Federal government plans to neuter part of Labor's legislation to regulate financial planners would create chaos, according to legal advice presented to the Assistant Treasurer Arthur Sinodinos.
Introduced in July 2013 in response to a string of high-profile financial collapses, the legislation imposes an overarching requirement on financial planners to act in the best interests of their clients. It also prohibits them from obtaining sales commissions and other forms of conflicted remuneration.
In the lead-up to Christmas, Senator Sinodinos announced plans to soften some of the clauses saying they ''went too far''.
The new regulations remove the catch-all ''best interests'' provision, leaving in place the specific requirements that are at present backed up by the provision. They also would allow advisers and clients to agree to limit the scope of advice in a way that made it clear there was no expectation the adviser would act in the client's best interests. The definition of ''conflicted remuneration'' would be narrowed to allow advisers to continue to receive payments in kind from product providers where the advice was general rather than personal.
The legal advice, commissioned by Industry Super Australia, was presented to Senator Sinodinos at the weekend. Prepared by the tax litigation specialist Arnold Bloch Leibler, it concludes the regulations would be ''invalid and susceptible to challenge in the courts''.
''A court declaration of invalidity would operate retrospectively,'' it says. ''This means, for example, financial advisers who relied on the regulations could be found to have acted unlawfully. The regulations would therefore create significant uncertainty and could well become the subject of protracted litigation between financial advisers and their clients - for example in an investor class action.''
At issue is whether regulations can be used to nullify parts of an Act. “Regulations are usually only a management tool to implement the details of the day-to-day operation of an Act,” the advice says.
It quotes a High Court precedent that struck down regulations it said represented “a new step policy”.
“That description is apt for the proposed Future of Financial Advice amendments,” it says.
While Labor’s law does include clauses allowing exemptions in “a particular situation” and in “prescribed circumstances” Arnold Bloch Leibler says those words cannot possibly mean “in all situations”, otherwise the words “particular” and “prescribed” would not have been used.
Senator Sinodinos is believed to be planning to introduce the regulations after parliament rises for a six-week break in March. The timing would prevent parliament disallowing the regulations until May.
Industry Super chief executive David Whiteley said he had sent the advice to the assistant treasurer in the hope that he would abandon changes that would throw the industry into renewed uncertainty.
“The laws have been in place for seven months. The right thing to do is to see how they work and then go back to amend the laws in parliament if necessary,” he said.
A spokesman for the minister said he would only regulate “to the extent legally possible”.
The regulations would be backed by legislation to be introduced within weeks. The Treasury has sought and received legal advice.