On 23 May 2012, the Government released for consultation the highly anticipated draft FOFA regulations in two separate packages. The first is a package of regulations set out in the draft Corporations Amendment Regulations 2012 which deals with a number of FOFA measures (FOFA Regulations). The second package is a number of further proposed amendments to the Corporations Regulations 2001 which deal solely with grandfathering aspects of the reforms (FOFA Grandfathering Regulations).
The release of these regulations follows the passage of the first and second tranches of the FOFA reforms set out in the Corporations Amendment (Future of Financial Advice) Bill 2011(Tranche 1 Bill) and Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 (Tranche 2 Bill) by the House of Representatives. These Bills await further debate in the Senate. Our summary of the FOFA reforms can be found here.
Submissions on the draft FOFA Regulations and FOFA Grandfathering Regulations are due by 5 June 2012.
A copy of the draft regulations and explanatory notes are available here.
NEED TO KNOW
The draft FOFA Regulations confirm the following:
- product fees are excluded from the definition of an “ongoing fee arrangement”;
- the ban on conflicted remuneration excludes benefits given for advice relating to interests in time-sharing schemes;
- the scope and detail of the exemptions from the ban on conflicted remuneration for certain non-monetary (“soft-dollar”) benefits and the introduction of record keeping requirements in relation to those benefits;
- the delayed application date of 1 July 2013 for the ban on conflicted remuneration with respect to group life risk insurance inside choice superannuation funds and all life risk insurance in default superannuation funds.
FOFA Grandfathering Regulations
The draft FOFA Grandfathering Regulations confirm that the grandfathering of any conflicted remuneration will not extend to benefits given in relation to a “new financial product” acquired on or after 1 July 2013 (or the date on which a person elects to be bound by the obligations imposed under Part 7.7A).
In the Explanatory Memorandum (EM) to the Tranche 1 Bill, the Government maintained that the regulation making power serves a number of functions including “keeping the legislation up to date, providing commercial certainty quickly and efficiently to industry participants that are unintentionally captured, and to provide efficacy to the legislation”. As such, industry comment will be crucial to ensuring that the regulations provide industry with the “commercial certainty” required to meet their obligations under FOFA.
FOFA Regulations in Detail
Product Fees and ongoing fee arrangements
Draft regulation 7.7A.10 confirms that where there is an arrangement under which:
- the only fee to be paid for the purposes of the arrangement is a product fee; and
- it is to be paid for an ongoing period of at least 12 months,
then the arrangement is not captured as an “ongoing fee arrangement” for the purposes of section 962A(5). That section provides that the regulations can prescribe arrangements which are not ongoing fee arrangements.
A product fee is defined in sub-regulation 7.7A.10(2) as a fee that the issuer of a financial product charges a retail client in relation to the administration of a financial product issued to the client (this includes fees charged by a platform provider with respect to custodial arrangements).
This draft regulation is consistent with the view expressed by Government in the EM to the Tranche 1 Bill. In the EM, the Government expressed the following view:
“The types of ongoing fee arrangements intended to be captured are those ongoing fees that are being charged for personal financial advice (including where the client is not actually receiving ongoing advice but still paying a fee to an adviser). The ongoing payment of an insurance premium or a product fee is therefore not intended to be captured as an ongoing fee arrangement.”
Conflicted Remuneration and Non-Monetary Benefits
- Time Sharing Scheme: Prescribed Benefit
The FOFA Regulations provide that advice relating to an interest in a time-sharing scheme is a prescribed benefit. Accordingly, such benefits are expressly excluded under draft regulation 7.7A12 from the conflicted remuneration provisions.
A time sharing scheme is defined in section 9 of the Corporations Act 2001. Broadly, it refers to a scheme, undertaking or enterprise, whether in Australia or elsewhere where participants of that scheme are entitled to use, occupy or possess properties for a certain period. The scheme operates the property. The period cannot be less than 3 years.
- Soft-dollar benefits: Prescribed Amount
Draft regulation 7.7A13 confirms that the cap on non-monetary benefits is a cap of up to $300 (Prescribed Amount) for each financial services licensee, or each representative of a licensee. This relates to benefits that have the potential to influence financial product advice to retail clients.
This Prescribed Amount was set out as the proposed amount in the EM to Tranche 2 of the FOFA Reforms.
- Education and Training
Under draft regulations 7.7A.14 and 7.7A.15 certain nonmonetary benefits relating to education and training will be exempt from the conflicted remuneration provisions if they meet certain requirements.
The requirements are that:
- at least 75% of the time spent on the course is spent on education or training activities for the professional development of participants in the course; and
- the participant or the participant”s employer pays for travel and accommodation relating to the course as well as events and functions (ie dinners) held in conjunctions with the course.
A course that is not an education or training course may still be exempt if the dominant purpose is education and training.
- Record Keeping
A financial services licensee is required under draft regulation 7.8.11A to keep records of any non-monetary benefit given to that licensee, or a representative of that licensee, which is not conflicted remuneration.
Draft regulation 7.8.11A(1) sets out the categories of information required to be included in the records. This includes (but is not limited to) a description of the benefit, value, date on which it was given, whether it was given to a licensee or a representative of a licensee. If a nonmonetary benefit is given to a representative, or authorised representative of the licensee, the licensee is also required to include the contact details of such parties.
- FSG and SOA
The FOFA Regulations have also clarified that non-monetary benefits under the Prescribed Amount do not need to be disclosed in a financial services guide or a statement of advice given by a financial services licensee or an authorised representative of the licensee.
Draft regulation 10.18.01 confirms the circumstances in which a benefit given to a financial services licensee does not apply with respect to the ban on conflicted remuneration. The exclusions relate to:
- a group life policy for members of a superannuation entity; or
- a life policy for a member of a default fund.
However, it should be noted that this draft regulation 10.18.01 expires on 1 July 2013.
FOFA Grandfathering Regulations in Detail
The draft explanatory statement to the FOFA Grandfathering Regulations states that:
“the intention of the grandfathering arrangements is to preserve any existing contractual rights to receive ongoing product commissions, but not to allow commissions on “new” financial products acquired on or after the application day......there can be no existing contractual right to commissions based on financial products that may be acquired in the future. Any such commissions are not intended to be excluded from the [FOFA reforms].”
Under the FOFA reforms, the ban on conflicted remuneration is not intended to apply to benefits given by a licensee where:
- the benefit is given under an arrangement entered into before the application day; and
- the benefit is not given by a platform operator.
In addition to this, the Grandfathering Regulations clarify the circumstances in which a benefit will not be “grandfathered”.
In particular, draft sub-regulation 7.7A.4.16 (2) expressly states that the ban on conflicted remuneration applies to a benefit given by someone other than a platform operator, under an arrangement that was entered into before the application day, and in relation to an investment in a new financial product (defined as a product acquired on or after the “application day”).
The “application day” is defined as the earlier of the day on which a person elects to be bound by the obligations imposed under Part 7.7A, or 1 July 2013.
As such, it appears that if a licensee has existing contracts and arrangements with respect to the receipt of commission payments (or other conflicted remuneration) for existing products that are not “new financial products” as defined by the draft regulations, then those arrangements will be grandfathered even if the contracts are assigned to another party or the licensee itself is replaced by another licensee in the future.
Australian financial services licensees now have some clarification of the scope of the FOFA reforms particularly the added certainty to the start date and the application of the grandfathering provisions. However, licensees should consider the impact of the draft regulations on their business and whether they wish to engage with the Government during the consultation period by making a submission by 5 June 2012.
Our Financial Services Team has the skills and expertise to help you assess the impact of the proposed new FOFA reforms and regulations and to assist with preparing your submissions.