Regulation is top future risk for financial services

The threat of regulatory change has outranked cybercrime as the biggest risk to the financial services industry

The threat of regulatory change has outranked cybercrime as the biggest risk to the financial services industry, according to a recent survey. The Allianz Risk Barometer shows that a raft of post-Global Financial Crisis changes in Australia, including the Future of Financial Advice (FOFA) reforms, saw regulation move to first place on the risk scale for financial services. 

Although it supports the principles of FOFA, the government has stated that it believes the previous government's reforms went too far, creating unnecessary complexity, imposing burdens on industry and reducing the availability and increasing the cost of advice to consumers.

The government's previously announced amendments include:

  • Removing the 'opt-in' requirement: Removing the requirement for advisers to request their clients renew their advice agreements every two years if clients are paying ongoing fees.
  • Amending the annual fee disclosure requirement: Removing the requirement for advisers to provide annual fee disclosure statements to clients who entered into a fee arrangement before 1 July 2013.
  • Removing the catch-all provision from the 'best interests duty’: Removing the requirement in section 961B(2)(g) of the Corporations Act 2001 for advisers to take any step that, at the time that advice is provided, would be regarded as being in the best interest of the client.
  • Explicitly allow scaled advice: Amending the best interest duty to explicitly allow for the provision of scaled advice.
  • Exempting general advice from conflicted remuneration: Exempting benefits relating to the provision of general advice from the ban on conflicted remuneration.
  • Introduce a casual link into the execution-only exemption: Introduce a casual link into the exemption so that benefits are permitted where no advice has been provided to the client by the individual performing the execution service in the previous year months.
  • Amending the conflicted remuneration provisions: Amending the conflicted remuneration provisions to allow for the payment of benefits under a 'balanced' remuneration structure, expand the basic banking exemption to include all simple banking products and permit the payment of performance bonuses that are calculated by reference to remuneration which is exempt from the ban on conflicted remuneration.
  • Amend the existing grandfathering provisions: Amending the existing grandfathering provisions to allow advisers to move between licensees and to continue to access grandfathered benefits in certain circumstances. 
  • Life insurance inside super: The ban on conflicted remuneration will only apply to commissions on risk insurance products inside superannuation in circumstances where no personal financial advice about these products has been provided.
  • Broaden training exemption: Broaden the existing training exemption that provides for training in relation to providing financial product advice as a permitted non-monetary benefit, to include other forms of relevant training.
  • Amend the drafting of the ban on volume-based shelf-space fees: Clarify that incentive payments between fund managers and platform operators for preferential treatment of certain products on the platform 'shelf' are banned.
  • Define intra-fund advice: The definition of intra-fund advice will be referenced in the FOFA provisions.
  • Amend the existing stockbroking-related exemptions: Clarify the application of the stamping fee exemption to initial purchasing offer arrangements and clarify the application of the brokerage fee exemption to products traded on the ASX24.
  • Minor technical issues: A number of amendments will be made to address technical issues including clarification of the client-pays exemption and consequential amendments to the application of the wholesale and retail client distinction.

According to the Australian Securities & Investments Commission (ASIC), while it will take enforcement action where it sees breaches of the new requirements, its focus during the facilitative period will be on education. ASIC will not take enforcement action in relation to the specific FOFA provisions that the Government is planning to repeal. ASIC will review and consult on its regulatory guides on FOFA once the announced amendments have been made.

Niran Peiris, managing director of Allianz Australia, said in a statement that regulatory fear could create a "systemic threat" for financial services businesses.  

"At the industry level globally, regulatory change was the number one risk facing the power/utility sectors and financial services, the latter reflecting increasing supervisory intervention around the globe following the Global Financial Crisis," Peiris said.  "Regulatory change over recent years, as well as foreshadowed reviews or changes in the areas of financial services regulation and carbon taxation/renewable energy, might also be impacting here."

 

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Contributing Author

Amanda Ciccatelli

Amanda G. Ciccatelli is a Contributing Writer for InsideCounsel, where she covers the patent litigation space. Amanda earned a B.A. in Communications and Journalism from...

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