The Federal Government has announced its intentions for the reform of the Future of Financial Advice (FOFA) legislation that was introduced by the previous (Labor) Federal Government. Many of the announced changes – such as removing the ‘catch-all’ provision in the ‘best interests’ safe harbour and limiting the application of the conflicted remuneration provisions to personal advice – will be welcomed by the financial services industry as there was significant uncertainty around the application of those provisions. However, despite the announcement indicating a number of positive changes, past experience with FOFA suggests that the devil is in the detail (or lack of it).
The main changes that have been announced are:
- Opt-in: Remove the opt-in requirements so that advisers no longer need to seek their client’s agreement every two years. This is no surprise, as the Federal Government campaigned strongly on this point when in opposition. As well as the administrative problems created by the opt-in requirement, it had the capacity to decrease the value of books of business based on ‘trailing’ commission if the licensee receiving the commission had to sign up the clients every two years in order to continue to receive the commission.
- Annual fee disclosure: Remove the retrospective application of the fee disclosure requirement, so that advisers will not need to provide fee disclosure statements to clients who entered into a fee arrangement before the mandatory 1 July 2013 commencement date of FOFA. Some licensees had hoped that the annual disclosure obligation would be removed altogether, but the majority of larger licensees will have already built systems to meet these requirements for new clients.
- Catch-all: Remove the ‘catch-all’ provision from the ‘safe harbour’ in section 961B(2) so that advisers can be certain they have satisfied their obligations under the best interests duty. This is a sensible decision, as the ‘catch-all’ provision removed the certainty that the ‘safe harbour’ purported to deliver to advisers.
- Scaled advice: Clients and advisers will be explicitly allowed to agree on the scope of financial advice to be provided, whilst ensuring advice is still appropriate for the client. We will wait to see what this entails, but it appears that the Federal Government may introduce a ‘safe harbour’ that will relate specifically to scaled advice.
- General advice: Benefits relating to the provision of general advice will be exempted from the ban on conflicted remuneration. This is a welcome decision. The inclusion of general advice in the conflicted remuneration provisions has created great concern for trustees and responsible entities, who might have otherwise been in breach of the law for doing nothing more than supporting their product through the general advice they give to members.
- Volume-based shelf-space fees: Amend the drafting of the ban on volume-based shelf-space fees to clarify that incentive payments between fund managers and platform operators for preferential treatment of certain products on the platform “shelf” are banned. This change appears to be designed to fill a gap in the current provisions which arguably allows for ‘one-off’ payments to be made by fund managers to platform operators without breaching either the volume-based shelf-space fee or conflicted remuneration prohibitions.
- Define intra-fund advice: The definition of intra-fund advice will be referenced in the FOFA provisions. This suggests that intra-fund advice will be specifically included as a category of scaled advice, and would therefore be covered by any ‘safe harbour’ that may be introduced in relation to scaled advice.
- Grandfathering: Amend the existing grandfathering provisions that exempt certain benefits under pre-existing arrangements from the ban on conflicted remuneration, to allow advisers to move between licensees and to continue to access grandfathered benefits in certain circumstances. Amendments will also be made to clarify the operation of the grandfathering arrangements with respect to the sale of financial planning businesses, superannuation to pension switches under multi-product offerings, and employed advisers becoming self-employed advisers. These could prove to be the most significant of the announced changes. Many authorised representatives have been reluctant to move from their current arrangements with licensees for fear they would lose the benefit of grandfathering on their current remuneration arrangements. The Federal Government is sympathetic to these concerns, particularly where they might create a disincentive for financial planners to move their clients to a licensee with a more favourable service offering and fee structure.
- Stockbroking: Amend the existing stockbroking-related exemptions to clarify the application of the stamping fee exemption to initial purchasing offer arrangements; and clarify the application of the brokerage fee exemption to products traded on the ASX24. We will be interested to see whether these changes extend the stamping fees exemption to REITs and other managed investment schemes that are currently carved out of the exemption, which puts them at a significant disadvantage when seeking to raise capital.
- Minor technical amendments: A number of minor amendments will be made to address technical issues including clarification of the client-pays exemption and consequential amendments to the application of the wholesale and retail client distinction under FOFA. It will be interesting to see what changes are made by the Government on these issues, as many product issuers are relying on a permissive interpretation of the ‘client-pays’ exemption to continue to pay and receive remuneration that would otherwise be banned as conflicted remuneration. In terms of the retail/wholesale distinction, we hope the Federal Government will (finally) clarify when SMSFs can be treated as wholesale clients.
Other changes announced include:
- Conflicted remuneration: Amend the conflicted remuneration provisions to allow for the payment of benefits under “balanced” remuneration structures; expand the basic banking exemption to include all simple (i.e. “Tier 2”) banking products; and permit the payment of performance bonuses that are calculated by reference to remuneration which is exempt from the ban on conflicted remuneration.
- Life insurance inside super: The ban on conflicted remuneration will only apply to commissions on risk (life) insurance products inside superannuation in circumstances where no personal financial advice about these products has been provided i.e. where automatic coverage is provided inside a default (MySuper) superannuation fund.
- Execution-only exemption: Introduce a causal link into the exemption so that benefits are permitted where no advice has been provided to the client by the individual performing the execution service (as opposed to the licensee or authorised representative more broadly) in the previous 12 months.
- Training exemption: Broaden the existing training exemption that provides for training in relation to providing financial product advice as a permitted non-monetary benefit, to include other forms of training that are relevant to conducting a financial services business.
A link to the Assistant Treasurer’s media release can be found here.