples about giving scaled personal advice, as well as practical examples about giving factual information and general advice to clients.ASIC’s proposed guidance in this area indicates:

  • All advice is scaled to some extent – advice is either less complex or more complex along a continuous spectrum (i.e. there are not two categories of advice ‘scaled’ and ‘holistic’).
  • In general, the same rules, including the best interests duty, apply to all personal advice, regardless of the scope.
  • It is possible to provide less complex advice in a way that is consistent with the best interests duty and the law generally.


Scaled advice is advice about a specific area of an investor’s needs, for example insurance, or about a limited range of issues. This in contrast to traditional ‘holistic’ advice where advice is provided on all aspects of the client’s financial circumstances in a full financial plan. It is expected this will enable consumers to access beneficial advice at an affordable cost.