In brief
The Federal Government today introduced a Bill into Parliament to implement its proposed amendments to the Future of Financial Advice legislation. There are some significant differences between the Bill as introduced and the earlier exposure draft version released in January. The proposed reforms are intended to increase access to financial advice. There is a question as to whether the proposed reforms will achieve this and the effect they will have on the quality of advice. Senior Regulatory Counsel Michael Mathieson reports.
Conflicted remuneration
Carve-out for some cases of general advice
A big ticket change in the Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014 (the Bill) is the exclusion from the ban on conflicted remuneration (commissions) when provided in relation to general advice. This is also the change that has created the greatest confusion.
The distinction between general advice and personal advice has always been poorly understood and is often difficult to identify. General advice can, and often does, include a specific product recommendation. An advertisement for a financial product is probably the clearest example of this.
Now the distinction between general and personal advice will really matter since some incentives to sell financial products using general advice will be permitted. However, general advice (by its nature) will not be tailored to the needs of its audience and is very unlikely to assist in providing access to financial advice (unless one includes marketing material) or to promote better quality advice.
The original exposure draft of the Bill proposed an exclusion in relation to general advice at large. The exception proposed by the Bill, as introduced, is narrower. It will only apply where:
- the benefit is given to an employee of a financial services licensee – this means a benefit given to a financial adviser who is an independent contractor cannot fall within the exception;
- the benefit relates to general advice given by the employee and that employee has not given personal advice to the retail client in question in the previous 12 months; and
- the financial product to which the general advice relates is issued or sold by the employee's licensee – it is noteworthy that this does not extend to a product that is issued or sold by an associate of the employee's licensee.
Client-given benefits - generally
A key exception to the definition of conflicted remuneration depends on the ability to assert that the benefit has been given 'by' a retail client.
The Bill would introduce a note to the effect that a reference to giving a benefit includes a reference to causing or authorising it to be given. It then cross-refers to section 52 of the Corporations Act 2001 (Cth), which deals with causing or authorising a thing to be done. We consider that the note does not add anything material to the pre-existing operation of s52. The real question is whether s52 applies in any particular situation.
Client-given benefits – superannuation
A question that has been around since the Future of Financial Advice (FoFA) legislation first commenced is whether a payment made by a superannuation trustee to a financial adviser or their licensee can fall within the exception for client-given benefits, where the cost of the payment is recovered from the fund and debited to the member's account.
To date, the legal position has been unsatisfactory, involving recourse to s52 of the Corporations Act (see above) and/or to the original Explanatory Memorandum (EM).
Now, the Bill proposes to include a note in these terms:
Under the governing rules of some regulated superannuation funds, a member may seek advice on the basis that the trustee of the fund will pay the licensee or representative for the advice and then recover the amount paid from the assets of the fund attributed to that member. In that case, the member has caused or authorised the amount to be paid to the licensee or representative and so, because of section 52 of this Act, paragraph (1)(d) would apply to that amount. This does not affect the trustee's obligations under section 62 of the Superannuation Industry (Supervision) Act 1993 (which deals with the purposes for which a trustee may act in maintaining a regulated superannuation fund).
Our brief comments on this are:
- the question of whether a superannuation member has 'caused' or 'authorised' a payment will always be a question of fact – we would caution against relying on an overly literal interpretation of the note; and
- despite the caution we express, the note will at least make it plain on the face of the legislation that it is open to rely upon the exception for client-given benefits in a superannuation context.
Intra-fund advice
The amendments would include a note that will include a description of the meaning of the expression 'intrafund advice'. The expression is not used in the Corporations Act or Regulations and therefore cannot be used as an aid to interpreting the legislation. It is not clear why the note has been inserted.
The expression is used in the EM. It says: 'Where remuneration structures relating to the provision of intra-fund advice are unlikely to materially influence the intra-fund advice provided to members, for example the levying of administration or management fees by trustees or fee for service type payments to third party advice providers, it is not intended that these arrangements would be captured by the ban on conflicted remuneration.'
This statement appears to be a speculation about the outcome of applying the influence test in the definition of conflicted remuneration, in the context of intra-fund advice. Applying the influence test is always a fact-specific exercise and we would caution against relying on this kind of generalised speculation in the EM.
Financial adviser duties
Best interests obligation – seventh step
The attention of the media has focused squarely on changes to the duty of advisers to act in the best interests of their clients.
Under the existing law, they are deemed to do so if they comply with seven steps. The amendments will remove the seventh step that requires the adviser to take any other step that is in the best interests of the client. The steps (with or without the seventh step) do provide a sensible process that may improve the quality of an adviser's advice.
But the 'best interests' duty is one of the great FoFA furphies – the duty is all about process and says nothing about the quality of the advice or the adviser's duties to their client. There is no reason to think that a court would have interpreted the seventh step as going to anything other than process.
This amendment is unlikely to have any particular effect on the duties of advisers or on access to advice or the quality of advice. Advisers retain their duties to make reasonable enquiries of their clients and to provide appropriate advice under the Corporations Act. They also retain all of their general law duties.
Best interests obligation – scoping advice
One of the existing steps has been reformulated by changing the circumstances to be considered by the adviser from those disclosed 'by the client through instructions' to those disclosed 'by the client'. This is intended to assist advisers in being able to agree on the scope of their advice with their client. However, it is not clear how this change will achieve that outcome, particularly given the adviser's duties to make enquiries of the client.
An attempt seems to have been made to address this point by inserting the following words at the end of the existing note about 'scaled' advice in the legislation: 'The provider need not inquire into circumstances that would not reasonably be considered as relevant to the subject matter'. Lawyers will have to work out the relationship between this addition to the note on the one hand and the existing operative provisions of the FoFA legislation on the other.
A provision has also been added to the effect that the statutory best interests obligation does not prevent the adviser and their client agreeing on the subject matter of the advice sought. It includes an example where a client, following a discussion with the adviser, decides to narrow the scope of the advice from the scope they originally contemplated. There may be some difficulty in reconciling these amendments with the existing FoFA provision to the effect that it is not possible to contract out of the FoFA legislation.
Other changes
Volume-based shelf-space fees
The definition of 'volume-based shelf-space fee' has been made much clearer. The definition now turns, to some extent, on whether the fee could reasonably be expected to influence the platform operator that receives it. An anomaly in the exposure draft, which could have seen flat fees fall within the definition, has been corrected in the Bill as introduced.
Opt-in and disclosure statements
Advisers won't have to ask their clients to agree to pay ongoing fees every two years anymore – this will undoubtedly make life easier for advisers, but it is difficult to see how it will improve access to advice or improve its quality. It's interesting that this amendment has received little attention from the media.
Matters not addressed by the Bill
Regulations
When the exposure draft of the Bill was released, exposure draft regulations were also released. They contained some additional (and important) proposed amendments, including some significant exceptions to the conflicted remuneration bans. In fact, one of them would blast a big hole through the entire ban.
At the time of writing, there was no information available about these additional proposed amendments.
Anti-avoidance
Finally, a key question is how the anti-avoidance provision will be applied by ASIC and the courts, if the proposed amendments pass into law. The Bill itself does not propose to clarify how the anti-avoidance provision might apply in connection with the amendments.