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Future of Financial Advice – Second FoFA Bill Introduced.

1 December, 2011

 

The Corporations Amendment (Further Future of Financial Advice) Bill 2011 ("Bill") was introduced into the House of Representatives earlier today. While there are some important differences, they are largely matters of detail and the key obligations and bans are substantially the same as those contained in the Exposure Drafts of the Bill released on 29 August 2011 and 28 September 2011.

 

Summary of Bill

 

The Bill will amend Chapter 7 of the Corporations Act by including:

 

  • the statutory best interests duty for providers of personal advice;

 

  • the ban conflicted remuneration;

 

  • the ban on volume based shelf-space fees;

 

  • the ban on asset-based fees on borrowed amounts.

 

​The Bill also includes the transitional provisions and exemptions for certain existing arrangements.

 

The previous Bill, which was introduced into Parliament on 13 October 2011, included the proposed ongoing fee arrangement provisions, the anti-avoidance provision and the changes to ASIC’s powers. Please click here to see our alert for the first FoFA Bill.

 

We set out below the key differences between the Bill and the Exposure Draft Bills. Please click here to see our alert for tranche 1 and here to see our alert for tranche 2.

 

Statutory best interests duty

 

The statutory best interests duty and the duty of priority are substantially the same as in the Exposure Draft. However, there are some significant differences between the steps which must be taken by advisers.

 

Advisers giving personal advice to retail clients must act in the best interests of clients “in relation to the advice”. They must also give priority to the client’s interests if there is a conflict between the client’s interests and the interests of the adviser, a licensee, an authorised representative or any of their associates, where the adviser knows, or reasonably ought to know, about the conflict.

 

The adviser is deemed to satisfy their best interests duty if they "prove" that they have complied with 7 steps (or 3 in the case of basic banking products or general risk insurance products).

 

This looks like a win for industry who have been lobbying for a statutory defence to the duty. However, the 7th step requires the adviser to “take any other step that would reasonably be regarded as being in the best interests of the client”. Although there is a definition of what is a step that would reasonably be regarded as being in the best interests of the client, the definition does not provide much practical guidance.

 

The Bill has also omitted some of the steps proposed in the Exposure Draft. The Bill does not include:

 

  • a duty to recommend that the client obtain advice on another subject matter;

 

  • a duty to consider whether the client’s needs would be better served through means other than the acquisition of a financial product;

 

  • ​the additional steps required where a financial product is recommended in substitution for or in addition to another financial product.

 

The Bill has also modified some of the remaining steps.

 

The provisions about approved product lists have been removed – an adviser will now be required to conduct a reasonable investigation into the financial products that might meet the client’s objectives and needs.  Advisers are not required to investigate every product that is available. 

 

Conflicted remuneration

 

The Exposure Draft defined conflicted remuneration as any benefit (monetary or non-monetary) which “might” influence the choice of financial product recommended to retail clients or which “might” otherwise influence the financial product advice given.  The Bill has raised the required level of influence, so that a benefit will be conflicted remuneration if it “could reasonably be expected to” influence the choice of financial product recommended or the financial product advice given.

 

The Exposure Draft provided that “volume based” benefits were always conflicted remuneration. The position has been softened in the Bill.  Now, it will be presumed that volume based benefits will be conflicted remuneration “unless the contrary is proved”. The Bill also clarifies that a benefit can be volume based if it is “wholly or partly” dependent on the number or total value of financial products.

 

The main exceptions to the definition of conflicted remuneration are largely unchanged, although the general insurance exemption has been modified and the exemption for basic banking products expanded.

 

Importantly, the Exposure Draft provided that relevant employers could give conflicted remuneration to employees so long as the benefits were not volume based benefits. This provision has been removed, leaving relevant employers with a general ban on giving conflicted remuneration, whether volume based or not.

 

Also importantly, the ban formerly proposed on product issuers and sellers giving a broad range of benefits (with few exceptions) has been narrowed to a ban on them giving conflicted remuneration to AFS licensees and their representatives. This is a welcome development.

 

Volume-based shelf-space fees

 

The concept of what is a “platform” has been narrowed and is now equated with the concept of a custodial arrangement under section 1012IA of the Corporations Act. The definition of volume-based shelf-space fee has also been reworked, with it now including presumptions that certain types of fees are, or are not, volume-based shelf-space fees.

 

Asset-based fees on borrowed amounts

 

The ban in the Bill on asset-based fees on borrowed amounts is largely the same as it was in the Exposure Draft, with some minor clarifications.

 

Transitional provisions and exemptions for existing arrangements

 

The “grandfathering” provisions are new. They provide that:

 

  • The best interests obligation applies to the provision of personal advice on or after 1 July 2012, even if the advice was sought before that date.

 

  • The ban on conflicted remuneration does not apply to a benefit given to an AFS licensee or a representative if the benefit is given by someone other than a platform operator under an arrangement entered into before 1 July 2012.

 

  • Similarly, the ban on volume-based shelf-space fees does not apply to a benefit given to an AFS licensee or an RSE licensee under an arrangement entered into before 1 July 2012.

 

  • The grandfathering provisions in relation to conflicted remuneration and volume-based shelf-space fees may be amended by regulations.

 

  • ​The ban on asset-based fees on borrowed amounts will apply only to fees charged after 1 July 2012, but only to the extent the borrowed amounts are to be used to acquire financial products on or after that day (whether or not the fees are charged under a pre-existing arrangement).

 

Anti-avoidance

 

While the previous Bill introduced an anti-avoidance provision, this Bill amends it by lowering the purpose element from "sole or dominant purpose" to "sole purpose or … a purpose (that is not incidental)".

 

 

For further information, please contact:

 

Rohan Cush, Mallesons Stephen Jaques

rohan.cush@mallesons.com

 

Michelle Levy, Mallesons Stephen Jaques

michelle.levy@mallesons.com

 

Michael Mathieson, Mallesons Stephen Jaques

michael.mathieson@mallesons.com

 

Simun Soljo, Mallesons Stephen Jaques
simun.soljo@mallesons.com
 
 

 

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