Consumer protection ... in due course

When professional services which have been to a significant extent self-regulated become the subject of legislation, it is likely that the introduction and ‘bedding down' of the legislation will take time and require extensive consultation. This was evident with the introduction of the Tax Agent Services legislation during the 2009 year. The Tax Practitioners Board is still engaged in the lengthy process of developing the regulatory framework which underpins those laws.

A similar scenario is apparent in relation to the operation of the financial services industry. A relevant question becomes, what is a reasonable timeframe within which to establish the rules by which the industry must operate? In April 2010 the Federal Government announced the principles upon which legislation would be based in order to regulate the delivery of financial services, however it was not until 29 August 2011 that treasury released draft Future of Financial Advice legislation for public consultation.

In the period between the original announcement and the arrival of draft legislation much of the public comment focused on the basis upon which fees paid for the delivery of various financial services would be determined. Those persons who might be described as being on the fringes of the financial services industry, rather than mainstream participants, may not be fully aware of the range of issues, in addition to remuneration, which will be covered by the legislation.

Consumer protection is the key objective. The proposed legislation imposes a specific duty on the provider of financial advice to act in the best interests of their client at all times and to ensure that the client's interests are protected in the event a conflict of interest arises. Interesting issues may arise for the service provider who has an arrangement to dispense products from a particular supplier, but none of those products best serve the needs of a particular client.

In the April 2010 announcements a ban on trail commissions was foreshadowed. This has been confirmed in the draft legislation, however an existing contract which provides for the payment of trail commissions after 30 June 2012 will not be affected. The draft legislation also confirms a ban on up-front and trail commissions which are attributable to group risk insurance within superannuation and other life policies falling within a My Super or default arrangement. This would appear to permit the payment of commissions in respect of individual life policies held by a self managed superannuation fund, although the market might dictate in the future that such an arrangement does not occur.

Interestingly, it is proposed that a restriction be placed on the ability to use the designation ‘financial planner', however this will be the subject of a consultation paper which is not expected to be issued before the end of this year.

The creation of appropriate consumer protection legislation is an admirable objective. The delicate balance, which is often a source of frustration, is between taking time to get the law ‘right' and lengthy delays which leave the community in a position of uncertainty.