Shorten’s legacy – FoFA and LIF

Mike Taylor

Managing Editor and Publisher

6 September 2024

ANALYSIS

Mention the name Bill Shorten to financial advisers with more than 15 years’ time in the profession and they will think of the Future of Financial Advice (FoFA) and the Life Insurance Framework (LIF).

Shorten announced his upcoming retirement from politics yesterday to take up a position at the University of Canberra but he was once the Minister for Financial Services in the Rudd Labor Government and oversaw both the implementation of FoFA and the genesis of the LIF.

Thus, his impact on the evolving shape and texture of Australian financial planning sector has been profound and many in the advice sector would suggest it has, overall, been negative.

Shorten was the Minister for Financial Services and Superannuation from 14 September 2010 to 1 July, 2013.

What must be acknowledged is that both FoFA and LIF significantly altered the commercial underpinnings of the financial advice sector and, ultimately, turned what were once highly profitable dealer groups underpinned by volume bonuses and rebates into marginal operations.

So, what did FOFA do? According to an Australian Securities and Investments Commission (ASIC) summation of the Corporations Amendment (Future of Financial Advice) Act 2012 and Corporations Amendment (Further Future of Financial Advice Measures) Act 2012 it introduced:

• A prospective ban on conflicted remuneration structures, including commissions and volume-based payments, in relation to the distribution of and advice about a range of retail investment products.
• A duty for financial advisers to act in the best interests of their clients, subject to a ‘reasonable steps’ qualification, and place the interests of their clients ahead of their own when providing personal advice to retail clients.
• An opt-in obligation that requires advice providers to renew their clients’ agreement to ongoing fees every two years.
• An annual fee disclosure statement requirement.
• Enhanced powers for ASIC.

Anyone who had worked in and around financial advice prior to the full implementation of the FoFA regime in 2013 will remember how profoundly it changed the sector and the commercial consequences which followed.

Where the Life Insurance Framework is concerned, Shorten was an instigator but internal Labor Party politics not least the overthrow of Kevin Rudd as Prime Minister and then the ALP’s post-Julia Gillard loss at the 2013 Federal Election meant that he had gone from relatively junior Financial Services minister to Federal Opposition leader.

Shorten had been prompted to pressure the major life insurers via the Financial Services Council (FSC) based on ASIC Report 413, Review of Retail Life Insurance Advice, that identified “a strong correlation between high upfront commissions and poor consumer outcomes”.

It found that 82% of the industry utilised upfront commission arrangements and the average commission is high (around 120%  of the year one premium). It noted that for some insurers, more than 90% of their advice channels are paid under an upfront commission model.

Notwithstanding the ALP’s defeat in 2013 the LIF remained on foot as a policy issue and was given life by the Abbott Coalition Government in the form of the Corporations Amendment (Life Insurance Remuneration Arrangements) Regulation 2016 with the regime coming into effect in 2018.

Bill Shorten will be remembered by the financial services but not always fondly.