In brief
Last night the Senate Economics Legislation Committee released its report on the Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014. The Committee's recommendations could lead to changes in the treatment of scaled advice and general advice. Partner Michelle Levy and Senior Associate Simun Soljo report.
17 june 2014
The Bill
The Bill will amend part 7.7A of the Corporations Act 2001 (Cth) – the Future of Financial Advice (FOFA) provisions.
The Federal Government says the amendments contained in the Bill will 'reduce regulatory costs and provide greater certainty to industry in relation to their legal obligations'.
They would:
- Remove the 'catch-all' provision in the best interests duty safe-harbour and make minor changes apparently to promote scaled advice;
- Broaden the exceptions to the ban on conflicted remuneration; and
- Remove the requirement for advisers to obtain their client's consent every two years to charge ongoing fees ('opt-in').
(Read our previous Client Update on the Bill.)
The Committee's recommendations
What should not change?
The majority of the Committee supported:
- Removing the 'catch all' provision in paragraph 961B(2)(g) of the 'safe-harbour' provision. They said that its removal would not dilute the best interests duty. Given that the best interests duty in FOFA imposes a series of procedural steps, and the exhaustive nature of those steps, it is hard to disagree with this conclusion. It is also difficult to understand what all the fuss has been about.
- Removing the opt-in requirement, as well as the requirement on advisers to give a fee disclosure statement to clients who entered into an arrangement with them before 1 July 2013. This is probably the only change that will have any impact on the regulatory costs.
What should change?
The Committee recommended that the Government consider:
- how to facilitate scaled advice without compromising clients' best interests; and
- whether changes are required to the proposed general advice exemption from conflicted remuneration.
It also recommended that the Bill be passed after the Government 'gives due consideration' to these recommendations.
Scaled advice
The majority recommended that advisers have an explicit obligation to explain clearly to their clients what scaled advice is and its limitations. This is intended to address the risk that clients will misunderstand the scope of advice being provided under a scaled advice model.
Having noted the other obligations on advisers to act in clients' best interests which apply under the FOFA provisions, such as the obligations under sections 961B(1), 961G, 961J and 961H, the majority of the Committee recommended that the Explanatory Memorandum 'include a paragraph that clearly and unambiguously spells out the best interests obligations' under these sections and 'the level of consumer protection they provide'. The reason for this recommendation is unclear. How it will assist is even more so.
The more substantial recommendation by the majority was that the Government 'consider closely how these separate obligations work together and whether any further strengthening is required to ensure that a provider cannot circumvent these best interests obligations'. This appears to respond to concerns raised in some submissions about the potential for the scope of advice to be manipulated by advisers in ways that would be to the detriment of clients.
We will have to wait and see whether the Government decides to review the operation of these provisions, and whether any substantive changes emerge out of that process.
General advice carve-out
The more important amendment contained in the Bill, and the subject of most of the submissions, is the proposed carve out from the definition of conflicted remuneration of benefits given in relation to general advice. Currently the definition would include remuneration given both in relation to personal and general advice. The proposed amendment would exempt benefits given to certain employees of a financial services licensee who provide general advice.
The Committee noted considerable opposition to the widening of the exemption to include general advice, and the risk identified by some submissions that this could lead to the re-introduction of commissions. It noted that this was never the intention of the Government, and that the Explanatory Memorandum should be amended to clearly reflect this. Of course, this will not affect what the law in fact provides, and if an exemption is provided for conflicted remuneration given in relation to general advice, which the Bill currently provides, no amount of qualifying in the Explanatory Memorandum will change that.
The Committee also recommended that the use of the terms 'information', 'general advice' and 'personal advice' in the Explanatory Memorandum be considered 'with a view to making the distinction between them much sharper and more applicable in a practical sense when it comes to allow exemptions from conflicted remuneration'. Again, it is unclear what amendments would flow from such a consideration and what effect, if any, they would have on the interpretation of the substantive provisions. It seems that the Committee is more optimistic about what an Explanatory Memorandum can do than the case law suggests is likely.
Of greater significance is the recommendation that 'the government consider the provisions governing conflicted remuneration and redraft them to ensure that there is greater clarity around their implementation'. The Committee notes that 'much scope remains to bring greater clarity to [the conflicted remuneration] provisions and certainty that commission will not be allowed'. How the Government responds to this recommendation, and what changes it makes to the general advice carve out to address the risk of commissions coming back via the exemption, is something we will have to wait and see. Again, given that the Committee has not made any substantive recommendations as to the drafting of the provisions, the industry will be left with ongoing uncertainty until the Government gives an indication of how it will respond.
Dissenting views
Labour and the Greens both dissented from the majority and argued that the Bill should not proceed. This makes it unlikely that the Bill will be passed by the current Senate.
What to expect next
If the Government takes the Committee's recommendations, we might see some changes to the scaled advice provisions and will also likely see changes to the general advice carve out to in some way preclude the reintroduction of commissions. This will likely delay the passage of the Bill.
Whether the Government will be able to pass the Bill in any form will of course depend upon the views of those who will hold the balance of power in the new Senate from 1 July 2014.