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Australia – Streamlining FOFA: Amendment Of The Corporations Regulations.

21 July, 2014

 

Legal News & Analysis – Asia Pacific – Australia – Regulatory & Compliance

 

What You Need To Know

 

  • The Government has resumed its streamlining of the Future of Financial Advice (FOFA) legislation, amending the Corporations Regulations 2001 (Regulations) by registering the Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014 (Instrument).
  • The Instrument includes several interim time-sensitive amendments (with effect from 1 July 2014 until 31 December 2015), which the Government ultimately intends to repeal and replace with legislation. These interim amendments include:
    • removal of the “opt-in” requirement for ongoing fee arrangements, and the requirement for fee disclosure statements to be sent to pre-1 July 2013 clients;
    • removal of the “catch-all” provision in the safe harbour to the best interests duty; and
    • amendments aimed at better facilitating access to scaled advice.
  • Several amendments to the ban on conflicted remuneration are also included in the Instrument. The new regulations:
    • permit benefits to be paid under a balanced scorecard arrangement in some circumstances;
    • exempt benefits relating to general advice (subject to certain conditions);
    • clarify the operation of several existing exemptions; and
    • and expand the circumstances when the grandfathering arrangements for the ban on conflicted remuneration apply.
  • The Instrument also includes changes to remedy some unintended applications of the FOFA laws, by amending the application of the existing brokerage fee provisions to include brokerage fees paid in relation to financial products traded on the ASX24, and ensuring that the wholesale and retail client distinction that currently applies in other parts of the Act also applies in respect of the FOFA provisions.
 

What You Need To Do

 

  • The Government’s streamlining of FOFA has been very controversial, particularly the strategy of giving effect to its amendments through regulation. It is possible that the Instrument may be disallowed by Parliament, which will mean that these changes to the Corporations Regulations are repealed. Ashurst will be actively monitoring developments in Parliament, but if you are unsure about the status of these amendments or any aspect of them, please contact us.
 

Background To The FOFA Amendments

 

Consultation Period


On 29 January 2014, the Government released a draft bill and draft regulations for consultation to implement its election commitment to streamline FOFA. Submissions on the consultation closed on 19 February 2014.


The Government intended to introduce time sensitive amendments through regulations(scheduled for 28 March 2014), to the extent allowed under the relevant regulation-making powers, and then lock these amendments into legislation at a later time.


Introduction To Parliament


On 19 March 2014, the Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014 (Bill) was introduced to Parliament and read a first time. The following day, the Senate referred the Bill to the Senate Economics Legislation Committee for inquiry, with the final report due by 16 June 2014.


On 24 March 2014, Minister Cormann announced a halt to the scheduled changes by regulation.


Senate Economics Legislation Committee Report


After a round of submissions and public hearings, the Senate Economics Legislation Committee issued its report, recommending that the Bill be passed, but subject to specific recommendations in relation to the best interests duty, and conflicted remuneration.


Dissenting reports were issued by Labor Senators, and the Australian Greens. Although Independent Senator Xenophon (also a member of the Senate Economics Committee) did not issue a dissenting report, Senator Xenophon has since publicly stated that he does not support the Government’s amendments, or the Senate Economics Committee Report.
Resumption Of Wind-Back Of FOFA


On 20 June 2014, Senator Cormann announced that the Government would resume the implementation of some of its proposed amendments to FOFA through regulations to take effect on 1 July 2014, where legally possible. The Instrument was subsequently registered on 30 June 2014.


Possible Disallowance Of The Instrument


It is possible that the amendments to the regulations may be disallowed, by a motion in either the House of Representatives or the Senate. Based on Parliament’s scheduled sitting dates, the latest possible dates for lodging a notice of motion to disallow the Instrument are:

 

  • Senate – 1 October 2014; and
  • House of Representatives – 21 October 2014.
 

These dates assume that the maximum time allowable for tabling the Instrument in each house is taken (ie six sitting days of the relevant house). It is possible that the window for disallowing the Instrument may expire sooner.


Changes To The Ban On Conflicted Remuneration


General Advice


New reg 7.7A.12FA provides that benefits paid to a person who gives general advice to a retail client on behalf of a financial services licensee are not conflicted remuneration if:

 

  • the person gives general advice as an employee of the licensee (or a related body corporate of the licensee), or as an employee (or a sub-authorised representative) of an authorised representative of the licensee; and
  • the person gives general advice under the name of the licensee, a trade mark of the licensee or a business name of the licensee; and
  • the benefit is not a commission (being neither a recurring payment made because the person has given the general advice, nor a payment made solely because a financial product the client has received advice about has been issued or sold to the client); and
  • during the 12 months immediately before the benefit was given, the person did not give financial product advice to a retail client, other than general advice, or personal advice in relation to basic banking products, general insurance products, consumer credit insurance or a combination of those products, or a combination of these kinds of general advice and personal advice; and
  • the financial product advised on is either issued or sold by the licensee (or a related body corporate) or another entity under the name of the licensee, a trade mark of the licensee or a business name of the licensee.
 

Balanced Scorecard Remuneration Amendments


The Instrument inserts reg 7.7A.12EB to provide that certain performance bonuses for individuals are not conflicted remuneration, commonly referred to as being paid under a “balanced scorecard arrangement”.


The explanatory statement describes a “balanced scorecard” remuneration arrangement as one in which an employee receives remuneration that is calculated by reference to both volume-based and non-volume-based factors.
Under the proposed regulation, if a benefit:

 

  • is given as an element of an individual’s remuneration for work done by the individual:
    • as an employee or agent of a licensee; or
    • by arrangement with a licensee under the name of the licensee; and
    • the value of and/or access to the benefit is partly dependent on the total value of financial products of a particular class, or particular classes, that are recommended by the employee or acquired by retail clients (or a class of retail clients) to whom the employee has provided advice,
 

then any part of the benefit that would otherwise be conflicted remuneration, is not conflicted remuneration provided that:

 

  • the part, together with any other such part that is an element of the individual’s remuneration is “low” in proportion to the employee’s total remuneration (the explanatory statement provides that, while not defined, a benefit is likely to be considered low if it comprises less than 10% of the employee’s total remuneration); and
  • in calculating the part, the weighting attributed to the total value or number of financial products is outweighed or balanced by the weighting attributed to other matters.
 

Clarification Of The Client Authorisation Exemption


The Instrument clarifies, for the purposes of the fee for service exemption from the ban on conflicted remuneration, that the giving of a benefit includes causing or authorising it to be given (for example, a client causing or authorising a fee to be paid to their adviser out of an investment account) by inserting a note at the end of reg 7.7A.12 to this effect. 


The explanatory statement clarifies further that a benefit may be given either directly by a client or given by another party at the direction of the client. As long as the benefit is given using the client’s own money, or funds the client is beneficially entitled to, the client authorisation exemption applies.


There have been concerns raised over whether the client authorisation exemption can be used to permit payments from a superannuation fund member’s balance. The amendment to reg 7.7A.12 clarifies that such payments can occur, by also inserting a note that specifically indicates that the client authorisation exemption operates with respect to advice paid from a superannuation fund member’s fund balance. This principle also applies to other investments of the client, such as a platform or a managed investment scheme.


Mixed Benefits


A “mixed benefit” is a benefit that relates to more than one activity or service. The Instrument includes some amendments to address confusion over the operation of the mixed benefits regulation, by including an example at the end of reg 7.7A.12I(1) to illustrate that the mere payment of two nonconflicted remuneration benefits does not, in and of itself, make the combined payment conflicted.


Permissible Revenue


New reg 7.7A.12J provides a new exemption from the ban on conflicted remuneration where the amount or value of the benefit is calculated by reference to another benefit that is not conflicted remuneration because of s 963B, s 963C or s 963Dof the Corporations Act 2001 (Cth) (Act).


Broadening The Basic Banking Provision


The Instrument includes amendments that will also expand the exemption from the ban on conflicted remuneration for basic banking products (s 963D) to include circumstances where advice on other simple financial products (ie basic banking products, general insurance products and consumer credit insurance products) is provided at the same time as advice on a basic banking product.


Intrafund Advice


The Instrument inserts a note at the end of reg 7.7A.10 to clarify that the term “intrafund advice” refers to a type of financial product advice provided to a member of a regulated superannuation fund by a trustee of the fund, or by persons under an arrangement with a trustee of the fund.


Stamping Fees


The Instrument replaces existing reg 7.7A.12B and substitutes a new regulation that:

 

  • clarifies the application of the stamping fee provision to remuneration arrangements relating to capital raising activities; and
  • broadens the stamping fee provision to include investment entities.
 

Stockbroking-Related Provisions


The Instrument amends the brokerage-related provisions in reg 7.7A.12D to extend the exemption to products traded on the ASX24 (the financial market operated by Australian Securities Exchange Limited, formerly known as the Sydney Futures Exchange).


Execution-Only Services


The Instrument expands the execution-only exemption (s 963B(1)(c)). New reg 7.7A.12.ECcreates a nexus between the advisers and the party receiving the benefit, so that the exemption now applies even where personal advice has been provided to the client by another representative of the licensee in the previous 12 months, but not by the individual representative performing the execution service.


Education And Training In Conducting A Financial Services Business


New reg 7.7A.15A expands the exemption from the ban on conflicted remuneration for the provision of training (s 963(c)) to include broader forms of training relevant to a financial services business.
The exemption specifies that a non-monetary benefit is not conflicted remuneration if the benefit:

 

  • has a genuine education or training purpose; and
  • is relevant to the carrying on of a financial services business; and
  • complies with regulations made for the purposes of s 963C(c)(iii) of the Act (ie regs 7.7A.14 and 7.7A.15).
 

Changes To Grandfathering Arrangements For The Ban On Conflicted Remuneration


The Instrument expands the existing grandfathering provisions to provide that certain benefits given under arrangements (typically between product issuers and licensees) entered into before the application day of the ban on conflicted remuneration, and that relate to clients who had an interest in the relevant platform or product before 1 July 2014, are not subject to the ban. 


Specifically, the amendments:

 

  • insert new reg 7.7A.15B and reg 7.7A.16(2) to provide that a benefit (“a redirected benefit”) will be grandfathered even if it has been redirected under one or more later arrangements (eg when an authorised representative moves to another licensee, taking its client book to the new licensee, and the grandfathered benefits paid to the previous licensee are redirected to the new licensee under an arrangement that was entered into either before, or after the application day);
  • insert new reg 7.7A.16B(5A) which provides that when a retail client elects to switch from the growth phase to the pension phase within the same superannuation interest, this will not be treated as the acquisition of a new financial product for the purposes of reg 7.7A.16B (allowing grandfathered benefits to continue to accrue where the client held the superannuation interests before 1 July 2014 and made the election after that date);
  • insert new reg 7.7A.16BA which clarifies that when a business is sold, the rights to the grandfathered benefits are transferred to the purchaser, who can then receive the ongoing benefit (enabling the purchaser to acquire the same rights to the grandfathered benefits that the seller held before the sale);
  • amends existing reg 7.7A.16C, which provides the grandfathering arrangements for benefits paid under an employee agreement, to extend by 12 months, the dates at which grandfathering ceases;
  • amends existing reg 7.7A.16F to enable an authorised representative that moves from one licensee to another licensee, and a representative of a licensee that becomes an authorised representative of the same licensee, to retain their entitlement to receive grandfathered benefits passed through to them under that regulation.
 

Changes To Ongoing Fee Disclosure


Renewal Notices – Removal Of The “Opt In” Requirement


New reg 7.7A.7 effectively removes the requirement for a renewal notice to be provided to a client in relation to an ongoing fee arrangement under s 962K of the Act.


The Government anticipates that this regulation will be replaced by an identical provision in the Bill, and therefore it ceases to have effect after 31 December 2015.


Fee Disclosure Statements – Pre-1 July 2013 Clients


New reg 7.7A.8 provides that fee disclosure statements need not be provided to a client under s 962S of the Act, in relation to an ongoing fee arrangement entered into before 1 July 2013.


The Government anticipates that this regulation will also be replaced by an identical provision in the Bill, and therefore it ceases to have effect after 31 December 2015.
Summary of changes to ongoing fee disclosureThe changes to ongoing fee arrangements are significant and can be summarised in the following tables.

 

Rules For Existing (Pre-1 July 2013) Clients

 

  Current law New regulation
Give annual fee disclosure Yes No
Give 2 yearly opt-in/ renewal notice No No 

 

Rules For New (Post-1 July 2013) Clients

 

  Current law New regulation
Give annual fee disclosure Yes Yes
Give 2 yearly opt-in/ renewal notice Yes No

 

Changes To The Best Interests Duty


Facilitating Scaled Advice


New reg 7.7A.2 amends s 961B(2) of the Act (ie the safe harbour to the best interests duty) to remove the requirement that a client’s objectives etc are disclosed “through instructions”, and to make it clear that nothing in s 961B of the Act:

 

  • prevents the provider and a client from agreeing the subject matter of the advice sought by the client;
  • requires the provider to inquire into circumstances that would not reasonably be considered as relevant to the subject matter.
 

The Government anticipates that this regulation will be replaced by an identical provision in the Bill, and therefore it ceases to have effect after 31 December 2015.


Removal Of The “Catch-All” Provision

 

New reg 7.7A.3 amends s 961B(2) of the Act by removing the requirement for a provider to prove that they have taken “any other step” contemplated by s 961B(2)(g) (ie the “catch-all provision”).


The Government anticipates that this regulation will also be replaced by an identical provision in the Bill, and therefore it ceases to have effect after 31 December 2015.


Basic Banking And General Insurance Products


New reg 7.7A.4 provides that where advice is sought in relation to: a basic banking product, a general insurance product, consumer credit insurance, or a combination of any of these, and the provider is an agent or employee of an Australian ADI (or otherwise acting by arrangement with an Australian ADI under their name), the provider need not prove that they have taken the following steps in relation to the best interests duty:

 

  • assessed whether the provider has the expertise required to provide the client advice on the subject matter sought, and if not declined to provide the advice (s 961B(2)(d));
  • conducted a reasonable investigation into the financial products that might meet the client’s needs and objectives (s 961B(2(e)); and
  • based all judgements in advising the client on the client’s relevant circumstances (s 961B(2)(f)).
 

New reg 7.7A.5 provides that these steps also need not be proved where a client seeks advice in relation to a general insurance product.


Changes To The Wholesale/ Retail Client Distinction


The Instrument includes several amendments to extend the effect of a number of regulations, whichrelate to the treatment of persons as wholesale clients, so that they now also apply to Part 7.7A of the Act. For example, reg 7.6.02AF which extends the two year renewal period for accountants’ certificates for persons electing to be treated as a wholesale client, did not previously apply to Part 7.7A of the Act. The Instrument ensures that requirements for treating a person as a wholesale client now apply consistently to Parts 7.6, 7.7, 7.7A, 7.8 and 7.9 of the Act.

 

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For further information, please contact:

 

Don Maloney, Partner, Ashurst
[email protected]


Con Tzerefos, Partner, Ashurst
[email protected]


Lisa Simmons, Partner, Ashurst
[email protected]


Vince Battaglia, Ashurst
[email protected]


Matt Vitale, Ashurst
[email protected]

 

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