NEED TO KNOW
- ASIC has released the long awaited Regulatory Guide 246 (RG 246) that finalises ASIC’s position on conflicted remuneration and other banned remuneration. The provisions on conflicted remuneration specifically apply to financial product advice given to retail clients.
- Treasury is consulting on a draft regulation that amends the conflicted remuneration provisions and modifies the transitional provisions. ASIC will update RG 246 to reflect the amended regulation once finalised.
- ASIC has released Regulatory Guide 183 (RG 183) that gives guidance on ASIC’s approach to approving codes of conduct. The guide applies to AFS licensees and representatives who seek an alternative to complying with the requirement to give a renewal notice to new clients at least every two years.
ASIC RG 246 sets out ASIC’s expectations for how AFS licensees and representatives can comply with the ‘conflicted remuneration provisions’. These provisions aim to align the interest of those who provide financial product advice to their clients.
The conflicted remuneration provisions determine how the AFS licensee and their representatives are paid for the financial product advice they give to a retail client. Any benefit, that in substance, could reasonably be expected to “influence the advice” is conflicted remuneration and must not be given or accepted.
Currently, the conflicted remuneration provisions apply to benefits given or accepted under arrangements entered into on or after 1 July 2013 unless the licensee has opted in to the regime earlier than this “application date”.
Generally, the FoFA provisions prohibit:
- AFS licensees and their representatives (including authorised representatives) from accepting conflicted remuneration;
- product issuers and sellers from giving conflicted remuneration; and
- employers of an AFS licensee or representative from giving their AFS licensee or representative employees conflicted remuneration for work they carry out as an employee.
ASIC RG 246 discusses monetary and non-monetary benefits that are conflicted remuneration and the exclusions that apply, and provides examples on remuneration structures that ASIC may and may not scrutinise. In determining whether a benefit is conflicted remuneration, ASIC will consider a range of factors including:
- how the AFS licensee or representative gains access to the benefit;
- who is giving the benefit;
- when the benefit is given or accepted;
- what reasonably appears to be the likely reason why the benefit is being given;
- how the value of the benefit is determined; and
- what the benefit is and its features.
In addition to the conflicted remuneration provisions, volume-based shelf-space fees and asset-based fees on borrowed amounts used to acquire financial products are prohibited under FoFA. ASIC RG 246 provides guidance on this and other forms of remuneration that have the potential to influence the financial product advice received by retail clients.
A welcome addition to ASIC’s guidance, following the release of ASIC Consultation Paper 189 on conflicted remuneration (CP 189) last year, is ASIC’s position on management and administration fees. ASIC will not take action against a product issuer where they breach the conflicted remuneration provisions by accepting management and administration fees.
Generally, RG 246 provides principles for AFS licensees and their representatives, and other entities to apply. ASIC has moved away from proposing detailed criteria as it did in CP 189. For example, ASIC no longer indicates the ranges outside of which it will scrutinise performance benefits or what it expects financial products on platforms to cost. ASIC considers that these details are better dealt with in a commercial context as applicable to the circumstances of the AFS licensees.
GRANDFATHERING OF CONFLICTED REMUNERATION
Treasury has released a draft regulation that significantly modifies the application of the ban on conflicted remuneration and amends the grandfathering arrangements. ASIC will update RG 246 to reflect the amended transitional provisions, once the regulation is finalised.
Currently, a benefit given under an arrangement entered into before the application date, generally 1 July 2013, will be grandfathered. This means a benefit that attracts the conflicted remuneration provisions, can continue to be given and accepted, after 1 July 2013 if it originated before this date.
If the draft regulation is passed in its current form, the ban on conflicted remuneration will apply to platform operators and persons other than platform operators separately.
The ban on conflicted remuneration will not apply (i.e. grandfathering is applicable) if the benefit:
- is given by a platform operator; and
- is given under an arrangement entered into before the application day; and
- is given under a custodial arrangement on instruction given for a regulated acquisition before 1 July 2014.
Treasury intends that this preserves benefits under pre-FoFA arrangements, expect where they relate to new clients coming onto the platform after 1 July 2014.
Person other than a platform operator
The ban on conflicted remuneration will apply (i.e. grandfathering is not applicable) if the benefit:
- is not given by a platform operator; and
- is given under an arrangement entered into before the application day; and
- is given in relation to the acquisition of a financial product by a retail client who did not have an interest in the product immediately before 1 July 2014.
Treasury intends that this preserves benefits under pre-FoFA arrangements relating to existing investments as at 1 July 2014.
In both cases, the draft regulation aims to ban conflicted remuneration for all new clients from 1 July 2014, even if the benefit is given under an existing arrangement.
The regulation clarifies that benefits given and accepted in relation to re-investments in a managed investment scheme (where the interest was acquired before the application day) and further contributions to a superannuation scheme (acquired before the application day), will not attract the conflicted remuneration provisions.
In addition, the draft regulation proposes to insert a new regulation to specify that a monetary benefit in relation to an arrangement for an AFS licensee to buy a representative’s financial advice business will not breach the conflicted remuneration provisions. ASIC addresses this type of ‘buyer of last resort’ arrangement in RG 246.
Submissions on the draft regulation are due by 18 March 2013.
CODE OF CONDUCT
On 29 January 2013, we provided an update on ASIC’s guidance on annual fee disclosure to clients who pay an ongoing fee arrangement to an AFS licensees or their representative. Click here for a copy. FoFA imposes a further requirement on AFS licensee or their representatives, to give a renewal notice to clients at least every two years (the opt-in requirement). The opt-in requirement applies only to clients entering into an ongoing fee arrangement after the application date, generally 1 July 2013.
ASIC RG 183 gives a person such as a financial adviser, or a class of persons including members signed up to an ASIC approved code of conduct, a mechanism to exempt them from the opt-in requirement.
RG 183 outlines ASIC’s approach to approving codes, including how to obtain approval, and provides guidance on how ASIC will use its relief powers.
Approved codes will need to meet substantially the same policy objective as the opt-in requirement. This means a code must ensure clients do not pay ongoing fees where they are receiving little or no advice. ASIC provides that an applicant must satisfy “threshold criteria” before formally considering an application for approval of a code. ASIC will make available a checklist for applicants seeking approval of a code. An applicant that can meet the code content checklist will not need to comply with the opt-in requirement.
AFS licensees or their representatives seeking to join an approved code of conduct, or comply with the opt-in requirement, must do so by 1 July 2015.
You may have started preparing or putting in place compliance programs following last year’s transitional regulations. You should ensure your businesses compliance programs are up-to-date and consistent with these latest FoFA developments.
Civil penalties and administrative sanctions will apply for breaches of FoFA. ASIC indicates it will take a facilitative compliance approach for the first twelve months. However, AFS licensees and their representatives should ensure they have arrangements in place to comply with FoFA from the date of application.