FOFA reforms – fiduciary type duties imposed on financial advisors

As part of the FOFA reforms, recent amendments have been made to the Corporations Act which impose two statutory obligations on any individual (the provider) who provides personal advice to a retail client. These duties are that:

  • the provider must act in the best interests of the client, and
  • where there is a conflict between the interests of the client and the interests of the provider or certain other specified associated persons, then the provider must give priority to the client’s interests when giving the advice.

ASIC proposes to give some guidance on what it expects in relation to the best interests duty in an update to Regulatory Guide 175 “Licensing: Financial product advisers-conduct and disclosure”. It has issued a consultation paper that sets out what it proposes in this regard.

These provisions are mandatory from 1 July 2013. However licensees have been entitled to opt into this regime since 1 July 2012.

FOFA Reforms – Ban on conflicted remuneration

Another of the FOFA reforms which has been introduced by recent amendments to the Corporations Act places a ban on certain types of remuneration known as “conflicted remuneration”. These provisions apply to all financial product advice given to retail clients and are not limited to personal advice.

The term “conflicted remuneration” is defined. In summary it means any monetary or non-monetary benefit given to a licensee or representative who provides financial product advice to persons as retail clients that because of the nature of the benefit or the circumstances in which it is given could reasonably be expected to influence the financial product advice, by either influencing the choice of financial product being recommended or by otherwise influencing the financial product advice more generally.

This definition is intended to even cover benefits that are product-neutral, if those benefits could reasonably be expected to influence the advice given. The definition is also intended to cover a broad range of monetary and non-monetary benefits, covering both traditional product commissions, volume payments from platform operators to financial advice dealer groups, and ‘soft-dollar’ (nonmonetary) benefits. It is also considered that any flat payment received by a licensee for product distribution would, on its face, be conflicted remuneration.

There is also a presumption that the following benefits will be conflicted remuneration unless otherwise proved to the contrary:

  • benefits which depend on the value of financial products of a particular class recommended or acquired, and
  • benefits which depend on the number of financial products of a particular class recommended or acquired.

However there are a number of carve outs from this ban on conflicted remuneration.

Firstly, monetary commissions or incentive payments in relation to execution-only sales or issues of financial products (that is, where the product is sold with no advice provided to a retail client) are not conflicted remuneration. Further where there is advice, but that advice is provided to someone in their capacity as a wholesale client only, monetary commission is not conflicted remuneration. These carve outs will be of assistance to product issuers aiming to issue products only to wholesale clients.

Secondly, it will not constitute conflicted remuneration where the monetary benefit is given by the client (as distinct from the product issuer) in relation to the issue or sale of a product or in relation to financial product advice provided to the client.

There are also statutory exceptions for benefits given in relation to general insurance products, certain types of life insurance products and certain basic banking products.

These provisions are mandatory from 1 July 2013. However licensees can opt in from 1 July 2012.

ASIC has issued a consultation paper that sets out proposals for guidance about complying with these conflicted remuneration provisions. Submissions close on 9 November 2012.

FOFA Reforms – No asset based fees on borrowed amounts

As part of the FOFA reforms, the Corporations Act has been amended to prohibit licensees and representatives of licensees who provide financial product advice to a person as a retail client from charging an asset-based fee on a borrowed amount used or to be used to acquire financial products by or on behalf of a client.

These provisions are mandatory from 1 July 2013. However licensees can opt in from 1 July 2012.

FOFA Reforms - On-going Fee Arrangements e.g. Trailer Commissions

The Corporations Act has also been amended to insert additional provisions dealing with on-going fee arrangements such as trailer commissions paid where the financial services licensee gave personal advice to a person as a retail client. This change has been controversial because it affects the long established practice of trailer commissions payable to financial planners by product providers. The value of the businesses of financial planners is affected by the value of the underlying trailer commissions that are payable in relation to financial products that have been sold in the past through that business.

An on-going fee arrangement is an arrangement under which the financial services licensee or the representative of a financial services licensee provides personal advice to a retail client and the retail client agrees to pay a fee (however described or structured) and the fee cannot reasonably be characterised as relating to advice that at the time the arrangement is entered into has already been given.

Under these new provisions:

  • Firstly, clients have the right to terminate an on-going fee arrangement at any time.
  • Secondly, clients must be given a fee disclosure statement at least 30 days before what is called the “disclosure day”. For the first fee disclosure statement given to the client in relation to the on-going fee arrangement, the “disclosure day” is the anniversary of the day on which the arrangement was entered into. For each subsequent fee disclosure statement, the “disclosure day” is the anniversary of the day on which a disclosure statement in relation to the arrangement was last given to the client. Failure of the fee recipient to comply with this provision results in the on-going fee arrangement automatically being terminated.
  • Thirdly, a renewal notice must be given to the client at least 30 days before the second anniversary of the day on which the on-going fee arrangement was entered into and then on each second anniversary thereafter. During the 30 day period after the renewal notice is given to the client, the client can do three things, namely renew the arrangement, not renew the arrangement or do nothing. If the client does not take positive steps to renew the arrangement under the renewal notice, the on-going fee arrangement will come to an end within a further 30 day period. Positive action by the client every two years is therefore required in order for the on-going fee arrangement to continue, with the provisions generally referred to as “opt-in” provisions because the client has to effectively opt-in to allow the fee recipient to continue to benefit from the on-going fee arrangements after each two year period. Failure of the fee recipient to comply with this provision results in the on-going fee arrangement automatically being terminated.

These provisions are mandatory from 1 July 2013. However licensees can opt in from 1 July 2012.