In brief
The Federal Government announced today that it will press ahead with changes to the future of financial advice provisions, initially by regulation and then by legislation (when it has a more sympathetic Senate). The announcement includes some key changes, including narrowing the proposed general advice exception from the bans on conflicted remuneration for employees of financial services licensees (such as banks). Employees who provide general advice in relation to products issued or sold by the licensee will be able to receive conflicted remuneration, provided that it is not commission. While the announcement will provide some comfort to the industry, it does little to alleviate uncertainty. Partner Michelle Levy and Senior Associate Simun Soljo report.
Overview
Earlier this week, the Senate Economics Legislation Committee released its report on the Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014 (the FOFA Bill) (please see our Client Update: Senate releases report on FOFA Bill).
The Minister for Finance and Acting Assistant Treasurer, Senator Mathias Cormann, has today issued a media release setting out the Government's intended approach to the proposed amendments to FOFA contained in the FOFA Bill and the Government's previously released policy.
A number of the proposed changes will be blocked by the current Senate. The Government therefore intends to proceed with the majority of the changes by issuing regulations ahead of the 1 July 2014 start-date, relying on the existing regulation-making power in the Corporations Act 2001 (Cth). The industry will therefore again be faced with regulations it is seeing for the first time on the eve of the commencement date. Unhappily, the previous batches of FOFA regulations, made in similar hurried circumstances by the previous Federal Government, have added to the complexity and difficulty of complying with FOFA. It is hard to be optimistic about this further batch, particularly if it will attempt to modify the existing law.
General advice exception
The Senate Committee had recommended that 'the government consider the provisions governing conflicted remuneration and redraft them to ensure that there is greater clarity around their implementation'. This recommendation was made, in particular, in relation to the proposed exception for conflicted remuneration given to employees of financial services licensees where those employees only provide general advice in relation to products issued or sold by the licensee.
Senator Cormann has now announced that the Government will issue regulations, and eventually attempt to pass legislation, to make the 'necessary change to better support the provision of general advice to consumers, while putting beyond doubt that commission-style payments cannot be re-introduced'. How it will define 'commission-style payments' and distinguish them from conflicted remuneration is likely to introduce more room for lobbying and uncertainty. It seems that the Government intends the exception to apply to payments such as bonuses, which may be based on total volumes of financial products sold, but to exclude one-off payments linked directly to the sale or issue of a particular financial product or ongoing payments made to an employee because the employee has given general advice. But the distinction is likely to be difficult to define with precision.
New regulation-making power
The Government also proposes to legislate to expand the regulation-making powers in relation to the conflicted remuneration provisions 'to allow the Government to react quickly to address unintended consequences or if industry were found to be misusing the provisions'. The Government notes the use of this power specifically to 'put absolutely beyond doubt how serious the Government is about not permitting commissions' in the context of the general advice exception.
This proposal seems to be an admission of the difficulty of distinguishing between conflicted remuneration the Government intends to permit and 'commissions' it wishes to ban. It seems that the Government will monitor the use of the general advice exception and might step in to ban particular types of payments if they are considered to be inconsistent with the exception's intention (perhaps here read potentially politically damaging).
Other amendments
The following other changes will be made by regulation:
- Opt-in: Removal of the ‘opt-in’ provision, which requires advisers to obtain consent from clients every two years to continue charging ongoing fees.
- Best interests: Removal of the 'catch-all' provision in the 'safe-harbour' to the best interest duty.
- Scaled advice: Changes to better facilitate access to scaled advice. What these changes will be is somewhat unclear. The FOFA Bill proposed to add a clause confirming that the client and the adviser are not prevented from agreeing the subject matter of the advice, and a note stating that an adviser does not need to inquire into the circumstances not reasonably considered relevant to the subject matter of the advice. The effectiveness of these provisions to allow scaled advice is doubtful, and legislation 'by note', although it seems increasingly popular, may not stand up to scrutiny in court.
- Fee disclosure: Removal of the requirement for fee-disclosure statements to be sent to pre-1 July 2013 clients.
The regulations in relation to the above changes are intended to apply from 1 July 2014 until 31 December 2015. The Government will seek to pass legislation to replace the regulations in the meantime.
Senator Cormann has also announced that the following changes will be made only by regulation:
- Balanced scorecard: Providing that incentive payments paid to an adviser that are based on a 'balanced scorecard' and do not conflict advice are permitted. We query why a specific exception is needed in these circumstances, as payments that do not conflict advice should not be caught by the FOFA provisions. The regulations, however, may provide a degree of certainty as to the types of balanced scorecard arrangements that will not infringe the provisions, although they also open up the potential for greater uncertainty if the drafting is unclear.
- Transfer of clients: Amendments will also be made to the FOFA grandfathering provisions to 'facilitate competition in the financial advice industry', by 'enabling advisers to move licensees with their clients whilst continuing to receive grandfathered remuneration'.
Volume-based shelf-space fees and fee notices
Senator Cormann's announcement has also noted that the Government will seek to legislate to make the amendments clarifying of the operation of the volume-based shelf-space fees and extending the time within which advisers are required to send a fee disclosure statement to a client (from 30 to 60 days).
What to expect next
Expect shortly to see regulations to implement the announced changes ahead of the 1 July 2014 commencement date. Given the tight timeframe, it is unlikely the Government will consult publicly before issuing final regulations, and the industry will only have certainty once they are issued.