FOFA: the Farce of Financial Advice regulation

With the news that the Senate has now (on its third attempt) disallowed the FOFA reform regulations registered in late June (the Corporations Act (Streamlining Future of Financial Advice) Regulation 2014), participants in the financial services industry are questioning whether they acted lawfully during the period from 1 July 2014 to 18 November 2014 when the regulations were in force (which we will refer to as ‘the Disallowed Period’), and whether transactions they entered into are valid and have delivered the commercial outcomes they had expected.

What it means

In summary:

• none of the reforms the Abbott government has attempted to make to FOFA (discussed in our article of 31 January 2014) are currently in effect, other than the Statement of Advice changes negotiated with the Palmer United Party;
• where the disallowed regulations repealed an obligation that would otherwise have arisen during the Disallowed Period (such as the obligation to give Renewal Notices and Fee Disclosure Statements), a person that did not comply with that obligation during the Disallowed Period has not breached the law, and has no obligation to retrospectively comply with the obligation for the Disallowed Period;
• advisers that gave personal advice during the Disallowed Period can rely on the ‘safe harbour’ provisions that deem advice to have been given in accordance with the ‘best interests’ obligation without having to prove that they took any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances (which many have referred to as the ’catch all’ requirement);
• the ‘stamping fees’ exemption reverts to what it was before the FOFA reform regulations were introduced (ie, excluding ‘investment entities’ like REITs) but licensees that received ‘stamping fees’ under the terms of that exemption as it applied during the Disallowed Period have not breached the law; and
• the disallowance could be a major blow for licensees that entered into transactions during the Disallowed Period in the expectation that they could rely on regulations that have now been disallowed (such as the regulation that provided for grandfathering of ‘redirected’ commissions or the ‘balanced scorecard’ regulation).  As those regulations have ceased to have effect, any grandfathering or exemption conferred by those regulations has also fallen away, meaning the receipt of those benefits is once again prohibited.

Legislative effect of disallowance

If a notice of motion to disallow a disallowable legislative instrument, like the FOFA regulations, is agreed to, the instrument is disallowed and it then ceases to have effect.¹ Disallowance has the effect of repealing the instrument – if the instrument repealed all or part of an earlier instrument then disallowance also has the effect of reviving that part of the earlier instrument.²

This means that obligations under the FOFA legislation that were repealed by the disallowed regulations had no effect during the Disallowed Period, but are now revived and once again become effective.

This raises the question whether the revival of the obligation on licensees to give Renewal Notices and Fee Disclosure Statements means that licensees now have to go back and provide those documents to clients for the Disallowed Period.

In short, the answer is ‘no’. The fact that a regulation is subsequently disallowed does not affect acts done in accordance with the law existing prior to such disallowance.³ As the Renewal Notice and Fee Disclosure Statement obligations must be satisfied at a particular point in time⁴ and those obligations are deemed to have been repealed during the Disallowed Period, there is no retrospective obligation to satisfy them.

Likewise, the ‘bests interests’ obligation is also a ‘point in time’ obligation that applies at the time an adviser gives advice to a client. The ‘catch all’ provision that relates to the ‘best interests’ obligation⁵ is deemed not to have applied to advice given during the Disallowed Period. However, an adviser giving the same advice today would have to prove that they had taken any other step that would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances.

That’s the good news. The bad news is that ongoing rights that would have been conferred by disallowed regulations no longer exist.  For example, where the disallowed regulations provided that an issuer could continue to pay, and an adviser could continue to receive, grandfathered benefits in certain circumstances without those benefits being prohibited as conflicted remuneration (such as rights to treat benefits paid under a ‘redirected’ arrangement as grandfathered), that right no longer exists.  The practical effect of those grandfathering regulations being disallowed is that benefits paid under a ‘redirected’ grandfathered arrangement are once again prohibited, irrespective of whether the transaction completed during the Disallowed Period. A purchaser that acquired a book of business during the Disallowed Period that included grandfathered commissions may find the income they receive on the book to be much less than they expected.

The same applies for ‘performance bonus’ remuneration arrangements that were exempted from being conflicted remuneration under the disallowed regulations: as the regulation has been repealed, the exemption no longer applies, irrespective of whether an agreement was executed by an employer and employee during the Disallowed Period.

Following the disallowance of the regulations, ASIC immediately issued a press release reiterating the position it took in a previous announcement (when the Abbott Government first announced its FOFA reform program) that it would be taking a ‘facilitative’ approach to compliance, understanding that many licensees will have to make systems changes to be able to comply with their obligations to give Renewal Notices and Fee Disclosure Statements.  However, that will be of little consolation to people who entered into transactions during the Disallowed Period that will not produce the outcome they had hoped for.

The ultimate irony is that the FOFA reforms were designed to bring trust and confidence to the financial services sector.

¹Section 42, Legislative Instruments Act 2003 (Cth)

²Section 45, Legislative Instruments Act 2003 (Cth) and related state legislation such as the Acts Interpretation Act 1987 (NSW) and Subordinate Legislation Act 1994 (Vic)

³Victorian Stevedoring & General Contracting Co Pty Ltd v Dignan (Dignan’s case) (1931) 46 CLR 73 at 104-106, Scerri v Commr for Consumer Affairs (SA) [2002] SASC 439, at [93]; and Aidon v Minister for Aboriginal Affairs of New South Wales [2006] NSWLEC 169 held (at [22])

⁴Sections 962G and 962K, Corporations Act 2001 (Cth)

⁵Section 961B(2)(g), Corporations Act 2001 (Cth)