The Government has released an exposure draft Corporations Amendment Regulation concerning the ban on conflicted remuneration. If made, the regulation will change the transitional arrangements for conflicted remuneration and provide an exception for the purchase of financial advice businesses. Submissions are due by 18 March 2013.
The transitional arrangements for conflicted remuneration will change both for benefits given by platform operators and for benefits given by others.
Benefit provider a platform operator
Where the benefit provider is a platform operator, in order for the ban not to apply the benefit will still have to be given under an arrangement entered into before the “application day”. This is 1 July 2013, unless a notice to opt in early is lodged with ASIC (for ease of reference we use 1 July 2013 as a reference to the application day in the rest of this alert).
The additional requirement is that the benefit will have to relate to a “regulated acquisition” under a “custodial arrangement” provided by the platform operator on the instructions of a person who had given an instruction for a regulated acquisition under the custodial arrangement before 1 July 2014.
For example, if a person becomes a client under an IDPS and has given an instruction to the operator before 1 July 2014, then benefits relating to regulated acquisitions made by the operator on or after 1 July 2014 will nevertheless be grandfathered, so long as those benefits are still given under a pre-1 July 2013 arrangement. In other words, benefits relating to new investments made by that client through the IDPS on or after 2014 will be grandfathered so long as that is contemplated by a distribution agreement of the kind described.
In very general terms, grandfathering cannot apply in respect of new money for new clients but can apply in respect of new money for existing (as at 1 July 2014) clients.
A significant shortcoming in the regulation is that it will not provide grandfathering for benefits given by a platform operator where they are engaged in activities other than making regulated acquisitions under custodial arrangements. Many companies that are platform operators engage in a much broader range of activities. There will be no grandfathering for benefits they give in relation to those other activities (eg as a trustee of a superannuation fund or a responsible entity of a managed investment scheme which does not involve any custodial arrangements). This shortcoming could be fixed by extending the grandfathering for non-platform operators (discussed below) to platform operators where the benefit does not relate to a regulated acquisition under a custodial arrangement.
Benefit provider not a platform operator
Where the benefit provider is not a platform operator, in order for the ban not to apply the benefit will, again, still have to be given under an arrangement entered into before 1 July 2013.
The additional requirement is that the benefit must not to relate to the acquisition of a financial product by a retail client who did not have an interest in the financial product immediately before 1 July 2014.
For example, if a person becomes a member of a superannuation fund and has an interest in a superannuation product before 1 July 2014, then benefits relating to that product will be grandfathered, so long as those benefits are given under a pre-1 July 2013 arrangement. In other words, benefits relating to further contributions made by or for that member on or after 2014 will be grandfathered so long as that is contemplated by a distribution agreement of the kind described.
Again, in very general terms, grandfathering cannot apply in respect of new money for new members but can apply in respect of new money for existing (as at 1 July 2014) members. There are provisions which expressly confirm that acquiring further interests in a managed investment scheme or making further superannuation contributions will not result in the acquisition of a financial product (which could, in turn, result in a loss of grandfathering).
Continuity of arrangement
The regulation provides that, if a party to an arrangement changes, the arrangement is taken to have continued in effect, after the change, as the same arrangement. Examples of a change of party include that the party assigns its rights under the arrangement. This is a welcome clarification of the circumstances in which a new arrangement will not be entered into.
Purchase of financial advice businesses
Paying a purchase price for a financial advice business can pose difficult issues under the ban on conflicted remuneration. In recognition of this the regulation will introduce an exception to the definition of conflicted remuneration for a monetary benefit:
- given by a financial services licensee to a representative of the licensee;
- paid as part of the purchase by the licensee of the representative’s financial advice business;
where the purchase price is calculated using a formula:
- which is based, in whole or in part, on the number or value of the financial products held by the representative’s clients;
- in which the weighting attributed to the financial products issued by the licensee or a related body corporate or other person is the same as the weighting attributed to other financial products.
Our comments are:
- the exception should not be limited to benefits given by a licensee (they are often given by a related party or a third party) nor should it be limited to benefits given to “representatives” – it should extend to benefits given to licensees;
- it should be clarified that the exception can apply irrespective of whether the transaction is by way of share sale or asset sale;
- the requirement for equal weighting of financial products in the determination of the purchase price could potentially undo some of the work the regulation is seeking to do.
The regulation needs more work. As discussed, the grandfathering for benefits given by platform operators is incomplete. The exception for the purchase of financial advice businesses is too narrow. In addition, the regulation will introduce further complexity into an already complex area. For the period from 1 July 2013 to 30 June 2014, organisations will need to test whether a benefit is given under an arrangement that was entered into before 1 July 2013. From 1 July 2014, organisations will need to apply that test and also test whether the benefit relates to a pre-1 July 2014 client. Even so, the limitations on grandfathering set out in the regulation may not be as far-reaching as some had expected and the 1 July 2014 cut-off date will give organisations more time to prepare.