Financial services industry participants will need to look closely at volume based arrangements and payments of soft dollar benefits to ensure that they do not attract the ban on conflicted remuneration

The Australian Government's Future of Financial Advice (FoFA) reform commenced on 1 July 2012 and compliance will be mandatory from 1 July 2013.

A core part of the reform is the ban on conflicted remuneration. We've already looked at the main elements of the ban on conflicted remuneration and ASIC's "Regulatory Guide 246: Conflicted Remuneration" (RG 246).

In this article we'll look at the volume based statutory presumption aspect of the ban on conflicted remuneration and some of the "non-monetary" exemptions available under the conflicted remuneration provisions.

Conflicted remuneration and volume based statutory presumption

Section 963A of the Corporations Act 2001 defines conflicted remuneration to mean any benefit (whether monetary or non-monetary) given to a financial services licensee, or a representative of a financial services licensee, who provides financial product advice to persons as retail clients that (because of the nature of the benefit or the circumstances in which it is given) could reasonably be expected to influence:

  • the choice of financial product recommended by the licensee or representative to retail clients; or
  • the financial product advice given to retail clients by the licensee or representative.

In addition, section 963L of the Act presumes that volume-based benefits are conflicted remuneration. A benefit is considered volume based if the value of the benefit or the access to the benefit is wholly or partly dependant on the total value or the number of financial products:

  • recommended by a licensee or representatives to retail clients; or
  • acquired by retail clients to whom a licensee or representative provides financial product advice.

Such a statutory presumption is part of the FoFA legislation because the Australian Government views volume based payments as inherently conflicted, and where such payments are not inherently conflicted it will be peculiar within the knowledge of those paying and receiving the payments. Therefore, the Australian Government thought it was appropriate for the relevant parties to be required to demonstrate that volume based payments are not conflicted.

Practically, what this means is that, if an arrangement involves volume based payment(s) and the provision of financial product advice to retail clients, then ASIC will assume that those payments will be conflicted remuneration unless the relevant parties prove to it otherwise.

In RG 246.90, ASIC has provided some useful guidance on how the relevant parties could rebut the volume-based statutory presumption, for example, by showing that:

  • the value of the volume-based benefit is not significant enough that it could reasonably be expected to influence the advice given to a retail client; or
  • how the benefit is accessed could not reasonably be expected to influence the advice given to a retail client.

ASIC indicated that whether the presumption can be rebutted will need to be assessed objectively based on the circumstances as a whole. The following considerations may also be relevant in rebutting the presumption:

  • the connection between the benefit and the financial product advice that is provided to retail clients;
  • how often the licensee or representative who receives the benefit provides financial product advice to retail clients;
  • the value of the benefit, including relative to the total remuneration of the licensee or representative;
  • what a licensee or representative needs to do to access the benefit;
  • the content of the financial product advice; and
  • who is advantaged by the benefit.

Please note that the wording of section 963L (ie. the volume based statutory presumption) has been drafted quite broadly to capture most volume based arrangements in the financial services industry. More importantly, if such volume based arrangements are unable to receive the benefit of grandfathering [1], the relevant parties to such volume based arrangements will need to show that the benefit received under such arrangements is not one that could reasonably be expected to influence the provision of financial advice to retail clients. Therefore, a careful review of the terms of such volume based arrangements should be undertaken.

Soft dollar benefits

Non-monetary benefits (or commonly known as "soft dollar" benefits) given to a financial services licensee, or a representative of a licensee, who provides financial product advice to persons as retail clients is not conflicted remuneration in the circumstances set out in any of the following paragraphs:

  1. Benefits given by the client: A non-monetary benefit is not conflicted remuneration if it is given by a client in relation to:
  • the issue or sale of a financial product by a financial services licensee or representative to the client; or
  • financial product advice given by the a financial services licensee or representative to the client (section 963C(e)).

Please note that a similar exemption is available for monetary benefits given in similar circumstances. To enjoy this exemption the benefit would need to be specifically authorised by a client. A benefit has been authorised by a retail client if it is given at the client’s direction or with their clear consent. ASIC has indicated in RG 246 that in its view, consent is "clear" if it is genuine, express and specific. However, mere knowledge of the benefit, or agreement to proceed with financial services in light of a disclosure about the benefit, is not clear consent.

  1. General insurance: A non-monetary is not conflicted remuneration if the benefit is given in relation to a general insurance product (section 963B(1)(a) and regulation 7.7A.12G). Please note that this exemption also applies to monetary benefits given in similar circumstances.
  2. Basic banking and general insurance products: A non-monetary benefit is not conflicted remuneration if the benefit is given in relation financial product advice and the benefit only relates to a basic banking product, a general insurance product or a combination of those products. This exemption is only available:
  • where the provider of the financial product advice does not (at the same time) provide advice about any other financial product (ie. other than a basic banking product, a general insurance product or a combination of those products); and
  • the provider is an agent or an employee of an Australian ADI (or otherwise acting by arrangement with an Australian ADI under the name of the Australian ADI) (regulation 7.7A.12H).

Please note that this exemption also applies to monetary benefits given in similar circumstances. This exemption ensures that an agent or employee of an Australian ADI can continue to receive remuneration for providing advice on its principal's or employer's basic financial products. It also allows the agents or employees of an Australian ADI to receive such benefits even if those benefits also relate to advice or services that are not financial product advice (eg. advice about a credit facility) provided at the same time as advice about the basic financial products.

  1. Time sharing scheme: A non-monetary benefit is not conflicted remuneration if the benefit is given for financial product advice about an interest in a time-sharing scheme (regulation 7.7A.12C). Please note that this exemption also applies to monetary benefits given in similar circumstances.
  2. Small Value Benefits: A non-monetary benefit is not conflicted remuneration if it is less than $300 for each financial services licensee or representative that is the final recipient of the benefit and identical or similar benefits are not given on a frequent or regular basis.

It is interesting to note that in "Consultation Paper 189 - Future of Financial Advice: Conflicted remuneration" (CP 189), ASIC stated that it is more likely to consider that a benefit is given on a frequent or regular basis if it is given at least three times over a one year period to the same financial services licensee or representative. However, this statement does not appear in RG 246.

Please note that there is an obligation on the financial services licensee to keep records of benefits between $100 and $300 that are given to the licensee or one of its representatives (regulation 7.8.11A).

  1. Education or training purpose: A non-monetary benefit, regardless of who gives it, is not conflicted remuneration if it has a genuine educational or training purpose that is relevant to providing financial product advice to the client (regulations 7.7A.14 and 7.7A.15). There are two ways to qualify for this exemption.

A benefit that is a provision of an education or training course to a financial services licensee or representative (the participant) qualifies for the exemption. In addition, the education or training course must satisfy the following:

  • the education and training activities for the course must take up at least the lesser of six hours a day or 75% of the time spent on the course; and
  • the participant or their employer or financial services licensee must pay for travel and accommodation relating to the course, and events and functions held in conjunction with the course;

A benefit that has the dominant purpose of education or training also qualifies for this exemption. In RG 246, ASIC provided some examples to which this exclusion applies (which includes written materials on the tax implications of a product and research materials on a class of products an adviser gives advice on that would further the adviser’s knowledge about these products).

Please note that there is also an obligation on financial services licensees to keep records of education and training benefits that they or their representatives receive (regulation 7.8.11A).

  1. Information technology software and support: A non-monetary benefit is not conflicted remuneration if it is for the provision of information technology software or support and the benefit is related to the provision of financial product advice to retail clients (in relation to the financial products issued or sold by the benefit provider) (section 963C(d)).

In RG 246, ASIC has provided some useful examples of the types of benefits which are likely covered by this exclusion:

  • software for an administration platform where the benefit is given by the owner or distributor of the software;
  • access to an information technology ‘help desk’ for problems that a financial services licensee or representative experiences in using administration platform software, where the benefit is given by the software owner or distributor;
  • access to a website to place client orders; and
  • information technology software and support benefits received by a licensed dealer group and used by the licensed dealer group to meet operating costs for so long as the benefit is not passed on to advisers, and there are controls in place to ensure that the benefit does not influence the advice.

Also, ASIC considers that the following types of information technology software and support are unlikely to be covered by this exclusion:

  • payroll administration software and related support services;
  • accounting software and related support services to manage the accounts of a financial services licensee’s or representative’s business; and
  • anti-virus software.

Please note that there is also an obligation on financial services licensees to keep records of information technology software or support that they or its representatives receive (regulation 7.8.11A).

  1. Mixed benefits: A non-monetary benefit that is excluded from being conflicted remuneration is not conflicted remuneration even if:
  • the benefit also relates to other activities, but only to the extent that the part of the benefit that relates to the other activities is not conflicted remuneration; or
  • the financial services licensee or representative that provides financial product advice to a client at the same time, provides other services (whether or not financial services) (regulation 7.7A.12I).

Please note that a similar exemption is available for monetary benefits given in similar circumstances. Please note this exclusion does not apply to the extent that the provisions under which the benefit is given state that:

  • the benefit may only relate to particular financial products or services; or
  • a financial services licensee or representative must not receive the benefit if they, at the same time, provide other specified financial services.

Before a party determines that a "non-monetary" benefit received or given satisfies one of the eight exemptions listed above, it is important to test whether the "non-monetary" benefit is capable of influencing the choice of financial product recommended by the licensee or representative to retail clients or the financial product advice given to retail clients by the licensee or representative. If it is not capable of such things then the "non-monetary" benefit could not be considered as conflicted remuneration.

Also it is important to note that, notwithstanding the number of benefits that are excluded from being conflicted remuneration (see above), when an excluded benefit is passed on or reflected in a benefit given to another financial services licensee or representative that provides financial product advice to retails clients, this benefit should be treated as a separate benefit and not presumed to be an excluded benefit. This is because the separate benefit does not automatically continue to be excluded from the conflicted remuneration provisions as the circumstances in which the separate benefit is given are different to the circumstances in which the excluded benefit was given.

ASIC specifically stated in RG 246.43, that the separate benefit is only excluded if it satisfies the conditions of an exclusion (or could not reasonably be expected to influence the advice provided by the financial services licensee or representative that received the benefit). Therefore, a careful review of any soft dollar benefits which has been passed on should be undertaken to ensure that it could be excluded from the conflicted remuneration provisions.