Yesterday, Treasury released exposure drafts of amendments to the Corporations Act and Corporations Regulations to implement the Coalition Government’s proposed changes to the FOFA regime. The changes are generally as expected. If the FoFA amendments are made in the form released yesterday, they will provide an opportunity for financial services industry participants to reconsider previous positions, as certain benefits that are currently banned will be permitted.

The release of the draft legislation follows the announcement on 20 December 2013 by the Assistant Treasurer, Senator the Hon Arthur Sinodinos AO, of the Government’s intention to implement “a package of amendments to improve FoFA”. 

ASIC issued a press release on 20 December 2013 stating that it would take a facilitative approach to the FOFA reforms until mid-2014, adopting a no-action position in relation to the specific FOFA provisions the Government indicated it would repeal. However, ASIC’s position remains somewhat unclear in relation to provisions that the Government is seeking to amend rather than repeal.

To the extent possible, changes in the draft Bill are proposed to be implemented on an interim basis by Regulation pending the Bill receiving Royal Assent.

The draft FoFA amendment package includes the following changes: 

Significant change to the scope of FoFA
The most significant change is the reduction in the scope of the definition of conflicted remuneration. The draft Bill amends the definition of “conflicted remuneration” in section 963A to provide that a benefit will only be banned if it could reasonably be expected to influence: 

  • the personal advice provided by the licensee (or representative) to whom the benefit is given; or 
  • the financial products recommended to a retail client in personal advice given by the licensee or representative to whom the benefit is given.

This change will ensure that benefits cannot be conflicted remuneration if recipient of the benefit only provides general advice. This amendment, if made, will significantly reduce the scope of business to business benefits that are currently banned even though the recipient has no direct relationship with retail clients. 

Nevertheless it needs to be remembered that the bans on volume-based shelf space fees and asset-based fees on borrowed amounts can still apply in circumstances where personal advice is not provided.

Changes primarily relating to the adviser-client relationship

Removal of the opt-in requirements 
The draft Bill will repeal the requirement for advisers to provide clients with renewal notices every two years. Instead, an ‘opt-out’ system will apply where ongoing fee arrangements will continue to exist unless the arrangement is terminated by the client or their adviser. 

Removal of the annual fee disclosure requirements for pre-1 July 2013 clients
The draft Bill will amend the fee disclosure statement requirements, so that an FDS is no longer required to be provided to clients who had entered into their ongoing fee arrangement before 1 July 2013. Ongoing fee recipients will still be required to provide annual fee disclosure statements to post-1 July 2013 clients. 

Removal of the ‘catch-all’ provision from the best interests duty
The draft Bill will repeal section 961B(2)(g) – the much-maligned “catch-all” provision of the best-interests duty safe-harbour, which 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.”. Advisers will still be required to satisfy the remaining six steps of the safe-harbour specified in section 961B(2). 

Explicitly allowing for the provision of scaled advice
The draft Bill introduces amendments designed to limit the scope of investigations and explicitly allow agreement between clients and advisers on the scope of advice. 

Changes to exemptions from the conflicted remuneration ban and grandfathering

Extending the existing grandfathering provisions 
The draft Regulation makes amendments to the existing grandfathering provisions to clarify that: 

  • when a business is sold, grandfathered benefits are effectively preserved in the hands of the purchaser; 
  • where a retail client elects to switch from the growth phase to the pension phase within the same superannuation interest, this will not be treated as an acquisition of a new financial product (and will therefore not disturb grandfathering); and 
  • the benefit pass-through grandfathering relief in regulation 7.7A.16F will still be available even if the arrangement in question was entered into after the application day, where that arrangement involves an authorised representative of one licensee becoming an authorised representative of another licensee, or a representative of a licensee becoming an authorised representative of the same licensee. This will assist the movement of advisers between licensees with their grandfathered “back book”. 

Stamping fee exemption
The draft Regulation introduces amendments relating to the exemption from the ban on conflicted remuneration for stamping fees. This is a significant expansion of the exemption as it will now allow stamping fees to be paid in relation to capital raising activities in respect of investment entities such as REITs. 

Exemption for life risk insurance benefits
The draft Bill will reduce the extent of differential treatment of benefits provided inside and outside of superannuation, by providing that the ban on conflicted remuneration will only apply to monetary benefits paid in relation to life risk insurance products inside superannuation in circumstances where no personal advice has been provided to the client, or where coverage is provided in relation to My-Super members. 

Expansion of execution-only exemption 
The draft Bill will expand the execution-only exemption, so that it applies where: • the benefit is given to the licensee in relation to the issue or sale of a financial product to a person; and • the licensee (or its representative) has not provided any personal advice to the person in relation to the product, or products of that class, in the 12 months immediately before the benefit is given.

Expansion of education and training exemption 
The draft Bill seeks to broaden the exemption applicable to education and training benefits, so that the exemption extends to education and training which is “relevant to the carrying on of a financial services business” rather than the more restrictive requirement that it relate to financial product advice. 

Amendments to stockbroking-related exemptions
The draft Regulation amends the application of the brokerage-related exemptions to ensure that the ban does not apply in relation to products traded on the ASX24 (or related brokerage fees). 

Changes relating to employee benefits 

New exemption for balanced scorecard remuneration arrangements
The draft Regulation introduces new regulation 7.7A.12EB, which is designed to ensure that monetary remuneration benefits provided to employees paid under a “balanced scorecard arrangement” will not be considered to be conflicted remuneration if specified criteria are met. This new provision will provide greater flexibility and certainty for licensees in determining the remuneration structures for employees. However the proposed provision states that the benefit must be “low in proportion to the employee’s total remuneration”. The draft Explanatory Memorandum states that a benefit is likely to be considered low if it comprises less than 10% of the employee’s total remuneration. 

Expansion of basic banking exemption
The draft Bill will extend the exemption for basic banking products to include circumstances: 

  • an agent or employee of an ADI receives a remuneration benefit which is, in the whole or in part, dependent on recommending a general insurance product, a consumer credit insurance product, a basic banking product, or a combination of those products; and 
  • the agent or employee only gives financial product advice that relates to any of those products.

Technical changes and clarification of interpretation

Clarification of client directed payment exemption 
The draft Bill will insert a note to clarify that the giving of a benefit includes a reference to causing or authorising it to be given. This exemption is a critical pillar of the approach to FoFA by many licensees. The clarification (even though it is proposed as a note rather than an operative provision) is particularly significant in providing greater certainty for benefits paid out of superannuation products. 

However, the explanatory material indicates that in order to fall within the client directed payment exception to the meaning of “conflicted remuneration”, a benefit given by another party must have be caused or authorised by the client. Mere consent from the client that the benefit be paid is not sufficient. While this clarification reduces the uncertainty that had surrounded this exemption, the distinction between a benefit authorised by a client and a benefit to which a client has consented will still require careful consideration when implementing arrangements to rely on this exemption. 

Definition of intrafund advice
The draft Bill will insert a note to define “intrafund advice”, and clarify that the relevant subject rules under section 99F of the SIS Act continue to apply to intrafund advice. 

Clarification of ban on volume-based shelf space fees 
The draft Bill introduces a definition of “volume-based shelf-space fee”. The draft amendments also: 

  • clarify the exemption for scale efficiencies (by referring specifically to economies of scale being gained because of the number or value or financial products on the platform); and 
  • introduce a new exemption for benefits provided for custodial arrangements relating to a general insurance product or a life risk insurance product.

Clarification of application of exemptions to “mixed” benefits
The draft Regulation will clarify that a benefit that is not conflicted remuneration does not become conflicted remuneration only because it is given in combination with another benefit. 

New exemption for permissible revenue
The draft Regulation introduces new regulation 7.7.12HA, which provides that a benefit will not be conflicted remuneration where the amount or value of the benefit is calculated by reference to another benefit that is not considered to be conflicted remuneration or to which Division 4 of Part 7.7A does not apply. 

Clarification of wholesale/retail client distinction 
The draft Regulation introduces amendments that will enable a person to be treated as a wholesale client for the purposes of Part 7.7A of the Act if they meet specified criteria. 

Submissions on exposure draft
Submissions on the Exposure Draft must be submitted by 19 February 2014. For more information on the amendments and how to make a submission see: