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Publications / Corporate Advisory

30 Jan 14
FOFA update - ASIC's common sense response to proposed reforms

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On 20 December 2013 the Assistant Treasurer, Senator the Hon Arthur Sinodinos, reiterated the Federal Government’s previous representations to amend or repeal certain Future of Financial Advice (FOFA) provisions which it considers go too far. 

In response to the Government’s announcement, the Australian Securities and Investments Commission (ASIC) has confirmed it will not take enforcement action in relation to provisions the Government is planning to repeal – a common sense approach which is welcome news and removes uncertaintyfor the financial services industry.

Partner, Tim Wiedman, summarises the amendments proposed by the Government and the practical effect of ASIC’s position for financial services licensees and their representatives.

Proposed reform and impact for licensees and representatives

Reform

Practical effect

Removal of opt-in requirement

The opt-in requirement will be removed and advisers who have ongoing fee arrangements with retail clients will not need to obtain the client’s agreement every 24 months in order for the fee arrangement to continue.

The opt-in requirement only applies to post-1 July 2013 retail clients who have ongoing fee arrangements.  As the opt-in requirement will require advisers to commence renewing ongoing fee arrangements in July 2015 (unless an adviser decides to renew more frequently than every 24 months), this obligation should be repealed prior to advisers having to comply with the obligations.

Fee disclosure statement – not required for existing clients

The Government will remove the obligation to provide a fee disclosure statement to existing/pre-FOFA clients.

Fee disclosure statements are required to be given to both new clients (post-1 July 2013) and existing clients (pre-1 July 2013). 

Depending on the approach adopted by an adviser, fee disclosure statements will be issued to existing clients between 1 July 2013 and 30 January 2014. 

For advisers who have not yet provided a fee disclosure statement to existing clients, ASIC’s announcement means the adviser does not have to issue fee disclosure statements to existing clients. 

Where advisers have already provided a fee disclosure statement to existing clients, the Government’s proposal to repeal this obligation, coupled with ASIC’s announcement, ensures that no future fee disclosure statements will need to be given to those clients (even if the provisions have not been repealed when the next fee disclosure statement is due to be given to an existing client).

Best interests duty – removal of ‘catch all’ requirement for safe harbour provisions

The FOFA reforms impose a best interests duty on advisers who provide personal advice to retail clients.

The best interests duty includes a safe harbour provision which means the adviser is deemed to have acted in the best interests of the client if they have taken certain actions. 

This safe harbour provision includes a ‘catch-all’ requirement for the adviser to take any other step which would reasonably be regarded as being in the best interests of the client.

The Government proposes to repeal this ‘catch-all’ requirement to provide advisers with certainty that if they take the other specific actions listed in the safe harbour provisions they will have satisfied the best interests duty.

The effect of ASIC’s announcement is if ASIC assesses whether an adviser has discharged its obligations to act in a client’s best interests (for example, as part of ASIC’s surveillance activities), and if the adviser can demonstrate they meet the requirements of the safe harbour provisions (excluding the ‘catch-all’ requirement). ASIC will then agree the adviser has discharged its best interests duty and ignore the ‘catch-all’ requirement.   

Best interests duty – recognition of scaled advice

The Government will amend the FOFA provisions to explicitly recognise that advisers and clients can agree on the scope of financial advice to be provided.

The previous Government’s position is the FOFA legislation facilitated scaled advice.  The current Government proposes to amend the FOFA legislation to expressly recognise that advisers can provide scaled advice. 

ASIC have already issued Regulatory Guides regarding scaled advice, namely, Regulatory Guide 90: Example statement of advice - scaled advice for new client and Regulatory Guide 244: Giving information, internal advice and scaled advice.  A key feature of ASIC’s policy is for the scope of advice to be agreed by the adviser and the client in light of the client’s goals, rather than determined by the adviser.

We expect ASIC will continue to apply its policy on scaled advice and will reassess once the Government provides specific details of how the explicit recognition of scaled advice will operate.

Ban on conflicted remuneration – limiting the ban on life insurance inside superannuation

The ban on conflicted remuneration on risk insurance in superannuation will be limited to automatic insurance cover within superannuation funds where no personal financial advice about the products has been provided (i.e. when automatic coverage is provided inside a default (My Super) superannuation fund).

The impact of ASIC’s position is that commissions can be paid on risk insurance products provided within superannuation funds, where personal advice has been provided to the client.

Where such commissions would be conflicted remuneration under the existing FOFA provisions, ASIC will not take enforcement action. 

Ban on conflicted remuneration – exclusion for general advice

The Government will exempt the provision of general advice from the ban on conflicted remuneration.

In light of ASIC’s position, product issuers will be able to pay, and licensees and representatives receive, commissions and other benefits where the licensee or representative has only provided general advice to the client.  In these cases ASIC will not take enforcement action even though such commissions and benefits are prohibited by the conflicted remuneration ban under the current FOFA provisions.  

This is a key win for product issuers, who prior to FOFA, frequently paid advisers a commission where the adviser arranged for their client to acquire or invest in the issuer’s product.

Ban on conflicted remuneration – execution only exemption

The FOFA provisions provide an exemption from the ban on conflicted remuneration for a benefit given to a licensee or representative relating to the issue or sale of a financial product where advice in relation to the product or similar products has not been given by the licensee or representative to the retail client in the 12 months immediately before the benefit is given.

The Government proposes to amend the exemption to introduce a causal link so that monetary benefits are permitted when no advice has been provided to the client by the actual individual performing the execution service (i.e. arranging for the issue or sale of the financial product), as opposed to by the licensee or representative generally.

A monetary benefit can be given to an individual who facilitates the issue or sale of a product to a client.  This is provided the individual has not given financial product advice to the client in the previous 12 months and ASIC will not take enforcement action, even if the benefit would constitute conflicted remuneration under the current FOFA legislation.  

Ban on conflicted remuneration – expansion of training exemption

The FOFA provisions permit a non-monetary benefit which has a genuine educational or training purpose, is relevant to the provision of financial product advice to retail clients and meets other requirements set out in the FOFA provisions. 

The Government proposes to expand the exemption to cover training relevant to conducting a financial services business generally, rather than only training relevant to the provision of financial product advice. 

ASIC will not take enforcement action for non-monetary benefits given to a licensee or representative in relation to training which is relevant to conducting a financial services business and which meets the other requirements set out in the FOFA provisions.

Volume-based shelf-space fees

The Government will revise the ban on volume-based shelf-space fees to clarify that incentive payments between fund managers and platform operators for preferential treatment of certain products on the platform ‘shelf’ are banned.

To the extent ASIC identifies incentive payments which do not currently contravene the ban on volume-based shelf-space fees, we believe it is unlikely ASIC will take enforcement action given the fund manager and platform operator would currently be complying with FOFA provisions.

Rather, we suspect ASIC will suggest or encourage the platform operator and fund manager to remove or restructure the incentive payment.  If ASIC identifies such incentive payments, it is also likely they will revisit the fund manager and platform operator upon the Government’s amendment taking effect to ensure compliance with the prohibition.

Definition of ‘intra-fund advice’

In assessing the proposed FOFA reforms during the consultation stages, the Coalition members of applicable Senate committees raised concerns that intra-fund advice, being the provision of financial advice by superannuation funds to their members, was not defined and therefore its treatment under the FOFA provisions was uncertain. 

We anticipate the Government’s intention with defining ‘intra-fund advice’,  is to clarify how the best interests duty and ban on conflicted remuneration will apply to the advice.

The Government’s media release does not provide specific details on the impact of defining ‘intra-fund advice’.  The coalition representatives on the applicable FOFA Senate committees stated that intra-fund advice should be defined as being general advice only and any personal advice provided within a superannuation fund is expressly subject to the best interests duty and paid for by the recipient rather than members as a whole.

While the Government’s media release did not confirm that its intention is to implement the coalition’s original views and therefore provides uncertainty for ASIC, we expect there will be limited impact for ASIC.  ASIC will continue to apply the best interests duty to all personal advice provided to retail clients (subject to any other exemptions), including within a superannuation fund.

Expansion of grandfathering arrangements

The Government proposes to:

  • amend existing grandfathering provisions to exempt certain benefits under pre-existing arrangements from the ban on conflicted remuneration, and to allow advisers to move between licensees and continue to access grandfathered benefits in certain circumstances, and
  • clarify the operation of the grandfathering arrangements in the context of the sale of a financial planning business, superannuation to pension switches under multi-product offerings, and employee advisers becoming self-employed advisers.

The Government will need to provide further details of proposed modifications in order for ASIC to recognise grandfathering provisions prior to their actual implementation. 

Ideally, ASIC should work with the Government to understand the scope of the proposals and make a further announcement providing these details and confirming it will not take enforcement action if licensees and representatives treat such arrangements as grandfathered prior to the Government implementing its reform agenda.

We expect the Government’s amendments will clarify that if an adviser with grandfathered clients moves from Licensee A to Licensee B, then not only will the clients continue to be grandfathered (in accordance with the current provisions which enable conflicted remuneration to continue to be paid), but will also recognise that Licensee B can pay conflicted remuneration to the adviser in respect of those clients. Such remuneration will be treated as grandfathered, presuming the remuneration arrangement is similar to what the adviser held with Licensee A. 

Hopefully, the Government’s changes will also clarify that if a licensee receives remuneration from a client which is not conflicted remuneration, then the licensee can pay all or part of that remuneration to an employee adviser (who provided advice to that client) and such payment will not constitute conflicted remuneration.

Ban on conflicted remuneration – expansion of exemptions

The Government proposed to amend the conflicted remuneration prohibition to:

  • allow for the payment of benefits under ‘balanced’ remuneration structures
  • expand the basic banking exemption to include all simple (i.e. ‘Tier 2’) banking products, and
  • permit the payment of performance bonuses that are calculated by reference to remuneration which is exempt from the ban on conflicted remuneration.

Product issuers will be able to pay, and licensees and representatives accept commissions and other remuneration for all simple banking products.

Employers will be required to pay licensee and representative employees’ performance bonuses calculated by reference to exempt remuneration.

ASIC will not take enforcement action even though such remuneration may be conflicted remuneration under the current FOFA provisions.

This circumstance will also apply to ‘balanced’ remuneration.  We believe the Government will need to provide further details of what constitutes ‘balanced’ remuneration structures to give ASIC, licensees and representative’s certainty as to the payments which will be treated as exempt from the ban on conflicted remuneration under that exemption. 

Ban on conflicted remuneration – expansion of stockbroking exemptions

The Government will expand the existing exemptions from the ban on conflicted remuneration for stockbroking activities to:

  • clarify the application of the stamping fee exemptions to IPOs, and
  • clarify the application of the brokerage fee exemption to products traded on the ASX24. 

Again, product issuers will be able to pay, and licensees and representatives receive, brokerage fees in these circumstances without ASIC taking any enforcement action.

In order for ASIC and the financial services industry to give effect to these exemptions, the Government will need to details what ‘clarification’ will be undertaken.  However, we are hopeful ASIC will expand the stamping fee exemption to investment entities and Real Estate Investment Trusts (REIT).

 

Concerns with proposals
While financial services professionals can take comfort they can now operate their business in accordance with the Government’s proposed changes without the threat of enforcement action by ASIC, they must appreciate ASIC’s policy is not binding to consumers whom financial services are provided.

A consumer could take action against a licensee or representative for a breach of a FOFA provision even though the Government proposes to repeal the particular provision and the licensee or representative operated in reliance on such proposal.  For a majority of the proposed changes, this will be an academic concern as one would expect a consumer will only take action to recover loss or damage suffered due to a breach and they are unlikely to do so due to the Government’s proposed reforms. 

For example, a client is unlikely to take action against an adviser for a breach of the conflicted remuneration provisions where the adviser gave the client general advice on a managed fund and received a commission from a product issuer (from the issuer’s own resources) for the client investing in the fund.  This is attributed to the fact the client has not suffered loss or damage due to the breach as the commission was not paid from the client’s funds. 

However, if a client took action against an adviser for failing to act in the best interests of the client for advice given prior to the Government repealing the ‘catch-all’ requirement, the adviser would need to demonstrate it had taken any other steps which would reasonably be regarded as being in the best interests of the client (i.e. satisfy the ‘catch-all’ requirement), as well as the other requirements of the ‘safe harbour’ provisions, to have the benefit of being deemed to act in the best interests of the client (and, if not, the onus is on the adviser to demonstrate they have otherwise met their best interests duty).  

To remove this uncertainty, the Government should both confirm that its proposed amendments will have retrospective effect and seek to implement its FOFA reform program as soon as possible.  Licensees and representatives should also exercise caution in relying on the Government’s proposed reforms prior to their implementation and identify the proposals which may expose the licensee or representative to claims from clients if relied upon prior to repeal or amendment by the Government.  This will be of particular relevance, if the Government does not intend its reform agenda to have retrospective effect. 

How can McCullough Robertson assist?
McCullough Robertson can advise licensees, representatives and product issuers understand the impact of the Government’s proposal and ASIC’s response and assistance in taking advantage of these reforms.
 

Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.
 

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