Draft FOFA legislation released

Treasury has released consultation drafts of the Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014 (Bill) and the Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014 (Regulations), which would amend the Future of Financial Advice provisions in Part 7.7A of the Corporations Act and regulations in accordance with the announcement by the Assistant Treasurer on 20 December 2013.

In a nutshell

The Bill includes the following key amendments to the FOFA legislation:

  • removing the need for clients to renew their ongoing fee arrangement with their adviser every two years (also known as the ‘opt-in’ requirement);
  • making the requirement for advisers to provide a fee disclosure statement only applicable to clients who entered into their arrangement after 1 July 2013;
  • removing the ‘catch-all’ provision from the list of steps an advice provider may take in order to satisfy the best interests obligation;
  • better facilitating the provision of scaled advice; and
  • exempting from the ban on conflicted remuneration, benefits relating to general advice.

The proposed Regulations make changes by:

  • broadening the circumstances when the grandfathering arrangements for the ban on conflicted remuneration apply;
  • clarifying what benefits can be paid under a balanced scorecard arrangement;
  • exempting bonuses paid in relation to ‘permissible revenue’;
  • clarifying the application of the stamping fee exemption to capital raising activities and broadening its application to include investment entities;
  • amending the application of the existing brokerage fee exemptions to include brokerage fees paid in relation to financial products traded on the ASX24;
  • 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; and
  • clarifying the operation of the ‘mixed benefits’ provisions.

The ‘best interests’ obligation

The Bill makes two key amendments to the best interests obligation:

  • it removes the ‘catch all’ provision in the safe harbour (section 961B(2)) which required an adviser to have ‘taken any other step [in addition to the six preceding ones] that … would reasonably be regarded as being in the best interest of the client’ in order to benefit from the ‘safe harbour’; and
  • it provides that clients and advisers are explicitly permitted to agree on the scope of any scaled advice provided.  It follows that, because the scope of advice is limited under a scaled advice model, the investigations required to be undertaken by an advice provider in order to provide scaled advice will also be limited to what is relevant to providing advice that is in the client’s best interests on the particular issue or issues.

Ongoing fee arrangements

The Bill reforms the requirement to have an ongoing fee arrangement with a client in order to charge fees by removing the renewal notice obligation for fee recipients and making the requirement for advisers to provide a fee disclosure statement only applicable to clients who entered into their arrangement after 1 July 2013.

Conflicted remuneration

The definition of conflicted remuneration has been amended to specifically refer to benefits received by licensees or representatives that give personal advice that might influence the financial product recommended or the personal advice given.  In addition, a note has been included to the definition of conflicted remuneration that ‘giving a benefit includes a reference to causing or authorising it to be given’ as per section 52 of the Corporations Act.  This is to clarify that the ‘client-pays’ exemption (section 963B(1)(d)) extends to a benefit given at the direction of the client with the client’s clear consent.  However, the Explanatory Memorandum to the Bill cautions that ‘the mere fact that a client consents to a benefit to be paid, does not mean that the benefit is caused or authorised by the client.’

The Bill also amends the exemption from conflicted remuneration that applies to certain life risk insurance policies so that benefits paid in relation to life risk insurance offered inside superannuation will be permitted under a broader range of arrangements than under the current law.  Under the new law, the exemption provided for monetary benefits paid in relation to life risk insurance policies offered inside superannuation will be broadened such that the ban on conflicted remuneration will only apply in relation to monetary benefits paid with respect to:

  • life risk insurance products for MySuper members; and
  • life risk insurance products offered inside other (non MySuper) superannuation products in circumstances where no personal financial advice has been provided to the member regarding life risk insurance.

Volume-based shelf space fees

The existing legislation presumes that benefits that are wholly or partly dependent on the total number or value of the funds manager’s financial products which relate to platform arrangements are volume based shelf-space fees.  There are specific exemptions from the presumption where the benefit relates to scale efficiencies or is paid as a fee for services provided by the platform operator.

Under the amended legislation, a volume-based shelf-space fee will be defined as a benefit that, because of the nature of the benefit, or the circumstances in which it is given, could reasonably be expected to influence the platform operator to:

  • increase the total number or value of the funds manager’s financial products in which the platform operator is prepared to provide under the custodial arrangement; or
  • give preferential treatment to the funds manager’s financial products in providing the custodial arrangement.

A benefit will therefore only be a volume-based shelf-space fee if it influences the platform operator’s behaviour, much in the same way that the ban on conflicted remuneration only applies to benefits that influence an adviser’s behaviour.

Stamping fees and brokerage

Amendments will be made to remove the exclusion that prevented investment entities (including REITs) from relying on the stamping fees exemption.  The effect of this amendment is that ‘stamping fees’ will be able to be paid in relation to capital raising activities in respect of investment entities.  Amendments have also been made to include transactions undertaken on the ASX24 as falling within the various brokerage exemptions.


The Regulations make amendments to the grandfathering arrangements so that a person (whether a platform operator or non-platform operator) that purchases a ‘grandfathered’ book of business has the same right to rely on the grandfathering provisions as the person that sold the business.  This allows continuity of the grandfathering of commissions and other remuneration within a book of business notwithstanding a change of ownership.

The Regulations also amend the grandfathering of ‘pass through’ benefits so there is no requirement to have a grandfathered arrangement in place to pass through the benefit where:

  • an authorised representative of one licensee becomes an authorised representative of another licensee after the application day of the ban on conflicted remuneration;
  • a representative (for example, an employee) of a financial services licensee becomes an authorised representative of the same licensee.

In addition, a person that has a superannuation interest in ‘growth’ (accumulation) phase prior to 1 July 2014 and moves into a pension is taken not to have acquired an interest after 1 July 2014 for the purposes of the grandfathering provisions. This will allow grandfathered benefits to continue to accrue where the client held the superannuation interests prior to 1 July 2014 and made the election to take a pension after this date.


The amendments in the Bill will apply from the day they are given Royal Assent.  However, the Government has announced that time sensitive FOFA amendments will be dealt with through regulations and then locked in to legislation.  To the extent possible under the primary legislation, the proposed Regulations will make interim changes until the Bill passes the Parliament and receives Royal Assent.

In the meantime, ASIC indicated in a media release before Christmas that it will take a ‘no action’ position in relation to those matters that are the subject of legislative amendment (see 13-355MR).  Financial services licensees and their representatives should inform themselves about the scope of the proposed amendments if they wish to rely on the ‘no action’ position.


Adrian Verdnik

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

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