Alert | Regulations to give effect to FOFA

28 May 2012

The Australian Government has released two sets of draft regulations relating to the Future of Financial Advice (FOFA) legislation.

The first tranche of regulations relates to ongoing fee arrangements and conflicted remuneration. These regulations:

  • exclude financial product fees from the definition of an 'ongoing fee arrangement';
  • introduce a delayed commencement date (to 1 July 2013) for the ban on conflicted remuneration for group life risk insurance superannuation funds – that is, this measure will not apply earlier to licensees that elect to comply with FOFA before 1 July 2013;
  • exclude time-share schemes from the ban on conflicted remuneration;
  • prescribe requirements for the soft-dollar exemptions from the ban on conflicted remuneration.

The second tranche of regulations amends the 'grandfathering' provisions in relation to conflicted remuneration.

Unfortunately, we are still waiting to see whether there will be regulations relating to:

  • exemption for stock broker commission and remuneration arrangements for employed brokers;
  • scaled advice – industry concerns remain about the ability to provide scaled advice, which the Parliamentary Joint Committee recognised in its report on the FOFA legislation at least in relation to providing scaled advice through the internet (see Parliamentary Joint Committee on Corporations and Financial Services Report on the FOFA Bills, para 4.53);
  • matters ASIC must be satisfied of when approving codes of conduct under the opt-in exemption;
  • exemptions to the annual fee disclosure statement requirement and whether any additional information will need to be included in fee disclosure statements;
  • requirements for IT benefits.

New products are not grandfathered

The draft grandfathering regulations exclude benefits relating to investments in new financial products – that is, financial products acquired after FOFA commencement. (Under the Government's proposed amendments to the FOFA legislation, it will commence on 1 July 2013 unless the licensee elects to comply earlier.)

This means that, as expected, grandfathering will not apply to new clients. It also means that it will not apply to investments in new financial products by existing clients. The draft Explanatory Statement (ES) justifies this position by stating that "there can be no existing contractual right to commissions based on financial products that may be acquired in the future".

However, new investments in existing products will be grandfathered. The ES expressly recognises this and states it includes reinvestment of returns.

There are some problems with the draft regulations:

  • They do not apply to platform payments, which remain excluded from grandfathering until regulations are made.
  • There is no more certainty about the circumstances in which the exemption for acquisitions on unjust terms will apply.
  • Despite the ES, further investments in some products, such as managed investment schemes and securities, may be excluded.
  • Uncertainty remains about the implications of transactions such as change of responsible entity, successor fund transfers or transfer of adviser or licensee business.

The draft regulations also formally defer the commencement of the ban on conflicted remuneration relating to life risk insurance through superannuation to 1 July 2013.

Ongoing fee arrangements

Under the draft regulations, a product fee, defined as an administration fee charged by the product provider to the client for administering the product, will not be an ongoing fee arrangement. The example given in the ES is a fee charged by a platform operator in relation to a custodial arrangement. While it is hard to image a platform operator providing personal advice, this exemption will facilitate the provision of scoped advice by product issuers.

Soft dollar benefits

As expected, the draft regulations provide for the A$300 limit for soft dollar benefits not otherwise exempted. However, they also provide an explicit exemption from disclosing benefits below this threshold in financial services guides and statements of advice. This effectively means that soft dollar benefits do not need to be disclosed by advisers, as amounts above this limit are banned unless they are education, training or IT benefits.

Unfortunately, the draft regulations also impose record keeping obligations on licensees who receive or whose recipients receive exempt soft dollar benefits – that is:

  • benefits less than A$300 in value that are not given on a frequent or regular basis;
  • education or training activities;
  • IT benefits received from product issuers; and
  • benefits received from clients.

These records must be available for the past financial year to any person who requests them. A reasonable charge may be levied for access to the records.

Education and training

The draft regulations set out the requirements when a conference or seminar will qualify for the education and training exemption from conflicted remuneration:

  • 75 per cent of the time spent on the course must be for professional development; and
  • the participant or their employer must pay the travel and accommodation costs.

Other types of education and training can fall within the exemption, provided they are for the dominant purpose of education and training. The key, therefore, will be determining whether a particular event is a conference or seminar.

There is no proposal to limit events to particular countries such as Australia or New Zealand.

Links

For more information, see the homepages for the two tranches of regulations:

Exposure Draft - First Package of FOFA Regulations

Exposure Draft - FOFA Regulations on Grandfathering

Author(s) Richard Batten