06 Feb 2014

New year, new FoFA

by Matthew Daley, Erik Setio

The consultation process for the proposed FoFA changes is open until Wednesday, 19 February 2014.

Major changes to the Future of Financial Advice (FoFA) regime are being proposed by the Government in 2014. Participants of the financial services industry should take note of the proposed changes as they will likely have a significant impact on their day-to-day operations.

In this article, we will look at the proposed changes which include, amongst other things, the carve-out of general advice from the ban on conflicted remuneration, the scaling back of the best interest duty, the broadening of the grandfathering provisions and amendments to provisions regulating the ongoing fee arrangements.

New exposure draft FoFA amending Bill and Regulation

On 29 January 2014, the Government issued the following for public consultation:

The Bill and Draft Regulation proposes extensive reforms to the FoFA regime which has only been in place for approximately 18 months. The Government's intention behind the proposed Bill and Draft Regulation is to deliver on the Coalition's election commitment, in particular its commitment to reduce compliance costs and remove red tape on the financial services industry.

Proposed changes to the FoFA regime

The proposed changes contained in the Bill and Draft Regulation include the following:

1. General advice carve-out

One of the major changes being proposed by the Bill is the exemption of benefits that relate to general advice from the ban on conflicted remuneration (in section 963A of the Act). Currently the law prescribes that the ban on conflicted remuneration applies to benefits given to a licensee or a representative that could reasonably be expected to influence the financial product advice (ie. both personal and general advice) provided or the financial products recommended to retail clients.

The proposed changes will amend this ban on conflicted remuneration to ensure that a benefit given to a licensee or a representative will be banned only if it could reasonably be expected to influence the personal advice provided or the financial products recommended to a retail client in the course of providing personal advice.

2. Best interest duty amendments

There are three proposed changes contained in the Bill which amends the current best interest duty (in section 961B of the Act):

(a) Catch all provision: The first proposed change is the removal of the "catch all" provision (in section 961B(2)(g) of the Act) which requires the provider of personal advice to a retail client to prove that they have taken any other steps (in addition to the six other steps prescribed by section 961B(2)) that, at the time the advice is provided, would reasonably be regarded as being in the best interest of the client, given the client's relevant circumstances.

(b) Scaled advice: The second proposed change is:

  • to amend the best interest obligation to better facilitate the provision of low-cost scaled advice; and
  • to clarify the current best interest duty so that a provider of personal advice and a retail client may agree on the scope of personal advice to be provided.

(c) Reduced best interest obligation: The third proposed change broadens the scope of the current reduced best interest obligation. In particular, the agent or employee of an ADI will be able to access the reduced best interest obligation (ie. not be required to satisfy section 961B(2)(d) to (g)) in relation to personal advice on a basic banking or general insurance product where the subject matter sought by the client relates to a basic banking product, general insurance product, consumer credit insurance product or a combination of these products.

3. Grandfathering provisions amendments

There are three main proposed changes contained in the Draft Regulation which amend the current grandfathering provisions:

(a) Selling a business: The Draft Regulation clarifies that, for so long as a client maintains their interest in a financial product, when a business is sold (and that business is either acting in the capacity of a platform operator or not) the business' rights to grandfathered benefits are transferable from the business to its purchaser.

(b) Switching: The Draft Regulation provides that in circumstances where:

  • a retail client holds a superannuation interest prior to 1 July 2014; and
  • the retail client switches from the growth phase to the pension phase within that same superannuation interest after 1 July 2014,

the switch should not be treated as a new acquisition of financial product and, therefore, the grandfathered benefits relating to that superannuation interest should continue to be payable.

(c) Change of representative arrangements: The Draft Regulation provides that, for so long as a client maintains their interest in a financial product, advisers may be able to move licensees or change their employment arrangements within a licensee (ie. change from an employed representative to an authorised representative of the licensee) and still able to access grandfathered benefits.

4. Ongoing fee arrangements

There are two main changes proposed by the Bill which alter the current law regulating ongoing fee arrangements between a retail client and advisers:

(a) Fee disclosure statements: The Bill proposes to remove the requirement to provide yearly fee disclosure statements to clients who entered into their ongoing arrangement prior to 1 July 2013. The requirement to provide a fee disclosure statement is now restricted to those clients who entered into their ongoing arrangement after 1 July 2013.

(b) "Opt-in" requirement: The Bill proposes to remove the requirement for advisers to obtain their client's approval at least every two years in order to continue an ongoing fee arrangement (entered into after 1 July 2013) between the retail client and the adviser.

5. Stamping fees and brokerage fees

The Draft Regulation contains various proposed changes to the exemption on the ban on conflicted remuneration and other fees that relate to stamping fees and brokerage fees:

(a) Stamping fees: The Draft Regulation broadens the current exemption to the ban on conflicted remuneration contained in paragraph 7.7.A.12B of the Regulation (which provides an exemption for certain benefits relating to capital raising activities, in particular initial issuance or sale activities, in circumstances where a licensee or representative receive a benefit in relation to their dealing on behalf of a retail client in an "approved financial product"). Currently, if the capital raising activities relates to an "investment entity" (which, broadly, is an entity whose primary purpose is to provide a financial investment through investments in financial products or owning real property), the exemption (referred to above) will not be available. The new law ensures that the current exemption will extend to circumstances where the capital raising activities relate to an "investment entity".

(b) Brokerage fees: The Draft Regulation broadens the brokerage fee exemptions (contained in paragraphs 7.7.A.12D, 7.7A.17 and 7.7A.18 of the Regulation) to ensure that brokerage fees in relation to products traded on the ASX 24 are not subject to the ban on conflicted remuneration or the ban on charging asset-based fees on borrowed amounts.

6. Balance scorecard exemption

The Draft Regulation clarifies that, where a monetary benefit is paid as part of a balance scorecard remuneration arrangement (which is, broadly, where an employee receives remuneration that is calculated by reference to both volume-based and non-volume-based factors), the monetary benefit is not conflicted remuneration. Please note that there is one subjective criterion which the monetary benefit needs to satisfy in order for this exemption to apply – the benefit must be low in proportion to the employee's total remuneration. While it is not defined in the Draft Regulation, the explanatory statement helpfully states the intention of the Government in imposing such a criterion. Specifically, a benefit is likely to be considered low if it comprises less than 10 percent of the employee's total remuneration.

7. Other changes to FoFA

Other changes proposed by the Bill and Draft Regulation to note are:

(a) Life risk insurance through super: Under current law, monetary benefits paid in relation to life risk insurance offered inside superannuation are predominately banned except for a group life policy for members of a superannuation entity or a life policy for a member of a default superannuation fund. The Bill proposes to broaden the above exemption such that the ban on conflicted remuneration will only apply in relation to monetary benefits paid with respect to life risk insurance products for: (i) MySuper members; or (ii) members of other superannuation products in circumstances where no personal advice has been provided to the member regarding life risk insurance.

(b) Execution only exemption: The Bill proposes to amend the existing execution only exemption so that it will apply if a monetary benefit is given in relation to the issue or sale of a financial product and the licensee or representative receiving the benefit has not provided personal advice to the relevant retail client in relation to that financial product in the previous 12 months.

(c) Training exemption: The Bill proposes to broaden the existing training exemption from the ban on conflicted remuneration for non-monetary benefits to cover all training relevant to conducting a financial services business. The current law limits the training exemption so that only training relevant to the provision of financial product advice is not considered conflicted remuneration.

(d) Basic banking exemption: The Bill proposes to broaden the exemption so that benefits received by an agent or employee of an ADI for recommending basic banking products, general insurance products or consumer credit insurance would be exempt from the ban on conflicted remuneration where the agent or employee only provides financial product advice in relation to those three types of products.

(e) Clarification changes: The Bill and Draft Regulation also introduce changes which are clarificatory in nature only. They include:

  • Intra-fund advice: The Bill ensures that the definition of the term "intra-fund" advice is appropriately cross-referenced to the definition contained in the Superannuation Industry (Supervision) Act 1993.
  • Volume-based shelf space fee: The Bill clarifies the drafting of the ban on volume-based shelf space fees to clearly define the benefits it intends to capture. In particular, it specifies benefits that are not a volume-based shelf space fee such as: (i) a reasonable fee for service provided to the funds manager by the platform operator or another person; (ii) a discount on an amount payable, or a rebate of an amount paid to the funds manager by the platform operator, than can reasonably be attributed to economies of scale gained; or (iii) a benefit that relates to a general insurance product or a life risk insurance product provided by the custodial arrangement.
  • Client-pays exemption: The Bill clarifies that the client-pays exemption operates such that clients are able to direct product issuers (for example: superannuation trustees, responsible entities of a managed investment scheme or platform operators) to deduct payments from funds held in the products to be paid to an adviser. The Bill does so by clarifying the operation of section 52 in relation to the ban on conflicted remuneration.
  • Wholesale/retail client distinction: The Draft Regulation clarifies that the wholesale and retail client distinction that exists in other parts of the Act also applies to the FoFA regime.

ASIC's position

In ASIC 13-355MR, ASIC has indicated that it will take a facilitative approach during the introduction process of the above major FoFA reforms. In particular, ASIC has stated that it will not take enforcement action in relation to the specific FoFA provisions that the Government is planning to repeal.

Next steps

Currently, the Government welcomes any input the industry may have on the above FoFA reforms and is opening the consultation process until Wednesday, 19 February 2014 with a view of:

  • enacting the Draft Regulation by the end of March 2014; and
  • introducing the Bill into Parliament in the 2014 autumn sitting period with passage scheduled for the winter sitting period.

Financial services industry participant should consider the impact of the above proposed FoFA reforms on their day to day operation and analyse whether certain business assumptions made as a result of the initial implementation of the FoFA regime in 2013 may now be revisited.


You might also be interested in...

Related Knowledge

Get in Touch

Get in touch information is loading


Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.