ASIC finalises guidance on conflicted remuneration, Treasury restructures grandfathering regulations

The final pieces of FOFA regulation and guidance have been released, and there is some welcome clarification for financial services licensees and product issuers amongst them.

In a much anticipated follow up to Consultation Paper 189 (CP 189) on conflicted remuneration, ASIC has released Regulatory Guide 246 – Conflicted Remuneration (RG 246) which sets out its guidance on the application of the conflicted remuneration provisions that were added to the Corporations Act by the Future of Financial Advice (FOFA) amendments.

RG 246 does not throw up a lot of surprises for those familiar with ASIC’s preliminary views on the application of the conflicted remuneration provisions as set out in CP 189.  However, there are a couple of notable additions, and omissions, from RG 246:

  • management and administration fees: ASIC will take a ‘no action’ position where product issuers breach the conflicted remuneration provisions by accepting management or administration fees. It will also not take action against a trustee of a registrable superannuation fund for a breach of the conflicted remuneration provisions for accepting management or administration fees that may reasonably be expected to influence ‘intra-fund’ advice that the trustee may charge under section 99F of the Superannuation Industry (Supervision) Act. Further, in relation to a responsible entity of a registered managed investment scheme, it will also not take action for any breach of s601FC(1)(k) as result of the unlawful payment. These no-action positions only apply if the product issuer does not provide any personal advice about products that it issues or about products of that class.
  • benefits authorised by the client: ASIC has expanded on its guidance as to when a benefit will fall within the exemption as having been ‘given by the client’ under sections 963B(1)(d)(ii) and 963C(e)(ii) of the Corporations Act.  ASIC had previously indicated that it would accept benefits given ‘at the direction or with the clear consent of’ the client as falling within the exemption.  It clarifies this position in RG 246 by stating that: ‘In our view, consent is ‘clear’ if it is genuine, express and specific. Mere knowledge of the benefit, or agreement to proceed with financial services in light of a disclosure about the benefit, is not clear consent.’  ASIC therefore makes it clear that a client simply signing, say, an application form in which the client agrees to an adviser receiving a benefit from a third party is not sufficient for the benefit to fall within the exemptions in section 963B(1)(d)(ii) or section 963C(e)(ii).

    An interesting additional point made by ASIC in RG 246 is that a benefit paid to a licensee with the consent of the client will only continue to be excluded from being conflicted remuneration when paid onto an authorised representative of the licensee if the licensee has no discretion as to whether the benefit is passed on, or how much of the benefit is passed on, to the authorised representative.

  • different types of volume-based benefits: a benefit may be a volume-based benefit if, for example, it is:
    • calculated as a fixed percentage (e.g. 1%) of all client funds invested in financial products based on the recommendations of a representative
    • calculated based on a sliding scale
    • a flat fee which will only be paid if a threshold based on the number or value of financial products recommended by an AFS licensee or representative or acquired by their clients is met.

AFS licensees must therefore be conscious of the application of the conflicted remuneration provisions when entering into fixed fee arrangements.

  • remuneration arrangements based on total profitability: ASIC has restated its position that, if an employee is remunerated based on the total profitability of their employer or the business unit in which they work, and not the employee’s individual sales, this would not be conflicted remuneration if the size of the business unit is large enough that the impact of the individual employee’s sales on the profitability of the employer or the relevant business unit could not reasonably be expected to influence the advice given.  Interestingly, ASIC has not included in RG 246 the proposed guidance in CP 189 that it would not scrutinise benefits given to employees that were below certain minimum thresholds, so the general principles for determining conflicted remuneration apply to even nominal benefits given to employees.
  • volume-based shelf-space fees passed on to clients: ASIC will not take action against a platform operator that accepts a fee if that fee is passed on promptly—that is, as soon as practicable but no later than three months after receiving the benefit—to clients. In this case, ASIC does not consider that the fee will be regarded as a volume-based shelf-space fee.
  • grandfathering where there is a change of arrangement: ASIC acknowledges that it is possible for the terms of an arrangement, including its duration, to be changed on or after the application day without resulting in a new arrangement being created. Whether a new arrangement has been created depends on the circumstances, including the terms of the arrangement. If a new arrangement is not created, benefits under the amended arrangement continue to be grandfathered. If an arrangement that is in place before the application day is changed on or after the application day, benefits under the arrangement may not be grandfathered if the changes are so material that the arrangement is no longer the arrangement that was in place before the application day. It is possible that a number of incremental changes made to an arrangement after the application day may, when viewed as a whole, result in a new arrangement being created.  We think general principles of contract law will be relevant to this analysis.
  • discretionary benefits are not grandfathered: ASIC does not generally consider that a discretionary benefit is grandfathered if it is given on or after the application day because it considers the giving of such a benefit to be a new arrangement (ie, a benefit conferred on a person by the exercise of a discretion creates a separate arrangement).

Some significant aspects of the discussion about the application of the grandfathering provisions which were contained in CP 189 have been omitted from RG 246 because of substantial changes proposed to be made to the grandfathering regulations by Treasury.  Draft Corporations Regulations released for consultation by Treasury on 27 February 2013 propose to restructure the grandfathering provisions as follows:

  • grandfathering for platform operators: draft Corporations Regulation 7.7A.16 repeals the existing grandfathering provisions for platform operators and introduces new provisions. Under these provisions, a benefit will not be subject to the ban on conflicted remuneration if that benefit is given by a platform operator under an arrangement that was entered into before the application day, and relates to a regulated acquisition under a custodial arrangement provided by the platform operator on the instructions of a person who had given an instruction for a regulated acquisition under the custodial arrangement before 1 July 2014.

The effect of regulation 7.7A.16 is to grandfather benefits given under pre-FOFA arrangements except where they relate to a new client coming onto the platform after 1 July 2014. Arrangements between financial services licensees and platform operators entered into after 1 July 2013 will not be grandfathered and must be negotiated on a FOFA-compliant basis. Further, sub-regulation 7.7A.16(3) allows for changes to the parties to the arrangement without this event triggering a new arrangement for the purposes of the grandfathering provisions (although the parties to the arrangement still need to be mindful of the operation of the anti-avoidance rules).

  • grandfathering for non-platform operators: draft Corporations Regulation 7.7A.16A excludes from grandfathering any benefits that are given other than by platform operators under an arrangement entered into before the application day, and which are given in relation to the acquisition of a financial product by a retail client who did not have an interest in the financial product immediately before 1 July 2014. The effect of regulation 7.7A.16A is to limit grandfathering to conflicted remuneration paid under pre-FOFA arrangements relating to the existing investments of clients at 1 July 2014. Conflicted remuneration from non-platform operators will be subject to the ban for new investments in different products after 1 July 2014, regardless of whether these investments are made through a platform/custodian or directly by the client.

However, sub-regulations 7.7A.16A(4) and (5) allow for a client to increase their interest in an existing managed investment scheme or superannuation scheme without being taken to have acquired a new financial product. This means that non-platform operators can continue to pay conflicted remuneration in relation to clients who increase their exposure to a product that the client held before 1 July 2014. In addition, if it is possible for the client to change the nature of their interest without resulting in the acquisition of a different underlying product, this will not cause grandfathering to cease. This may be the case, for example, where a client moves between generic investment options (that is, from the ‘growth’ option to the ‘balanced option’) in a managed investment scheme or superannuation scheme. As is the case for regulation 7.7A.16, regulation 7.7A.16A allows for changes to the parties to an arrangement without this event triggering a new arrangement.

  • buyer of last resort arrangements: new regulation 7.7A.12EA covers ‘buyer of last resort’ arrangements. These arrangements allow a licensee to acquire the business of a representative for a purchase price using a specified formula. This regulation deems the purchase price not to be conflicted remuneration if it is based, in whole or in part, on the number or value of financial products held by the representative’s clients and the weighting attributed to the financial products that are issued by the licensee is the same as the weighting attributed to other financial products. In these situations, buyer of last resort arrangements would not influence the advice provided by a representative because favourable weighting is not provided to the licensee’s products.

Concluding comments

There are a number of welcome developments in these recent releases, particularly the ‘no action’ position on the receipt of certain management and administration fees (although superannuation trustees that provide personal advice directly, rather than through a third party agent, are at a distinct disadvantage).

The proposed changes to grandfathering will give platform operators and fund managers more time to implement the substantial systems changes to be able to identify and segment ‘grandfathered’ clients from new clients after 1 July 2014.  This will come as welcome relief to those licensees that were still struggling to determine how they were going to implement the grandfathering provisions by 1 July 2013.  On the basis of the draft Corporations Regulations, they will now only need to have their distribution arrangements in place by 1 July 2013.


Adrian Verdnik

Adrian’s financial services law practice covers superannuation, managed funds, insurance, and financial advice.

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