On Monday, Senator the Hon. Mathias Cormann (Minister for Finance and Acting Assistant Treasurer) announced that, although the Government remains committed to implementing the improvements to Future of Financial Advice (FoFA) laws that the Government took to the last election as soon as possible, he has decided to freeze the implementation of the FoFA Regulations.
What is being frozen?
In our article, "New year, new FoFA", we stated that the Government issued two pieces of legislation for public consultation:
More importantly, it needs to be clarified that:
- the Bill has been reissued since our last article and slightly modified (see below for further information). This revised Bill was introduced to Parliament last Wednesday and was referred to the Senate Economics Legislation Committee by the Senate for inquiry and report. The submissions closing date is 30 April 2014 and the Committee will report its findings to Parliament on 16 June 2014. Please note that this development in relation to the Bill is the normal parliamentary process and was expected; and
- since our last article, the draft Regulations have not been reissued to the public and it is these Regulations that the Acting Assistant Treasurer has decided to freeze. The Acting Assistant Treasurer cited that he has frozen the Regulations because it will enable the Government to consult in good faith with all relevant stakeholders before their implementation.
In "New year, new FoFA", we looked at the various changes proposed by these Regulations which included: (i) the amendments to the current grandfathering provisions (in particular in relation to selling a business, switching and change of representative arrangements); (ii) changes to the exemption on the ban on conflicted remuneration and other fees that relate to stamping fees and brokerage fees; and (iii) the balance scorecard exemption. Since the date of publication of our last article, we are aware that some industry participants are of the opinion that the new "permissible revenue" exemption contained in new regulation 7.7.12HA may have a very broad application which may not be intended by the Government. Further clarification in relation to the operation of the new "permissible revenue" exemption is expected.
What are the differences between the exposure draft Bill and the revised Bill introduced to Parliament?
Since we are not able to provide any further updates in relation to the frozen Regulations, we thought it would be useful to provide an update on the changes which were made to the Bill since the exposure draft (as detailed in, "New year, new FoFA"). The new changes include:
1. in regards to the best interests obligation (set out in section 961B), the revised Bill further clarifies that the investigations a provider needs to conduct when providing advice (regardless of scope) are those that are reasonably considered as relevant to the subject matter of the advice sought;
2. in regards to scaled advice (in proposed new section 961B(4A)), the revised Bill inserts an example of a client and provider agreeing the subject matter of advice. The example clarifies the operation of the new scaled advice provisions in particular that the best interests obligations apply to the advice ultimately sought by the client;
3. in regards to the appropriate advice requirement (set out in section 961G), the revised Bill clarifies that the best interests obligation operates as a separate obligation to the appropriate advice requirement. Please note that currently, section 961G requires advice provided to be appropriate had the best interests duty been satisfied;
4. in regards to the proposed amendments to the modified best interests obligations – available only to an agent or employee of an ADI or a person acting in arrangement with an ADI – (in proposed new section 961B(3)), the revised Bill makes it clear that the amendment does not extend the modified best interests duty to the provision of consumer credit insurance. Rather, it allows the modified best interests duty to apply to a basic banking product and/or general insurance product where the subject matter of the advice sought also relates to consumer credit insurance;
5. in regards to the client priority obligation (as set out in section 961J), the revised Bill amends the exemptions from the client priority obligation to ensure consistency with the amendments to the modified best interests duty that flow on from the inclusion of consumer credit insurance in the basic banking exemption. More importantly, the client priority rule will continue to apply to any advice provided in relation to a consumer credit insurance product;
6. in regards to the "general advice carve-out" from the ban on conflicted remuneration (as reported in "New year, new FoFA") after consultation on the exposure draft Bill, the Government has inserted a targeted general advice exemption (instead of the broad general advice exemption) to take into account some concerns from stakeholders about the wide application of the initial proposed exemption. The new proposed general advice exemption is now restricted to employees of a financial services licensee who have not provided personal advice to retail clients receiving the general advice in the past 12 months. In addition, the financial product in relation to which the general advice is given needs to be a product issued or sold by the licensee;
7. in regards to "life risk insurance through super", after consultation on the exposure draft Bill, the Government has scrapped its proposal to broaden the current 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. This means that the current law will continue to apply (ie. 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).
8. in regards to "mixed" benefits, the revised Bill has included an "example" at the end of subsection 963B(1) that illustrates and confirms that the mere payment of two non-conflicted remuneration benefits does not, in and of itself, make the combined payment conflicted;
9. in regards to the ban on volume-based shelf space fees (as set out in section 964A(1)), the revised Bill has included an additional benefit that is not considered to be a volume based shelf space fee (i.e. where the benefit relates to a basic banking product provided through the custodial arrangement – see new draft section 964A(3)(d));
10. new regulation-making powers which amends the current regulation making powers (in sections 963B, 963C and 963D) and extends them to clarify the operation of existing exemptions to the ban on conflicted remuneration. These new regulation-making powers have been proposed given:
a. the complexity of payment arrangements within the financial advice industry; and
b. the possibility that future remuneration structures may be developed that are inadvertently captured by the ban on conflicted remuneration,
as such these new regulation making powers provide a way to address any future unintended consequences of the ban on conflicted remuneration.
Some useful points from the revised Bill's explanatory memorandum
In addition, the explanatory memorandum of the revised Bill also helpfully clarifies that:
A. in regards to the client pays exemption (set out in section 963B(1)(d)), benefits given by another party at a client's direction:
i. are not given by the client if the benefits are borne out of the other party’s funds; and
ii. must be given with the client’s clear consent. A client would not be considered to have given clear consent if the consent was not clearly and expressly sought; for example, where consent has been sought as part of a broad range of terms and conditions agreed by the client in aggregate, clear consent would not have been provided. Rather, a client’s consent could be expressly sought in a separate and distinct section of the terms and conditions agreed by the client;
B. the breadth of the definition of basic banking product (in section 961F) - in particular the fact that basic banking products are continually evolving and therefore the definition captures a range of other functionally equivalent products outside those specifically referenced in section 961F. For example, whilst travel debit cards are not explicitly referenced, it serves the same purpose as a traveller’s cheque and is therefore considered a basic banking product. In addition the definition of basic banking products captures:
i. all types of basic deposit products such as transaction accounts, savings accounts, cash management accounts, and short term deposits; and
ii. basic deposit products associated with a credit facility (for example a debit account with an overdraft facility, or a mortgage offset account); and
C. in accordance with ASIC RG 175, the references to "an agent or employee, or otherwise acting by arrangement with an Australian ADI under the name of an Australian ADI" includes:
ii. employees of employment agencies who may be temporarily working for the Australian ADI/employer; employees of a body corporate related to the Australian ADI/employer; and
iii. employees of another company who work exclusively for the Australian ADI/employer.
We understand that, unless ASIC sees immediate and obvious harm to consumers, ASIC will continue to take a facilitative approach in regards to compliance with those FoFA provisions which are the subject of the Bill and Regulations. ASIC will inform the market if they change their approach.
We expect that the FoFA freeze as detailed in this article will continue at least until early June 2014. Financial services industry participants should maintain a watching brief on further development and changes. Also, this freeze helpfully provides participants with a further opportunity to participate in good faith consultation with the Government in regards to any concerns they may have over the proposed FoFA changes.