The Assistant Treasurer recently announced the passage of a series of amendments to the Corporations Regulations 2001 (Cth), which will affect the Future of Financial Advice (FOFA) provisions of the Corporations Act 2001 (Cth) (the Act) following targeted consultation with the financial services industry.
The government has declared that the amendments are directed at reducing compliance costs for small business, financial advisers, and the broader financial services industry, while maintaining the quality of advice for consumers who access financial advice.
Explaining the amendments
Each of the amendments, and their effects, are summarised below:
1. Defining the provision of advice about default superannuation funds as a 'financial service'
This amendment clarifies that, for the purposes of section 766A(1)(f) of the Act, a person that provides advice to an employer about default funds (being the fund where the employer makes contributions for the benefit of employees that have not chosen a fund) is providing a 'financial service'. Consequently, a person or entity providing employers with financial advice as to their default fund must treat the employer as a retail client and is necessarily caught by the FOFA provisions in the Act.
2. Carrying through the distinction between retail client, wholesale client, and professional investor
These amendments ensure that the wholesale and retail client distinction that currently applies in other parts of the Act, also applies in respect of the FOFA provisions. As a result of these amendments to section 761G of the Act, for the purposes of the FOFA provisions:
- a person that meets the net assets test or the income test is not treated as a retail client where they acquire a product or service for a company or trust that they control;
- the net assets and gross income of a company or trust that a person controls can be included in determining the person's net assets or income for the purpose of qualifying to be treated as a wholesale client;
- where a financial product or service is acquired by a body corporate as a wholesale client, related bodies corporate of the client are also considered to be wholesale clients; and
- a person is considered to be a professional investor if the person has, or is in control of, gross assets of at least $10 million, including any assets held by an associate or under a trust that the person manages.
3. Applying the modified best interests duty to advice on basic banking and general insurance products
This amendment replaces the existing regulation 7.7A.1 with new regulations 7.7A.05 and 7.7A.06 in order to clarify the application of the modified best interests duty in subsections 961B(2)(a) to (g) of the Act to advice given about basic banking and general insurance products.
The new regulation 7.7A.05 clarifies that an employee or agent of an Authorised Deposit-taking Institution (ADI), or a provider acting by arrangement with an ADI under the name of an ADI, does not need to satisfy the steps set out in subsections 961B(2)(d) to (g) of the Act when providing advice on a basic banking product and/or a general insurance product where the subject matter sought by the client relates to a basic banking product, general insurance product, consumer credit insurance product, or a combination of these products.
The new regulation 7.7A.06 provides that a person does not need to satisfy the steps set out in 961B(2)(d) to (g) of the Act when providing advice only on a general insurance product.
4. Clarifying that a facility for making non-cash payments (i.e. travel money cards) is a basic banking product under FOFA
The new regulation 7.7A.07 provides that a facility for making non-cash payments (i.e. travel money cards) that is not related to a basic deposit product is a basic deposit product for the purposes of section 961F of the Act (which in turn contains a list of products considered to be basic banking products for the purposes of the FOFA provisions).
5. Clarifying the application of the existing client-pays exemption
Subsection 961(1)(d) of the Act currently exempts a benefit from the definition of conflicted remuneration if it is 'given' to a licensee or representative by the investor. This amendment clarifies that for the purpose of the conflicted remuneration provisions of Division 4 of Part 7.7A of the Act, including but not limited to subsection 963(1)(d), 'giving' a benefit includes "causing or authorising" a benefit to be given, as provided in section 52 of the Act.
In addition, this amendment also inserts a note at the end of regulation 7.7A.12 clarifying that the client-pays exemption can be used to permit payments made from a superannuation fund member's balance. That said, the trustee of the superannuation fund must still consider whether payments out of the client's superannuation fund is appropriate given the trustee's other obligations, such as the sole purpose test under section 62 of the Superannuation Industry (Supervisions) Act 1993 (Cth).
6. Broadening the basic banking exemption from the ban on conflicted remuneration to include benefits relating to consumer credit insurance products
Section 963D of the Act currently provides that benefits are not conflicted remuneration if they relate to a basic banking product as long as the agent or employee of an ADI, or a provider acting by arrangement with an ADI under the name of the ADI - at the time of providing advice on the basic banking product - does not provide financial product advice on any other financial product.
Existing regulation 7.7A.12H allows access to the basic banking exemption where the agent or employee of an ADI also provides financial product advice on a general insurance product. This amendment broadens 7.7A.12H to also allow access to the basic banking exemption where the agent or employee of an ADI provides financial product advice on a consumer credit insurance product at the same time as providing advice on a basic banking product and/or general insurance product.
Summary and next steps
The government has passed a series of amendments clarifying the operation of the FOFA provisions. They include:
- defining the provision of advice about default superannuation funds as a 'financial service';
- carrying through the distinction between retail client, wholesale client, and professional investor;
- applying the modified best interests duty to advice on basic banking and general insurance products;
- clarifying that a facility for making non-cash payments (i.e. travel money cards) is a basic banking product under FOFA;
- clarifying the application of the existing client-pays exemption; and
- broadening the basic banking exemption from the ban on conflicted remuneration to include benefits relating to consumer credit insurance products.
If you require further advice as to the impact of the above changes on your remuneration structure, please contact any member of our Sydney team listed in this alert.
To view the Legislative Instrument containing the amendment, click here.
To view the Explanatory Statement accompanying the legislative instrument, click here.