FoFA reform – what is it?

The Australian Government has placed a great deal of information relating to the Future of Financial Advice (FoFA) reforms on a dedicated website. The Government stated that FoFA reforms focus on two things, firstly, improving the quality of financial advice, and secondly, expanding the availability of more affordable forms of advice. The ultimate goal of the reforms is to improve investor protection and instil confidence in the financial advice industry.

Overall benefits of FoFA

According to the Government, the overall benefits of the reforms for consumers are:

What - better quality advice
Why - consumeers can trust that the advice they receive is not influenced by product commissions

What - a more competitive advice market
Why - greater fee transparency means advisers will have to compete for clients on cos

What - a reduction in product fee
Why - product manufacturers have to compete on cost as they cannot pay advisers to sell their products

What - greater availability of low-cost advice on single issues
How - through the expansion of scaled advice

What - less rogue advisers in the industry
Why - ASIC has greater powers to remove licensees and individual advisers from the industry

The “best interest duty” for retail clients starts 1 July 2013

The “best interest duty” is a key FoFA measure commencing on day one of the new 2013/14 financial year. Essentially, when providing advice to retail clients, financial advisers now have a statutory duty to act in the clients’ best interests and place the interests of the client ahead of their own interests. 

A SME can be a retail client

“Retail client” is defined in section 761G of the Corporations Act 2001 (Cth) and Chapter 7, Part 7.1, Division 2 of the Corporations Regulations 2001 (Cth). The statutory definition of “retail client” is not the easiest to understand, but the recent ASIC Regulatory Guide 139 (June 2013) provides some helpful commentary:

“RG 139.82 - The definition of retail client varies depending on whether the relevant financial product is a general insurance product, a superannuation product, a retirement savings account product (within the meaning of the Retirement Savings Accounts Act 1997), or any other type of financial product.

RG 139.83 A small business may be a retail client. A ‘small business’ is defined in s761G as a business employing fewer than (a) 100 people (if the business manufactures goods or includes the manufacture of goods); or (b) 20 people (otherwise).”

There are other criteria for a SME to qualify as a retail client. It is wise for SMEs to seek confirmation from their financial advisers regarding whether they are being treated as retail clients.

SMEs and FoFA

Many SMEs can expect to reap some benefits of FoFA reform. For example, the reforms should provide greater protection for SMEs who are consumers of financial products and services. These can include commercial lending products and business insurance products. But a potential down side of this is that the providers of financial advice have more compliance matters to deal with, so unless these providers choose to absorb any increase in costs due to regulatory compliance, such costs may well be passed onto the consumer of the advice. 

Are you a small business borrower? You should know about this new ASIC report on EDR schemes. The ASIC report was released on 13 June following public consultation which highlighted that:

1. simpler and lower value small business lending disputes can he handled by the lender's external dispute resolution (EDR) schemes, but
   
2. more complex and high value small business lending disputes are more appropriately addressed in court.

What is EDR? Basically it is an alternative to going to court. Using ASIC's own definition, an EDR scheme is a free, independent dispute resolution service that can help borrowers if they have a complaint or dispute with one of its members (for example, a credit provider or broker), or if borrowers are having difficulties repaying their loan. It should be noted here that, before an EDR scheme can consider a complaint or dispute, (using the above example) the credit provider or broker must be given an opportunity to resolve the dispute with the borrower directly.

The new ASIC report, together with updated regulatory guidance, refined the rules for access to EDR schemes for small business borrowers. Here are the key points of ASIC's release (extracted from ASIC's website):

1. Small business borrowers will continue to be able to take disputes with their lender to the lender's EDR scheme.
   
2. Even where the lender has already commenced court proceedings against them, if the credit contract is $2 million or less, the small business borrower will continue to be able to take the matter to the EDR scheme.
   
3. Where the loan exceeds $2 million and the lender has already commenced proceedings in a court, the small business borrower will not have access to EDR. This restriction commences from 1 January 2014.
   

It is wise to have some knowledge of how EDR schemes work. Click here to read more about EDR schemes and here to read more about ASIC's latest release.

Do you know you can access a free copy of the PPS Act online? Today, the Australian Government’s ComLaw released the latest PPS Act as amended, taking into account amendments up to Federal Circuit Court of Australia (Consequential Amendments) Act 2013 (which is an Act devoted largely to the renaming of “Federal Magistrates Court” to “Federal Circuit Court”).

You can access the updated PPS Act here.

You may be thinking "why would I want to read the PPS Act?" Whether you are a lawyer or not, if you want to understand some popular PPS terms (for example, the definition of "security interest"), find a summary of key PPS concepts (for example, what “registration” really entails), or find examples to aid your understanding of the law, a quick search of the Act may just give you the answer you want. Here are some tips to get you started:

1. look at section 10 for definitions, 
   
2. go to the beginning of each part of the Act for a guide to that part (usually in the form of a summary), or
3. search the word "example" to locate various examples provided by the drafters of the legislation (for example, in section 3 there are examples of what the term "personal property" includes).

The PPS Act is not a simple piece of legislation to master, but some PPS answers are easier to find than others. For in-depth PPS analysis or expert legal advice, definitely consult an expert!  (And Legal Know-How can help you.)