How financial advisers are paid has been the headline act of the Future of Financial Advice (FOFA) legislation, but another issue has much wider implications.

The Federal Government included a “best interest” obligation in the first draft of the FOFA bill, but this has been dropped from the final legislation that was introduced into Parliament last week.

But those brokers and advisers who are celebrating the removal of this onerous piece of legislation should put down their champagne glasses. It will be included in future FOFA bills.

“A best interests obligation for financial advisers requires them 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,” the original draft of the FOFA bill said.

Looking at the submissions on the draft bill, both the general insurance and life insurance industries have complained about the lack of definitions and requirements to meet this obligation.

The National Insurance Brokers Association (NIBA) says it is totally opposed to the “best interest” obligation being extended to the risk insurance industry.

In its submission, NIBA says the Federal Government has “not conducted a risk insurance market review to determine the nature and extent, if any, of issues or concerns in the area of financial advice relating to risk insurance products”.

It also says the Government has not undertaken any cost-benefit analysis of applying the obligation to risk insurance brokers and advisers.

“There will be a significant increase in compliance costs; in particular the increase in cost of professional indemnity insurance.

“Less personal advice will be provided for no real consumer benefit as brokers avoid these costs and increased risks.

“This is a clear detriment for consumers who need access to competent professional advice on what can be complex issues.”

The Insurance Council of Australia (ICA) says the best interest obligations are “overly prescriptive and lack the flexibility to be workable in a general insurance context”.

“It is unreasonable to expect an adviser, whether they be a call centre operator or an individual authorised representative, to bear a burden to identify potential external advice regarding products (including non-financial services products) that may assist a client,” ICA says in its submission.

“Product providers who employ or authorise such advisers would be required to train, supervise and monitor the provision of such guidance on an unpredictable and flexible range of considerations.”

ICA argues the majority of personal lines insurance is sold through call centres, and to meet this obligation providers would have to train staff to identify other areas of financial need.

The best interest obligation “would impose a significant compliance burden on general insurers and is likely to discourage the provision of personal advice to customers”, it says.

The Association of Financial Advisers (AFA) has expressed concern about what steps an adviser must undertake to act in the client’s best interest and how they can also take unspecified, additional actions.

“The draft legislation lacks an adequate overarching definition of what will, and will not, constitute the best interests of the client in order that advisers are able to comply with the requirements,” the AFA says in its submission.

“On the basis of this draft section, should an adviser not complete one or more of these steps, then this will constitute a breach of the legislation.

“Conversely, an adviser that completes all of the required steps will not guarantee meeting the requirement to act in the ‘best interest’ of the client.”

The AFA wants further clarity on the requirements of an adviser acting in the best interest of a client.

The Financial Services Council (FSC) has also called for better drafting of the best interest obligations.

“The exposure draft issued establishes a duty in section 961C(1) but has not defined what ‘best interest’ means,” the FSC says in its submission.

“Given the significance of this change, the dimensions of the term ‘best interest’ need to be explained in the explanatory memorandum (with the bill).”

The FSC argues that “best interest” should be limited to financial interest and exclude physical and emotional issues when looking at further advice.

There were also a number of submissions from lawyers and industry participants that also raise serious concerns about the lack of definition of “best interest”.

Brokers and advisers will have to remain in the dark about meeting these obligations until the Government introduces the second FOFA bill.

This requirement supports the contentions of many critics that FOFA is a poorly drafted bill that has not been created to help consumers choose the services and products they want to meet their insurance needs.

And the thrust of the legislation raises the question about whose best interest the Government is really looking after with FOFA.