The Government’s Bill to streamline the future of financial advice regime was introduced this week as part of the so called red tape "repeal day". Despite the widely publicised claims from some sections of the industry and media, that the changes would remove the need for advisers to consider the best interests of their clients and allow the widespread reintroduction of commissions, the wind backs to FoFA reflected in the Bill are modest and leave the substance of the original FoFA reforms intact. These latest FoFA adjustments would be better described as an exercise in loosening some of the unnecessarily tight red tape, rather than cutting it.
While many aspects of the Bill are consistent with the exposure draft Bill released by Treasury on 29 January 2014, the proposed change that we stated in our previous alert was the most significant change in the package - the removal of benefits from the conflicted remuneration definition where only general advice is provided, has been substantially cut back and now represents only a very narrow exception. Either the Government has changed its policy on limiting the conflicted remuneration ban to where personal advice is provided, or something has been lost in the translation of the policy to the Bill – either way on this aspect, the Bill as introduced is but a shadow of the exposure draft. Our Alert on the earlier exposure draft Bill can be found here. The Bill as introduced and Explanatory Memorandum can be found here.
In this Alert we discuss the key differences between the exposure draft Bill and the Bill as introduced.
There are significant changes in the following areas:
Limited exception where only general advice is provided
While the exposure draft Bill took an approach of amending the definition of conflicted remuneration to include references to personal advice in each of the limbs of the definition, in the Bill as introduced, the definition of conflicted remuneration is unamended. In its place there is an exception in the proposed section 963B(6). This exception is very narrow and potentially unworkable commercially. It is narrow in that it only applies to monetary benefits given to an employee of an AFS licensee if:
- the benefit is given in relation to general advice provided by the employee
- the employee has not given personal advice to that retail client in the 12 months immediately before the benefit is given; and
- the financial product in relation to which the benefit is given is a product issued or sold by the AFS licensee.
While this appears to be a sensible exception to reflect the policy that it is appropriate to strike a balance between the legitimate interest of a product manufacturer to sell their own product through their employees where no personal advice is provided and the protection of consumers, the narrow drafting of the provision is unlikely to achieve this policy objective. There are a number of problems with the approach implemented by the Bill:
- First, if the employee has given any personal advice in the previous 12 months, even relating to a product that is exempt from the conflicted remuneration ban such as a basic deposit product, the exception cannot apply. This is the case even if the benefit relates to general advice on a different product given at a different time.
- Secondly the exception would not apply where the relevant product is issued or sold by another member of the group of companies to which the employee belongs. In large licensees, many employees may be employed by a service company or a different company to the AFS licencees that issue financial products.
- Finally we think the drafters have used the word “sale” in a loose way that is difficult to reconcile with other sections of the Corporations Act in which this word is used in a very different context.
There are also a number of other technical issues.
While a new regulation making power has been introduced to clarify the operations and scope of exceptions, inexplicably it only applies to the exceptions in section 963B(1) and not to the other exceptions in section 963B, meaning that these issues cannot be addressed either through regulation or ASIC relief (as ASIC also has no power to address them).
Removal of the “catch-all” provision
Significantly, the Bill follows through with the Government’s intention to repeal the “catch-all” provision of the best-interests duty – the provision that requires advisers to prove they have “taken any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interest of the client, given the client’s relevant circumstances.”
In an apparent response to the consumer group and media reaction to the exposure draft, the Explanatory Memorandum contains a more detailed explanation of the rationale behind the removal of section 961B(2)(g), namely to remove the “significant legal uncertainty” over how financial advice providers can satisfy their duties to the client.
The Explanatory Memorandum argues that “Even without paragraph 961B(2)(g), subsection 961B(2) still sets a high standard for providers to show they have acted in the best interests of their client”.
Facilitation of Scaled Advice
As foreshadowed in the exposure draft, the Bill inserts a provision to remove any doubt as to whether a client and adviser can agree on the scope of advice to be provided. In addition, the Bill inserts an example of how a client and adviser might agree to narrow the scope of advice, and notes that the obligations of Division 2 of Part 7.7A apply to the advice that is ultimately sought.
Interaction between the best interests duty and the appropriate advice requirement
A new feature of the Bill is the modification of the relationship between the best interests duty in section 961B, and the separate requirement in section 961G that advice be appropriate to the client.
In its current form, section 961G requires that the adviser only provide the advice “if it would be reasonable to conclude that the advice is appropriate to the client, had the provider satisfied the duty under section 961B to act in the best interests of the client”. The Bill changes this requirement, so that the advice may only be provided if it would be reasonable to conclude that the advice is appropriate to the client “having regard to section 961B”.
The Explanatory Memorandum clarifies that while the best interests duty and appropriate advice requirement operate in conjunction, these are separate obligations. The intended effect of the change is to require advisers to consider factors other than their best interests duty when considering the appropriateness of their advice.
This means that, although the best interests duty (as modified by the Bill) will explicitly permit advisers and clients to agree the scope of the advice, the adviser will still need to consider as a separate matter whether the advice (and its scope) is appropriate to the client.
Conflicts and prioritisation of interests
Section 961J(1) currently requires the provider of advice to given priority to the interests of a client, if the provider knows (or reasonably ought to know) that there is a conflict between the interests of the client and those of the provider (or the interest of specified persons associated with the provider).
A limited exemption from this requirement is currently contained in section 961J(2), where a client seeks advice solely on a basis banking product , and the provider of the advice is an agent or employee of an Australian ADI, or someone acting by arrangement with an Australian ADI under that ADI’s name. An existing exemption is also provided in section 961J(3), where the subject matter of the advice sought by the client is solely a general insurance product.
The Bill expands the circumstances in which these exemptions are applicable. The Australian ADI exemption in section 961J(2) will be broadened to include circumstances where the advice sought by clients only relates to a basic banking product, a general insurance product, consumer credit insurance, or any combination of those products.
Further, under the Bill, the advice sought by a client need not solely relate to a general insurance product for the exemption under section 961J(3) to apply. However, the adviser will need to prioritise the interests of the client to the extent that the client seeks advice on subject matters other than general insurance products
Regulations and the next steps
A number of the FoFA wind back proposals were contained in exposure draft regulations issued on 29 January 2014. The Government also announced that it intended to implement measure in the Bill by way of regulation as an interim measure. No draft regulations have yet been released.
The Bill has been referred to the Senate Finance and Public Administration Legislation Committee for inquiry and report by 16 June 2014.
Unfortunately, due to this referral and the uncertain fate of the Bill in the Senate, the status of the legislation may not be known by 1 July 2014, a significant date for FoFA implementation.