Further exemptions to the Future of Financial Advice (FoFA) ban on conflicted remuneration and the best interests duty were finalised on 22 November. Some of the draft exemptions have been broadened but do not go as far as some in the industry would have liked. The exemptions will be of particular interest to participants in the capital markets and issuers and advisers alike.
Stamping fees exemption
The exposure draft of the stamping fee exemption applied only to companies issuing shares options and debentures. A significant amount of lobbying followed the release of the exposure draft, particularly in relation to listed products, REITS, hybrid and stapled securities.
The final stamping fees exemption applies to a broad range of “approved financial products”. It covers shares or debentures in a listed body, interests in listed managed investment schemes and options to acquire those interests in those listed entities and also government debentures, stocks or bonds. It is intended to include stapled securities and hybrid securities to the extent that they are a combination of these products. Unfortunately, the REITS sector does not enjoy the benefit of the broadened exemption.
Importantly the stamping fee exemption does not apply if the entity issuing approved financial products is an “investment entity”. “Investment entity” is defined broadly. It means an entity (taken together with any subsidiaries or other entities that are the subject of a joint venture to which the entity is a party) which provides a return to its members or shareholders mainly from investments in financial products and/or owning real property, other than for the purpose of developing the property and is not an “infrastructure entity”. This is “intended to exclude entities with the primary purpose of providing a financial investment”. One example given is that “it is intended to exclude entities such as listed investment companies and listed equity and property trusts.”
The exemption is likely give rise to some practical issues. In particular, it does not cover interests in a number of listed managed investment schemes leaving those issuers at a competitive disadvantage to companies and government issuers. In addition, the exemption does not cover non-monetary benefits (eg indemnities).
Brokerage fees exemption
The conflicted remuneration exemption for brokerage fees has also been finalised. In short, market participants are allowed to pay up to 100% of the brokerage fees received from clients to employees/advisers. This exemption is only available to providers who are market participants and to brokerage fees in relation to financial products traded on prescribed markets. Providers who deal in financial products that are not traded on prescribed financial markets or prescribed foreign financial markets cannot rely on this exemption.
The final exemption also omits the requirement to have “anti-churning” arrangements in place that appeared in the exposure draft of the exemption.
Extension of exemption for the benefits given by retail client
The exemption for monetary benefits given by a retail client has been extended. Previously a monetary benefit had to be given by a retail client to a licensee (or the licensee’s representative) (provider) in relation to the issue or sale of a financial product or financial product advice given to the retail client. The new Regulations extend the circumstances where this exemption applies, providing that a monetary benefit is not conflicted remuneration if it is given to the provider by a retail client “in relation to the provider dealing in a financial product on behalf of the retail client”. An example of where this extension will apply is brokerage fees. It may also provide an additional avenue for retail clients to remunerate advisers and dealer groups who arrange for dealings on the clients’ behalf through platforms.
Conflicted remuneration and mixing
The insurance exceptions have been significantly expanded. Previously, a benefit that would otherwise be conflicted remuneration could only fall within the exceptions for life insurance or general insurance if the benefit related “solely” to a permitted life insurance product or a general insurance product. These exceptions in the Act have now been superseded by broader exceptions in the Regulations. It will now be enough if the benefit is given “in relation to” a permitted life insurance product or a general insurance product.
The Regulations also seek to clarify that, unless otherwise provided, benefits can be “mixed”. For example, if a provider receives a monetary benefit which relates to a general insurance product, a permitted life insurance product and a mortgage facility, it will not be conflicted remuneration because benefits relating to general insurance and permitted life insurance are each exempt (under the new Regulations) while benefits relating to credit facilities cannot be conflicted remuneration because they are not financial products. With one limited exception (relating to benefits for bank employees and agents advising on basic banking and general insurance products), it is not clear that this clarification is necessary. Despite this, any clarification will be welcome. If a benefit relates to permitted life insurance, it is exempt, regardless of whether it also relates to something else. If a benefit is truly a single benefit, there is no basis for it to be dissected into subsidiary components for the purposes of applying different exceptions to different components.
The Regulations also set out further amendments to the FoFA measures, including:
- reduced best interests obligations for agents or employees of ADIs when providing personal financial product advice on certain product combinations;
- reduced best interests obligations for providers of personal financial product advice in relation to general insurance products;
- clarification of the circumstances where benefits given to agents or employees of ADIs in relation to basic banking products and general insurance products are not conflicted remuneration; and
- clarification that if certain exempt benefits also relate to other activities, those benefits will still be exempt to the extent that the part of the benefit relating to other activities would not be conflicted remuneration.