Why the reforms
The FoFA reforms are the Government’s response to the Ripoll review that came about as a result of the collapse of Storm and other financial service provider failures. In his inquiry, Ripoll found that there was a level of dissatisfaction with financial service providers, in particular a suspicion that the advice they were providing was linked to the commissions they receive. The Government decided action was needed to address this and a number of changes to the financial planning industry were proposed. Included within these changes is the decision to remove what is generally known as the ‘accountants’ exemption’, which allows accountants to provide a limited range of services in relation to self-managed superannuation funds (SMSFs).
The rationale for this change was a concern that accountants were advising on the set-up of SMSFs and driving the growth in this sector. This really reflects the Government’s fear of SMSFs and the union-driven industry superannuation sector’s fear that people can make better judgements themselves.
In reality, the increase in the number of SMSFs is a combination of the previous Government’s changes to superannuation and the poor performance of other fund sectors during the economic down turn caused by the North Atlantic recession (let’s not call it a global financial crisis as the main cause and impact was in the US and Europe). It is also a reflection on the current Government’s desire to control the accounting profession by imposing additional registration requirements on accountants in a number of areas.
A better alternative
The professional accounting bodies have not fought the removal of the exemption. While we acknowledge there are a lot of problems with the financial services sector and government regulation of the sector, we recognise that the exemption was not effective and severely limits the ability of accountants to properly service their clients.
Instead, the professional bodies have proposed that if the exemption is removed it must be replaced with something broader. We believe that accountants need to be able to discuss the full range of superannuation options with their clients, not just SMSFs. There are many situations where an SMSF is not appropriate but accountants are not able to discuss such issues without attracting the wrath of ASIC for contravening licensing requirements.
The Joint Accounting Bodies have therefore proposed that there be a new form of advice licensing, that of licensing a person to provide general financial advice that does not lead to the recommendation of a financial product (except in relation to an SMSF). The accountant, or other suitable provider, would be able to discuss all the superannuation options, give general advice about shares, debentures and investment products, and in particular be able to talk about insurance in superannuation. However, they would not be able to recommend a specific financial product, rather they would forward the client on to a specialist financial planner to advise on what products best suit the client’s needs.
The Government has indicated it supports this concept in principle but that it must work within the current system. As a result we have been working with ASIC and Treasury to achieve this. We will see if the Government is true to its word on this. If so, then accountants will fill a missing gap in the financial services area, that of providing unbiased general advice, untainted by having to sell products.
The downside for accountants, however, is that under these proposals accountants will have to become licensed within the current system, either in their own right or as an authorised representative of a licence holder.
Choices available to practitioners
If you provide advice to clients in relation to SMSFs, such as helping to set up and administer a fund, you will have to start thinking about how to address this upcoming issue. You have one of three choices: cease providing SMSF services; become an authorised representative of a licence holder or obtain your own licence.
1. Cease providing SMSF services
While the Institute would hope that few members take up this option, if the practice has a small number of SMSF clients then it may be most effective to outsource the administration and other services you provide to these clients to a specialist SMSF administrator or another accountant. The Institute is willing to assist members who would like to find another Institute member to provide such services.
2. Become an authorised representative
For those members who wish to continue to provide SMSF services, or who wish to provide a greater range of services to their clients but do not have the resources or desire to become licensed in their own rights, the most effective choice will be to become an authorised representative of another provider.
The question then becomes what sort of authorisation should they seek. Most current authorisations do not suit accountants, particularly those that do not want to sell financial services, as such authorisations tie them to selling a limited number of products, are generally expensive to obtain and come with sales targets. This is not conducive to good financial advice, particularly if the Government wants to disentangle financial advice from commissions and pressure to sell products.
Having seen where the Government has been heading, and wishing to find a solution for our members, the Institute has been developing what we call our Financial Services Platform. This will provide members with a number of solutions to the upcoming FoFA issues.
The platform will provide four main options for members that we believe will suit most members’ needs:
(a) Authorisation to talk about superannuation and provide services relating to SMSFs.
(b) Wider financial advice authorisation to recommend financial products.
(c) A hotline service for members who do not want to be involved in financial advice but wish to offer a phone service for clients with ad hoc financial product issues.
(d) A referral system to enable clients with financial advice needs to be referred to a trusted adviser.
For members who just want to help their clients with SMSF issues, administer their fund and talk about superannuation generally, the first option is likely to be the most effective solution as it will allow you to continue to service clients and free you to provide other forms of advice. Those who want to go further, become more involved in financial planning and provide a greater range of services to clients (as well as increase the value of your practice) should consider the second option. The third and fourth options are for those members who want to offer clients a solution but do not want to be involved in financial services at all.
In developing our Financial Services Platform, the Institute went to tender with a number of Australian Financial Services Licence holders to provide these services. They must be willing to work with the Institute and the members, must not be sales focused or come with minimum sales requirements and must offer a range of services across the whole of Australia. And most importantly they must provide a cost-effective solution to members. We are also seeking more than one provider so as to provide members with a choice and to prevent the Institute being captured by a licence holder.
3. Get your own licence
For members who want to control their own destiny and not be limited in the services they provide, the obvious option is to become licensed in their own right. The Institute is also working to assist those members wishing to go down this path. To this end we are working with ASIC to allow accountants to more easily become licensed as individuals. We have mapped the professional and ethical requirements of accountants against ASIC’s requirements for licensing. We have also discussed the vexed issue of recognising accountants’ experience and will shortly have available a guide to members on how to apply for a licence and how to provide the relevant material to be licensed.
While getting your own licence should be the ultimate goal for members, there are some practical difficulties that might limit a member’s ability to be licensed or to be licensed to give all the services they should be able to provide. From our discussions with ASIC, our biggest concern is the matter of recognition of accountants’ experience. ASIC has indicated that it is likely to accept an accountant (provided they can show experience) having relevant experience in superannuation, basic deposit products and some forms of basic insurance. While this may be sufficient for some accountants we do not believe it goes as far as it should. We believe it is vital for an accountant to be able to talk about insurance in superannuation and things such as shares, debentures, managed investment funds and the likes – not to give recommendations about such products but to discuss them in general.
Another limiting factor for members is the cost of licensing. While we have worked to keep costs down, they are likely to be too high for some members. The main stumbling blocks on costs will be things such as PI insurance (which is often around $10,000 for many financial planners) and an audit conducted by a registered company auditor (around $3500) on top of registration and training costs.
The future
Members in practice who are involved with SMSFs will have to be registered, whether it is to provide advice and services to SMSF trustees or to audit a SMSF. While this can be seen as further proof of the Government’s ongoing assault on SMSFs, in particular to support its union backers who gain significant financial returns from industry funds, it is something members need to be prepared for.
The Institute is working to advocate members’ views and to support members in this new world. Over the next year members in practice will have to decide how they will deal with these changes. No single answer will suit all members and this is why the Institute has gone for a multi-pronged response.
