The long-awaited FOFA grandfathering regulations have finally been made.

The regulations limit the grandfathering relief which was originally proposed to apply.

They also include some additional grandfathering relief and exceptions to conflicted remuneration.

The new regulations commence 1 July 2013.

Ban on conflicted remuneration

The ban on conflicted remuneration under the FOFA provisions generally commences on 1 July 2013 (unless a party opts in to the regime earlier).

The conflicted remuneration provisions provide for an exception (or ‘grandfathering’) for benefits given under an arrangement that was entered into before 1 July 2013.

The Government later considered this concession too generous and proposed limiting it. Draft amending regulations were released earlier in the year (click here to see our alert on the draft regulations). Those have now been finalised, but with some significant changes.

New limitations on grandfathering

The regulations apply differently to platform operators and non-platform operators.

Platform operator acting in that capacity

When a platform operator is acting in its capacity as platform operator and gives a benefit that relates to an acquisition of a financial product on the instructions of a client, the benefit will be grandfathered only if the client has given the platform operator an instruction to open an account on the platform before 1 July 2014. In other words, grandfathering will apply only in relation to existing clients or clients who apply to open an account on the platform before 1 July 2014.

If the benefit relates to an acquisition of a financial product on the instructions of a client who applies to open an account on or after 1 July 2014, the benefit will not be grandfathered.

Non-platform operator or platform operator acting in a different capacity

When a benefit is given by someone not acting in the capacity of platform operator, and it is given in relation to the acquisition of a financial product for the benefit of a retail client, the benefit will be grandfathered only where the product is acquired before 1 July 2014. Grandfathering will not apply to benefits in relation to products acquired on or after 1 July 2014.

Neither of the following will be treated as an acquisition of a financial product on or after 1 July 2014:

  • a retail client has an interest in a managed investment scheme before 1 July 2014 and acquires a further interest in it on or after 1 July 2014;
  • a “multi-product offering” offers interests in more than one financial product under one offer document, and a retail client opened an account on the multi-product offering before 1 July 2014 and acquires an interest or a further interest under the facility on or after 1 July 2014.

Other rules

The regulations in relation to the above grandfathering rules also provide that:

  • Where a client has an interest in a financial product before 1 July 2013, a benefit given in relation to the continued holding of the financial product is treated as relating to an acquisition of the product; and
  • If a party to an arrangement changes, the arrangement can be treated as the same arrangement after the change of party.

New forms of grandfathering

Employment benefits

Grandfathering is also provided for a benefit paid under a remuneration arrangement between an employer and an employee.

If the benefit is paid in accordance with an enterprise agreement which was in force immediately before 1 July 2013, grandfathering continues to apply until 6 months after the nominal expiry date of the agreement.

If the nominal expiry date of the agreement is before 1 July 2013, or the remuneration is not paid under an enterprise agreement or collective agreement-based transition instrument, grandfathering ceases on 1 July 2014.

Replacement arrangements

Grandfathering is also provided for a benefit given under an arrangement made on or after 1 July2013 where that arrangement replaces a previous arrangement which terminated because of the ban on conflicted remuneration and where the new arrangement is on the same terms as the previous arrangement. The regulation provides that the new arrangement must also not provide “the giving of remuneration that would not be permissible under section 1528 of the Act or regulations made for that section”. The meaning of the exception is unclear. The explanatory statement suggests that the new arrangement must not provide for the payment of any remuneration that is not grandfathered, which is also unclear.

Change in party to arrangement

A new regulation also provides grandfathering for a benefit that is given under an arrangement entered into before 1 July 2013 where a party to that arrangement changes. It seems that the intention of this regulation is to provide that a change of a party to an arrangement will not break grandfathering.

Additional exceptions to conflicted remuneration

Benefits that are passed on

A new regulation provides that a benefit is not conflicted remuneration to the extent that the benefit:

  • is a “pass through” of a grandfathered benefit
  • was given under an arrangement entered into before 1 July 2013
  • is “consistent with purposes of the arrangement under which the grandfathered benefit was paid” and
  • does not exceed 100% of the grandfathered benefit.

Purchase or sale of financial advice business

A new regulation provides that a monetary benefit is not conflicted remuneration to the extent that:

  • the benefit is given to a financial services licensee or representative and is paid as part of the purchase or sale of all or part of the licensee’s or representative’s financial advice business and
  • the price is calculated using a formula of the prescribed kind including that it is financial product neutral (ie it does not favour related party products over other products).