31/05/2011

Under the Future of Financial Advice ("FOFA") reforms, the exemption that allows "recognised" accountants to provide structural and establishment advice in relation to self managed superannuation funds ("SMSF") will come to an end.

Treasury has recently published further information on Future of Financial Advice (FOFA II) which includes proposals on the type of advice that may be provided by licensed accountants under a streamlined licensing system. This has largely been favourably received.  Treasury will report to the Government on the outcome of consultation by the end of May and a decision will be made as to the legislative changes and transition period required to implement the changes.

SMSFs are a financial product under the Corporations Act 2001.  As an AFSL licensee, accounting organisations and their representatives will be regulated by the Corporations Act 2011 and the Australian Securities and Investments Commission (“ASIC”) in the provision of SMSF advice.  This is in addition to the requirements of the accounting bodies and other relevant legislation.

FOFA Stage II

In the provision of financial advice, the Government recognises that accountants may not wish to provide "holistic advice and recommendations to clients to purchase specific financial products".  A streamlined licence that allows accountants to advise on “" broader range of financial issues" is considered to be the appropriate arrangement.  There are essentially two elements to the proposal.

1. Provision to be made for "non-product financial advice".  This involves "granting licences that relate to classes of financial products rather than specific products".
2. Recognition of relevant experience of accountants for licensing purposes.

Non-product Financial Advice

Under the current licensing exemption, the SMSF advice that may be provided by “recognised” accountants is limited to establishment, operation and structuring advice to clients who control or will control a SMSF.

The introduction of “non-product financial advice” will potentially open the door for accountants to provide broader and more relevant financial advice to clients in relation to their SMSF needs.  Examples of broader advice are advice in relation to:

1. superannuation switching
2. superannuation class products
3. contribution levels
4. SMSF as part of the investment strategy
5. specific objectives and needs of the client

SMSF non-product financial advice is a form of "scaled advice" proposed under FOFA II.  Scaled advice is advice about one area of an investor’s needs, or about a limited range of issues.  To facilitate scaled advice, the Government has also proposed to amend the existing reasonable basis for advice obligation in the Corporations Act to make it clear that this obligation is commensurate and scalable to the client’s needs when providing advice.

AFS Licensees Conduct and Obligations

Applying for a AFS licence is an important decision. AFS Licensees have specific obligations under the Corporations Act.  Generally, these include:

1. compliance with conduct and disclosure requirements
2. on-going competence, knowledge and skills of the licensee and their representatives
3. compliance with financial services laws
4. management of conflicts of interest and risk management
5. adequacy of financial and technological resources and
6. dispute resolution arrangements.  

Licensees must have the required procedures and mechanisms to meet the above obligations.  In addition, competency, training and knowledge is an on-going requirement.  The ASIC has already published Consultation Paper 153 to revamp Regulatory Guide 146 which sets out the training requirements of financial advisors.  It was recommended that advisors who advise on Tier one products like SMSFs have to pass a national certification exam as well as online knowledge update every two years.

The extent that Regulatory Guide 146 will apply to licensed accountants remains to be decided.  The ASIC Consultation Paper 153 illustrates the seriousness with which the Regulators look upon AFSL competencies and what licensing involves. 

Generally, the Government has taken a practical approach to accountants' licensing and has proposed to put in place measures to recognise the relevant experience of accountants and provide specific guidance on how "a typical accountant might apply for a licence".  Lobbying is ongoing in relation to recognition of existing knowledge of recognised professionals.

Licensing is a legal matter.  Should you require assistance in regard to the Corporations Act requirements, please contact us on (02) 8296 6222.