Following this month’s disallowance of the Future of Financial Advice (“FoFA”) regulations contained within Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014, yesterday the Senate moved a motion that will permit the Government to reinstate some of the disallowed regulations. The Government intends to reinstate those regulations by the end of this year. The reinstated regulations will still leave a disconnect between the retail client test for the purposes of the FoFA provisions and the retail client test that applies for other purposes.
The regulations that are proposed to be reinstated are those that:
- amend the grandfathered remuneration provisions to remedy unintended consequences and enable advisers to move licensees with their clients while receiving grandfathered remuneration;
- exempt non-monetary education and training benefits relating to carrying on a financial services business;
- clarify the stamping fee exemption and extend it to include investment entities such as REITs and LICs;
- extend the brokerage related provisions to products traded on ASX24; and
- extend the accountants’ certificate renewal period for FoFA purposes to two years.
Until the regulations are made, FoFA law stands as it did on 30 June 2014. ASIC has indicated it will take a practical and measured approach to administering the law until 1 July 2015.
Wholesale client test disconnect
Notably absent from the Senate motion are the regulations that made the retail client test for FoFA consistent with the retail test used elsewhere in the Corporations Act. This means that the following usual wholesale client categories will continue not to apply for FoFA purposes, even after the reinstatement regulations are made:
- companies or trusts controlled by a person who holds net assets more than $2,500,000 or has gross income for the last 2 financial years over $250,000;
- clients who satisfy the wholesale client test by including net assets and gross income of controlled companies and trusts for accountants’ certificates purposes;
- bodies corporate related to wholesale clients; and
- those controlling gross assets of at least $10 million.
Impact on industry and consumers
The omission of regulations to address the FoFA retail client test disconnect will lead to consumers being treated as wholesale clients for some purposes but not for FoFA purposes. Understandably this will lead to confusion.
Many businesses will need to revisit whether their wholesale clients are in fact wholesale clients for FoFA purposes. They should consider whether client classification procedures need to change. The omission of the ability to include net assets and gross income of controlled companies is particularly problematic, as it could mean that it will be difficult to rely on an accountants’ certificate without further investigation.