It is fair to say that the Senate's disallowance of the Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014 on 19 November 2014 has generated a lot of noise.

Wherever you might stand on the merits of particular elements of the Streamlining Regulation, a Parliamentary action that results in many people and organisations being immediately in breach of the law is messy and regrettable. However, the description 'messy and regrettable' could equally be applied to the process that resulted in the Streamlining Regulation in the first place. It could also be applied to the process by which FoFA was originally enacted. The defining characteristic of FoFA is its incoherence.

The disallowance was accompanied by howls of outrage from all quarters. Dark mutterings about class actions against financial advisers have been heard. If some of the media reports are anything to go by, the revival of the final 'catch-all' step in the statutory best interests duty for financial advisers is a legal development whose significance is on a par with that of Mabo.

Amid all the din, I think there are a few important points that seem to have gone unnoticed:

  • Ongoing fee arrangements – The revival of the provisions concerning ongoing fee arrangements is very significant. The pool of financial advice clients who will have to be given annual fee disclosure statements has expanded. Even more important, in my view, is the opt-in requirement. If you have been following the Financial System Inquiry you could be forgiven for thinking that behavioural economists are the only people who know anything. Well, if behavioural economics teaches us anything it is that a lot of people are unlikely to renew their relationship with their financial adviser every two years.
  • Performance bonuses – The Streamlining Regulation had introduced an exception to conflicted remuneration for specified performance bonuses. This measure, now disallowed, is not proposed to be remade. However, an important point is that, if the preconditions to falling within the exception were satisfied, it was unlikely that the performance bonus would have fallen within the main definition of conflicted remuneration in the first place. The main definition requires an 'influence test' to be satisfied and the preconditions to falling within the exception were such that it would be unlikely that the influence test would be met. In other words, the exception was probably unnecessary anyway.
  • Accumulation to pension – The Streamlining Regulation had also introduced a provision which deemed grandfathering to continue to apply to a commission even though the relevant superannuation account moved from the accumulation phase to the pension phase. Again, this measure, now disallowed, is not proposed to be remade. However, an important point is that, again, the provision was probably unnecessary anyway. Interpreted properly, the limitations on grandfathering are unlikely to be triggered just because of a transfer from accumulation to pension.
  • Wholesale/retail – There are some long-standing modifications (to be found in the Corporations Regulations) to the provisions of the Corporations Act 2001 (Cth) governing the wholesale/retail distinction. They are important modifications (see regulations 7.6.02AB – 7.6.02AF). Up until the Streamlining Regulation, the modifications did not apply to the FoFA provisions, they only applied to other parts of Chapter 7 of the Corporations Act. The Streamlining Regulation extended those modifications to the FoFA provisions. The disallowance means they have ceased to apply in a FoFA context. Only one of the five provisions of the Streamlining Regulation which brought about that extension is proposed to be remade – this being the provision concerning the renewal period for accountants' certificates.
  • Benefits calculated by reference to other benefits – The Streamlining Regulation had also introduced an exception to conflicted remuneration for benefits calculated by reference to other benefits falling within another exception. For lawyers this was a most intriguing provision. The Explanatory Statement asserted, somewhat heroically: 'FOFA always envisaged that payments would not be considered conflicted remuneration if they were made by reference to another benefit that itself is not conflicted remuneration'. So the exception was meant to give effect to what FoFA 'always envisaged'. Whatever the scope of the exception, it is now gone and it is not proposed to be remade.

I have not said anything about the duties of financial advisers under FoFA. I do not mean to suggest that the associated issues are not important, although I do think a lot of the public statements and media commentary have been beside the point. I think a really important question is whether the general law concerning conflicts of interest and conflicts of duty can co-exist with the new statutory duties. I think there is a good argument that it cannot. If that is right, then a set of measures that was apparently aimed at increasing the responsibilities of financial advisers has had, at least in that respect, the opposite effect.

FoFA – if it wasn't such a shambles, it might be entertaining.

Postscript

The provisions of the Streamlining Regulation which are proposed to be remade are the following Items in Schedule 1 to that instrument (Select Legislative Instrument 2014 No. 102): Items 5 (Accountants certificate renewal period); 11 (Stamping fee provision); 12 to 17 (ASX24-related provisions); 27 (non-monetary education or training benefit not conflicted remuneration); and 28, 29 and 31 to 35 (Grandfathering arrangements).