ASIC Consultation Paper 189 (CP 189) was released last Friday. It provides 17 examples of benefits that, in ASIC’s view, are likely (or unlikely) to be banned under FoFA (the Future of Financial Advice measures). Comments are due by 9 November and a final regulatory guide is not due until February 2013.

Conflicted remuneration

General approach

In deciding whether a benefit is conflicted remuneration, ASIC says it will look at the substance of a benefit over its form. This means that stating that a benefit is not intended to influence financial product advice, or renaming the benefit, will not alter ASIC’s assessment of it as conflicted remuneration.

The identification of benefits can be difficult – for example, whether there is a single benefit or a number of subsidiary benefits. ASIC says that it will generally consider a benefit that has a number of interrelated components to be a single benefit if they are given at the same time. This does not assist very much. A person may give a monetary benefit and a related non-monetary benefit at the same time. Does this really mean there is only one benefit? We doubt it.

ASIC also says, we believe correctly, that a benefit does not need to relate to a specific financial product in order to be conflicted remuneration. The benefit could mean the recipient is more likely to recommend financial products issued by a particular issuer.

Volume-based benefits

Volume-based benefits are presumed to be conflicted remuneration. ASIC has indicated, we believe correctly, that the presumption may be rebutted if the main definition of conflicted remuneration is not satisfied, in particular if the influence test is not satisfied.

ASIC says a volume-based benefit may not be conflicted remuneration if it is passed on to the client. We agree, with two qualifications. The first is that the proposition should not be restricted to volume-based benefits – it can apply equally to flat benefits which would otherwise be conflicted remuneration. The second qualification is that the proposition may not hold true in every case. In each case, it will be necessary to apply the influence test in the context of all of the circumstances.

ASIC also says it is less likely to scrutinise a benefit that is not passed on to the adviser, if certain controls are in place. Here, ASIC is referring to a benefit that is received by a dealer group from a product issuer. However, it is uncommon for a dealer group not to pass on to the adviser at least part of a commission. Also, the basis in the law for ASIC’s view is unclear.

Employee remuneration

ASIC indicates that it is more likely to scrutinise performance benefits that are 7% or more of base salary (where the benefit is partly volume-based) or 5% or more (where the benefit is wholly volume-based).

ASIC seems to be comfortable with remuneration based on the employer’s (or business unit’s) profitability so long as the business is large enough, relative to the work of the individual employee, so that the employee’s work is unlikely to materially influence overall profitability.

ASIC also seems to be supportive of remuneration based on a “balanced scorecard”. Moreover, it appears to think that permissible criteria can include: the number of new clients the employee has brought into the business, and the value the investable assets of the employee’s clients.

Exceptions

In relation to the exception to conflicted remuneration for small non-monetary benefits which are not given frequently or regularly, ASIC thinks a benefit is not given frequently or regularly unless it is given to the same person at least three times over a one-year period. This builds on an example in the explanatory memorandum which indicates that a benefit given annually is not given frequently or regularly.

ASIC does not provide any guidance at all in relation to the exception for benefits given by retail clients. This is odd, since the exception is shaping up as one of the most significant FoFA provisions of all.

Examples

Examples which ASIC considers likely to involve conflicted remuneration include:

  • bundled administration fees that are split between a platform operator and a dealer group;
  • arrangements where a platform operator or other product issuer is also a dealer group, such as where a fund manager pays a flat fee to get preferred marketing access to the recipient’s advisers;
  • shares issued by a platform operator to a dealer group;
  • a procuct issuer providing an incentive scheme for advisers based on their use of an interactive tool relating to the issuer’s products.

An example which ASIC considers unlikely to involve conflicted remuneration is base salary where the salary level and the chances of promotion are not contingent on financial products recommended or acquired.

Volume-based shelf-space fees

ASIC discussed the two exceptions to the definition of “volume-based shelf-space fee”.

Reasonable fee for service

In relation to the reasonable fee for service exception, ASIC appears to consider that listing a fund manager’s product on a platform can in fact be a relevant service. However, ASIC also thinks that the fee for such a service could not be reasonable if it were based on funds under management, as opposed to being a flat fee per product on the platform. The basis in the law for this view is not identified. The other potential service which ASIC identifies is a reporting service provided by the platform operator to the fund manager about clients who have invested in its products and advisers who have recommended its products.

Fund manager scale efficiencies

The second exception is for a fund manager’s scale efficiencies. In our view this exception is unlikely to have much work to do. That view is reinforced by ASIC’s proposed approach to the exception. ASIC will expect platform operators to be able to demonstrate how a rebate or discount was arrived at and how it is referable to efficiencies gained by the fund manager from distributing its products through the platform. In doing this, ASIC expects that platform operators will receive and keep a written, up-to-date and appropriately verified analysis from the fund manager. ASIC’s expectations seem to bear little relation to what happens in practice.

Finally, as noted above, a benefit which is wholly passed on to a client may, as a consequence, not be conflicted remuneration. However, if the benefit is also a volume-based shelf-space fee, the fact that it is wholly passed on does not alter its character as a banned fee. ASIC says that, in this case, it will not take action against a platform operator because such an approach is “consistent with the overall policy intent”. While a no-action position makes sense, the law should be expressly amended to provide for this outcome.

Grandfathering

ASIC gives little meaningful guidance on grandfathering, although this is understandable given that a key draft regulation about grandfathering still has yet to be made.

Avoidance schemes

ASIC states that the anti-avoidance provision is designed to ensure that the policy intention is not avoided through industry or transaction restructuring. ASIC provides an interesting example of a dealer group that establishes a separate entity to receive percentage-based fees from a platform operator.

ASIC’s final guidance might come too late

Much of CP 189 is unlikely to come as a surprise to financial services participants who are prepared for FoFA. ASIC has asked for feedback on almost 100 questions by 9 November. Some questions ask whether industry would like other examples. It is unlikely that participants will (or could) wait until the final regulatory guide is released in February 2013 before making significant business decisions.