The long awaited Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014 was registered on Monday 30 June 2014, just one day before the regulations took effect. The regulations implement the Government’s “streamlining” changes to the Future of Financial Advice reforms. The regulations introduce important exemptions to a number of requirements, particularly in relation to employee remuneration arrangements, but fall short of completely undermining the FoFA regime as has been claimed by some.

However, while the streamlining reforms are now law, the fate of the legislation still hangs in the balance. Labor, the Greens and Palmer United have each indicated that they will disallow at least some of the regulations. This puts industry participants in a precarious position in considering whether to rely on the new exemptions.

The regulations as made and the Explanatory Statement can be found here.

Key changes

Some of the key changes implemented by the streamlining regulations include:

Conflicted remuneration exceptions

General advice exemption for employee and representative remuneration

The long awaited general advice exception is now law (at least for the time being). The exception is narrower than the initial proposal in the January exposure draft bill. The exception:

  • requires that the recipient has not given personal advice to a retail client in the preceding 12 months (other than personal advice in respect of basic banking products and certain categories of insurance products);
  • does not apply to trails or certain product sale commissions; and
  • applies only in respect of advice on products issued or sold by the licensee or its related bodies corporate.

Balanced scorecard bonuses

As foreshadowed in the exposure draft regulations released in January, the regulations introduce a “balanced scorecard” exception for performance benefits. The exception, which also overcomes some of the challenges associated with mixed benefits, applies if the conflicted parts of a benefit are “low in proportion to the employee’s total remuneration”. The Explanatory Statement suggests that the low threshold is likely to be satisfied if the conflicted parts comprise less than 10% of the employee’s total remuneration.

Benefits calculated by reference to excluded benefits

The regulations exclude from conflicted remuneration a benefit calculated by reference to another benefit that is not conflicted remuneration under sections 963B to 963D. This exception could obviate the need for “double direction” models. For example an employee bonus calculated by reference to benefits given to the licensee by retail clients (in reliance on the exception under section 963B(1)(d)) would also be excluded from conflicted remuneration.

Stamping fee exemption

The regulations significantly broaden the stamping fee exception, extending the exception to listed investment entities (ie investment trusts and LICs). This regulation (if it stands) will solve the challenges faced by REITs and LICs since the introduction of the lopsided stamping fee exception.

Interim amendments to the best interests duty

The regulations substitute some of the best interests safe harbour steps with narrower steps in order to permit the giving of scaled advice. In addition, the regulations temporarily remove from the best interests duty safe harbour the controversial “catch-all” requirement. These amendments apply until 31 December 2015.

“Opt-in” is out (for now)

The regulations defer the “opt-in” requirement until 31 December 2015.

More grandfathering

Grandfathering of benefits to employees is extended to 1 July 2015. In addition, grandfathering has been strengthened to survive business transfers, and advisers moving to new licensees.

So … now what?

Although Monday’s regulations are now law, there is a strong expectation that the Senate will disallow at least some of the regulations. The fate of the Government’s streamlining reforms will likely sit with the Labor Party, the Greens and the Palmer United Party, each of which have publicly opposed the Government’s streamlining reforms. The timeline for disallowance and a possible overturning of that disallowance could take us to September, until which time, the financial services industry must live on in limbo.

There is real uncertainty as to what, if any, streamlining rollbacks will survive the anticipated disallowance. In this environment, it would be a very brave licensee that defers their FoFA project in reliance on the streamlining rollbacks.