On 25 February 2009, the Parliamentary Joint Committee on Corporations and Financial Services (the Committee) resolved to inquire into issues associated with the collapse of financial product and services providers, such as Storm Financial and Opes Prime. The Committee’s report, Inquiry into Financial Products and Services in Australia,  was handed down on 23 November 2009.
The Future of Financial Advice Information Pack  was released on 26 April 2010, and is the Federal Government’s response to the Committee’s report. The Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP, said that “the Future of Financial Advice reforms are designed to tackle conflicts of interest that have threatened the quality of financial advice that has been provided to Australian investors, and the mis-selling of financial products that culminated in high profile corporate collapses such as Storm Financial, Opes Prime, and Westpoint”. 
This article summarises some of the main reforms announced by the Government in its response.
Under the reforms, the fee charged for a financial product and the fee for any advice in relation to that product must be separate. As a result, the reforms will ban:
charging clients a fee for financial advice which is a percentage of the client’s initial investment;
trail commissions charged as a percentage of a client’s assets;
fees for advice charged as a percentage of the client’s funds under management; and
any form of payment from a product provider or from any financial services business — in relation to the distribution of, or advice regarding, retail financial products — which is based on volume or sales.
Examples  of volume-based payments that are not permitted include:
payments from a provider of a financial product to a licensee or adviser based on the volume of sales of the product;
payments from licensees to their employee advisers, or authorised representatives, for the distribution of retail financial products, which are based on meeting sales targets or are volume based; and
payments based on volume that are paid from a fund manager to the platform provider and from the platform provider to a licensee.
The purpose of the remuneration reforms is to remove conflicts of interest which may affect the quality of financial advice. (For example, a particular financial product may pay a higher rate of commission than its competitors, which may lead an adviser to recommend that product, regardless of whether or not it is the product most suited to the client’s needs.) Advisers will be required to have a fee structure that is “product neutral”.
The reforms do not prevent a client and an adviser from agreeing to a deduction from the client’s investment to pay for financial advice. This is because the amount deducted is not set by the product provider and, as a result, is not a commission. An adviser cannot prefer a product provider who offers a deduction service over a provider who does not.
The remuneration reforms apply to all financial products, except risk insurance. The application of the reforms to risk insurance is to be considered at a later date.
A potential gap in the reforms is that they do not apply to “soft dollar benefits” (non-cash benefits, such as gifts and sponsored conference attendance). The Government has stated that this is “due to the varied and complex nature” of these payments. An expert advisory panel, which is to be established to review professional standards in the financial advice industry, will consider whether soft dollar payments are consistent with those standards. Treasury will then advise the Government on the best way of extending the ban on conflicted remuneration structures to “material soft dollar payments”. 
When advice is provided to a retail client, the following conditions apply.
Advisers will be required to negotiate fees directly with the client and clearly disclose the fee structure to the client — including, as far as practicable, the total adviser charges payable, expressed in dollar terms.
Advisers will only be able to charge ongoing advice fees if a payment plan has been agreed with the client, or if the charge relates to the provision of an ongoing service.
If an adviser provides an ongoing service, the adviser must send an annual renewal notice to the client. If the client does not renew the adviser’s services, the adviser cannot continue to charge the client.
The Corporations Act 2001 (Cth) will be amended to include a statutory duty requiring Australian financial services licensees and their authorised representatives to act in the best interests of their clients, and to place the interests of their clients ahead of their own when providing personal advice to retail clients.
This duty will be not be absolute: what will be required is that advisers and authorised representatives take “reasonable steps” to discharge the duty.
Other measures announced by the Government include the following.
The powers of the Australian Securities and Investments Commission (ASIC) will be strengthened in relation to the licensing and banning of individuals from the financial services industry. ASIC will be able to take into account a broader range of matters when determining whether to issue a licence, or whether to cancel or suspend a licence. ASIC’s powers to remove persons from the industry will also be increased, as it will be able to take into account a wider range of matters when considering whether or not to ban an individual.
The Government will consult with stakeholders as to whether or not the current criteria under which a client is classified as either a retail or a wholesale client need to be revised.
An expert advisory panel will be established to review professional standards in the financial advice industry, including conduct and competency standards, which may include introducing a code of ethics for financial advisers.
Mr Richard St John, a past Convenor of the Corporations and Markets Advisory Committee, has been appointed to report on the need for, and costs and benefits of, a “last resort” statutory compensation fund for investors.
Stakeholders are to be consulted on the implementation of the Government’s reforms, especially in relation to the adviser charging rules and statutory fiduciary duty, as well as on the legislation implementing the reforms.
It is not clear whether or not the Federal Opposition will support the reforms. Coalition financial services spokesman Luke Hartsuyker has said that he agrees with “much of what the Government proposes, in particular the ban on unending so-called trailing commissions”. On the other hand, opposition leader Tony Abbott has said that he does not necessarily have a problem with “upfront and transparent” commissions.  Even if the opposition does support the reforms, given that a federal election is due this year it is possible that legislation will not be passed prior to Parliament rising for the election.
In any event, the implementation of what the Government describes as the “three key reforms” is still some time away, as it has been announced that the statutory fiduciary duty, the new adviser charging rules and the ban on “conflicted remuneration structures” will not come into operation until 1 July 2012.
This article was first published in the Australian Insurance Law Bulletin, Volume 25 No 7, June/July 2010.
 Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into Financial Products and Services in Australia, 23 November 2009, at http://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services/Completed_inquiries/2008-10/fps/index. Back to article
 Office of the Minister for Financial Services, Superannuation and Corporate Law, The Future of Financial Advice Information Pack, 26 April 2010. Back to article
 Media Release by the Hon Chris Bowen MP, Minister for Financial Services, Superannuation and Corporate Law and Minister for Human Services, “Overhaul of Financial Advice”, 26 April 2010. Back to article
 The Future of Financial Advice Information Pack, above note 2, pp 13 and 14. Back to article
 Above, p 4. Back to article
 Martin P, “Commissions ban could hit mortgage brokers”, Sydney Morning Herald, 27 April 2010, at www.smh.com.au/small-business/finance/commissions-ban-could-hit-mortgage-brokers-20100427-to2f.html. Back to article