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Australia – Streamlining FOFA.

25 November, 2014

 

Legal News & Analysis – Asia Pacific – Australia – Banking & Finance

 

Senate disallows Government amendments to the Corporations Regulations to streamline FOFA


What You Need To Do

 

  • The Senate has passed a motion disallowing the Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014 (Cth), which amended the Future of Financial Advice legislation.
  • Financial services providers will need to comply with the FOFA legislation as it was enacted before the introduction of the Regulations.
  • In addition to the Regulations that amended the consumer protection aspects of the FOFA legislation, the Regulations provided a number of amendments to clarify ambiguous provisions of the FOFA legislation or fix unintended consequences of the FOFA legislation.
  • There remains considerable uncertainty in relation to many of these issues, which are now again unresolved as a result of the disallowance of the Regulations.

 

What You Need To Do

 

  • Financial services providers will now need to make systems and process changes to ensure compliance with the FOFA legislation as it was before the introduction of the Regulations.
  • If you are unsure about the status or any aspect of the FOFA legislation or your obligations and duties under the FOFA legislation, please contact us.
 

Background


On 19 November 2014, the Senate passed a motion disallowing the Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014 (Cth) (Regulations) introduced by the Government to amend the Future of Financial Advice (FOFA) legislation.

 

Disallowance By The Senate


The motion to disallow the Regulations was passed by the Senate with support from a Senate majority of Labor Senators, Greens Senators, Australian Motoring Enthusiasts Party Senator Ricky Muir, Palmer United Party Senator Jacqui Lambie, and independent Senators Nick Xenophon and John Madigan.

 

Response From Government And Industry Groups


The Government has criticised the motion, highlighting the impact on the financial services industry from the continuing uncertainty arising from the introduction and frequent modification of the FOFA legislation. Industry groups have also expressed concern with the motion to disallow the Regulations.


Regulations Clarifying FOFA Legislation


While the main grounds for the disallowance has been stated to be consumer protection, what seems to have been overlooked is that the Regulationsprovided a number of amendments introduced to clarify ambiguous provisions of the FOFA legislation or fix unintended consequences of the FOFA legislation. We set out below some of the key Regulations that have now been disallowed and the consequences for financial services providers.


Grandfathering Arrangements And Conflicted Remuneration


Sale Of Business — regulation 7.7A.16BA clarified that when a business is sold, the rights to the grandfathered benefits are transferred to the purchaser. This regulation was introduced to ensure that businesses have clarity that such benefits can be transferred.
The removal of this regulation means that the clarification of the availability of grandfathering from the ban on conflicted remuneration in the sale of a business has been removed and there is uncertainty in respect of benefits being grandfathered where financial services providers have already entered into arrangements, or intended to do so, in reliance on the Regulations. The disallowance of the Regulations means potentially unexpected and substantial costs in complying with FOFA for companies or individuals acquiring or divesting a financial services business.


Redirected Benefits — authorised representatives will not be able to rely on regulation 7.7A.15B and regulation 7.7A.16(2), that provided that a benefit (“a redirected benefit”) was to be grandfathered even if it has been redirected under one or more later arrangements.
For example, following the disallowance of the Regulations, when an authorised representative moves to another licensee (taking its client book to the new licensee), the grandfathered benefits(ie those entered into prior to the application of the ban on conflicted remuneration) paid to the previous licensee cannot be redirected to the new licensee.
The disallowance of the Regulations mean uncertainty and inflexibility for those authorised representatives that had intended to enter into such arrangements, or had intended to do so,with a new licensee.


Opt-In Requirement For Ongoing Advice


The opt-in requirement in respect of ongoing fee arrangements entered into after 1 July 2013 has been restored with the disallowance of the Regulations. Financial services providers are again required to provide a renewal notice to a client in relation to an ongoing fee arrangement under section 962K of the Corporations Act 2001 (Cth) (Act) (ie those in arrangements for a period of more than 12 months). Financial services providers that had relied on the Regulations will now need to make systems and process changes to ensure renewal notices are provided to relevant clients.


Fee Disclosure Statements — Pre-1 July 2013 Clients


Regulation 7.7A.8 provided that fee disclosure statements need not be provided to clients in relation to an ongoing fee arrangement entered into before 1 July 2013. The disallowance of the Regulations means that these clients will now need to be provided with fee disclosure statements. Financial services providers that had relied on the Regulations will now need to make systems and process changes to ensure fee disclosure statements are provided to relevant clients.


Changes To The Wholesale/Retail Client Distinction


The disallowance of the Regulations means that existing regulation 7.6.02AF, which extends the two year renewal period for accountants’ certificates for persons electing to be treated as a wholesale client, does not apply to Part 7.7A of the Act.


This inconsistency was an oversight in the FOFA legislation and the disallowance of the Regulations means that the extended period is again applied inconsistently, applying to Parts 7.6, 7.7, 7.8 and 7.9 of the Act, though not to Part 7.7A.


Stamping Fees


There is again uncertainty as to whether existing regulation 7.7A.12B unintentionally captures transactions that were not meant to be captured by FOFA (ie the clarification of “approved financial products”). This uncertainty has been reintroduced with the disallowance of the Regulations.


The existing regulation also does not allow investment entities (ie entities whose primary purpose is to provide a financial investment) from accessing the stamping fee provision. Now that the Regulations have been disallowed, there is again concern that the existing regulation creates an inappropriate, market-distorting distinction betweenthe types of entities that are otherwise legitimately permitted to raise capital from retail investors.


Stockbroking-Related Provisions


The trading that occurs on the ASX24 (the financial market operated by Australian Securities Exchange Limited, formerly known as the Sydney Futures Exchange) was never intended to be captured by FOFA, nor were the brokerage fees charged for trading on the ASX24.


With the disallowance of the Regulations, products traded on the ASX24 no longer come within the exemption under the brokerage-related provisions in regulation 7.7A.12D.


Approach By ASIC


ASIC has stated that it will take a “practical and measured approach to administering the law”, taking into account that Australian financial services licensees will now need to make systems changes.


ASIC has announced that it will reinstate two no-action positions that were in place prior to the introduction of the Regulations. ASIC has adopted no-action positions regarding stamping fees and ASX24 brokerage fees, in relation to cases where the disallowance of the Regulations has created uncertainty or financial services providers have unintentionally fallen short of the intention of the Government. These limited no-action positions, which are effective immediately, will apply until 1 July 2015.


ASIC has committed to working with Australian financial services licensees and will take a”facilitative approach” until 1 July 2015.


However, the question arises as to what this meansin the context of the disallowance of the Regulations? There may be circumstances where transactions are already on foot in reliance on the Regulations. While affected parties could look to ASIC for relief to be granted, ASIC’s discretion to grant relief is narrow and generally only exercised in the following limited circumstances:

 

  • minor and technical applications — if the departure from existing policy is minor or technical and fits within ASIC’s goal of providing consistent and definite principles; or
  • new policy applications — where there is a net regulatory benefit (or the commercial benefit outweighs the minimal regulatory detriment) and generally after undertaking public consultation or hearings.
 

Conclusion


It would appear that the motion to disallow the Regulations has been passed as a result of political uncertainty and a shifting balance of power in the Senate. Despite the facilitative approach adopted by ASIC, there remains considerable uncertainty in relation to many of the issues outlined above that are again unresolved, and there is limited scope to apply to ASIC for relief or for ASIC to grant no-action letters.
Financial services providers will now need to make systems and process changes to ensure compliance with the FOFA legislation as enacted prior to the introduction of the Regulations.

 

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For further information, please contact:

 

Don Maloney, Partner, Ashurst
don.maloney@ashurst.com


Con Tzerefos, Partner, Ashurst
con.tzerefos@ashurst.com


Lisa Simmons, Partner, Ashurst
lisa.simmons@ashurst.com


Matt Vitale, Ashurst
matt.vitale@ashurst.com


Jared Lynch, Ashurst
jared.lynch@ashurst.com

 

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