On Monday, ASIC issued Regulatory Guide 246: Conflicted Remuneration (RG 246), which sets out ASIC’s guidance on compliance with the conflicted remuneration and other banned benefits provisions of the Future of Financial Advice (FoFA) reforms.
The release of RG 246 follows ASIC’s draft proposals in Consultation Paper 189: Future of Financial Advice: Conflicted remuneration (CP 189) (released by ASIC in September 2012 and discussed in our previous alert).
RG 246 is largely consistent with the preliminary views express by ASIC in CP 189, but contains some modifications and additional guidance on ASIC’s interpretation of Divisions 4 and 5 of Part 7.7A of the Corporations Act 2001, and ASIC’s approach to administering those provisions.
ASIC’s general approach
In administering the FoFA provisions concerning conflicted remuneration, RG 246 confirms that ASIC will be guided by the principles that:
- the conflicted remuneration provisions are designed to more closely align the interests of those providing financial product advice to retail clients with the interests of their clients – ASIC is less likely to scrutinise benefits that are designed to more closely align these interests; and
- determining whether a benefit is one that could reasonably influence the financial product advice or recommendations given to retail clients depends on the substance of the benefit over its form.
In considering the substance of a benefit (to assess whether it could reasonably be expected to influence the financial product advice or recommendation given by an AFS licensee or representative to a retail client) ASIC will look at 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
- the features of the benefit.
ASIC will apply an objective standard of reasonableness in determining whether a benefit could be expected to influence the advice or recommendation given, and whether a benefit is capable of doing this will depend on the nature of the benefit and the circumstances in which it is given or accepted.
Passing on of benefits excluded from the meaning of “conflicted remuneration”
RG 246 set out new guidance dealing with situations where a benefit that is excluded from the meaning of “conflicted remuneration” is received by one AFS licensee or representative and then subsequently passed on to another AFS licensee or representative that provides financial product advice to retail clients.
ASIC considers this passed-on benefit to be a separate benefit, as the circumstances in which that benefit is given are different to the circumstances in which the original non-conflicted remuneration benefit was given. A separate assessment is therefore required to determine if the benefit that is passed on is itself conflicted remuneration, and it does not automatically continue to be excluded from the conflicted remuneration provisions.
Accordingly, the passed-on benefit must itself either satisfy the conditions of an exclusion from the meaning of conflicted remuneration, or be a benefit that could not reasonably be expected to influence the financial product advice or recommendation provided to retail clients by the recipient of that benefit.
Benefits given by a retail client in relation to financial product advice
RG 246 provides a useful clarification of ASIC’s view of when a benefit is taken to be “given by a retail client” for the purposes of the exceptions to conflicted remuneration where a benefit is given to an AFS licensee or representative in relation to:
- the issue or sale of a financial product by the licensee or representative to the client; or
- financial product advice given by the licensee or representative to the client.
Client Payment Exclusion
Benefits given by a retail client ASIC may include benefits that have been authorised by the client. ASIC intends to administer the law and treat a benefit as being authorised by a client “if the benefit is given at the client’s direction or with their clear consent”. In ASIC’s view, consent is “clear” if it is genuine, express and specific, and mere knowledge of the benefit (or agreeing to proceed with the financial services in view of a disclosure of the benefit) is not clear consent.
ASIC now considers that this exception will apply where:
- a benefit is given by a client to an AFS licensee, and the licensee subsequently passes on the benefit (or a portion of it) to one of its representative; or
- an AFS licensee passes on a benefit (or a portion of it) to an authorised representative, and the authorised representative passes on the benefit (or a portion of it) to another representative,
but only if (a) the client has authorised passing on the benefits in this way; and (b) no AFS licensee or representative that passes on a benefit has discretion over the portion of a benefit that is passed on. Where the licensee or representative can exercise discretion when passing on a benefit, ASIC does not consider the benefit to have been given at the client’s direction or with their clear consent. This means that the client’s authorisation or direction (obtained, for instance, via their application form) will need to specifically apportion a benefit as between particular recipients.
Importantly, ASIC has moved away from the view previously expressed in CP 189 that for the Client Payment Exclusion exclusions to apply, the benefit must be given to the AFS licensee or representative that actually provided the financial product advice to the client (this view held, for example, that if the financial product advice was provided by a representative, the benefit must be given to that representative in order for the Client Payment Exclusion to apply).
ASIC’s views on the section 963L presumption that volume-based benefits are conflicted remuneration are generally consistent with CP 189, but with some modifications and additions.
Benefits passed on to clients
ASIC’s finalised view in RG 246 is that a benefit is unlikely to be conflicted remuneration if:
- it is promptly passed on to the client (as soon as practicable but not later than three months after receiving the benefit) by the AFS licensee or representative that accepts the benefit; and
- the AFS licensee or representative accepts the benefit on the condition that it will be passed on to the client.
ASIC’s initial view in CP 189 was that the benefit would need to be passed on to the client within one week of its receipt in order to be “promptly passed on”. ASIC has also expanded its view on this point, so that a benefit that is promptly passed on to a client is unlikely to be conflicted remuneration regardless of whether or not the benefit is volume based.
No action position relating to receipt of management or administration fees by product issuers
ASIC states that the conflicted remuneration provisions may prevent a product issuer (such as a responsible entity of a managed investment scheme, platform operator or trustee of a superannuation fund) from giving financial product advice to retail clients to increase or maintain their investment or interest in the issuer’s products. This is because such advice may lead to increased administration or management fees for the issuer, which might reasonably influence the advice.
RG 246 sets out a new “no-action position” that ASIC will adopt in circumstances where a product issuer breaches the conflicted remuneration provisions by accepting management or administration fees. This no-action position will apply where the product issuer does not provide any personal advice about products that it issuers, or about products of that class.
An alternative no-action position applies in circumstances where the trustee of a registrable superannuation fund breaches the conflicted remuneration provisions by accepting management or administration fees that are permitted to be charged under the Superannuation Industry (Supervision) Act 1993.
Employee performance benefits
ASIC is less likely to scrutinise performance benefits that are designed to more closely align the interests of employees who provide financial product advice to retail clients with the interests of their clients. This general principle replaces the proposed approach set out in CP 189, under which ASIC was less likely to scrutinise performance benefits that were between 5-7% or more of base salary (depending on whether the benefit was partly or wholly volume-based).
Volume-based shelf-space fees
In RG 246, ASIC has re-stated its view from CP 189 that even if the reasonable fee-for-service exclusion or scale efficiencies exclusion is relied on by a platform operator (such that a benefit is not presumed to be a prohibited volume-based shelf-space fee), it is still possible for the benefit to be a prohibited volume-based shelf-space fee. ASIC does not provide further guidance on the circumstances in which this could arise. Assuming that a benefit is genuinely a reasonable fee-for-service or a rebate/discount attributable to a fund manager’s scale efficiencies, it is unclear how that benefit could still be prohibited as a volume-based shelf-space fee. This seems inconsistent with the purpose of the ban, which (as ASIC notes) is to prevent the receipt by platform operators of volume-based benefits to the extent that such incentives are merely a means of product issuers or fund manages purchasing shelf-space or preferential positions on a platform.
In relation to the reasonable fee-for-service exclusion, ASIC has omitted from RG 246 its preliminary guidance from CP 189 that a fee of between $5,000-$10,000 per product is charged by most platform operators to cover the platform operator’s costs in listing a product on a platform. It is not clear whether ASIC’s opinion of what is a typical fee for this kind of service has changed.
ASIC’s final guidance on the scale efficiencies exclusion appears to confirm that the utility of this exclusion for platform operators will not be significant. The onus is on the platform operator to demonstrate how a rebate or discount was arrived at, and how it is referable to the scale efficiencies gained by the fund manager from distributing its products through the platform. However, ASIC does not consider it to be sufficient for the platform operator to receive written confirmation from a fund manager stating that a discount or rebate is referable to the scale efficiencies gained by that fund manager, and further “appropriately verified written analysis” about the fund manager’s costs is required. As a practical matter, therefore, proving that the scale efficiencies exclusion applies is likely to be a particularly onerous task for platform operators.
While ASIC’s no-action position in relation to volume-based fees that are promptly passed on to clients is helpful, the law itself should be amended to clarify that benefits that are passed on promptly to clients are not prohibited volume-based shelf-space fees.
New draft grandfathering regulations not considered
In RG 246, ASIC does not consider the exposure draft Corporations Amendment Regulations that were released by the Government on the same day that RG 246 was issued (see our separate alert on these proposed changes to the FoFA transitional provisions).
RG 246 notes that the Government is consulting on these draft regulations, and ASIC foreshadows that it will update RG 246 to address the new grandfathering provisions once they are finalised.
Changes to arrangements and new arrangements
RG 246 provides guidance on the effect of variations to the terms of an arrangement (including the duration of the arrangement) on or after the FoFA application day, and states that such variations may not result in a new arrangement being created.
ASIC posits that whether or not a new arrangement is created will depend on whether or not the changes to a particular arrangement are so material that the arrangement is no longer the arrangement that was in place before the application day.
What may amount to a “material” change for these purposes is not explained, and will apparently be assessed on a case-by-case basis. ASIC suggests that:
- minor changes to an arrangement are unlikely to result in a new arrangement being created; but
- a number of incremental changes to an arrangement after the application day may (when viewed as a whole) result in a new arrangement being created.
In ASIC’s view, a discretionary benefit is not grandfathered if it is given on or after the application day, because the giving of such a benefit (and determining whether and what discretionary benefit is to be given) is generally a new and separate arrangement. The basis in law for this position is unclear, particularly given that the broad section 761 definition of “arrangement” (the application of which is accepted by ASIC) encompasses agreements and understandings regardless of whether or not they are enforceable.
RG 246 generally does not depart from ASIC’s position relating to the FoFA anti-avoidance provisions that was set out in CP 189. ASIC’s is unlikely to:
- scrutinise schemes that are normal commercial transactions conducted in the ordinary course of business; or
- take action on arrangements that have been genuinely entered into to comply with the conflicted remuneration provisions.