While the industry has won some concessions on grandfathering within the Future of Financial Advice (FoFA) reforms, lawyers warn that licensees who rely too heavily on the grandfathering clauses will have to monitor multiple revenue sources.
The industry has belatedly been given some more time to comply in what has been a contentious aspect of FoFA but this hasn’t been enough for some who still hope a change of government will bring relief.
“It was partly necessary because a number of businesses weren’t yet FoFA compliant from the perspective of their employee remuneration regimes – and had been applying for no-action letters with ASIC,” lawyer Astrid Raetze, a partner at Baker & McKenzie told Professional Planner.
“The grandfathering gives companies an extra year to get these regimes compliant. I also know that a number of clients are hoping that if the Liberals win the election, that at the very least, this part of FoFA will be unwound.”
In relation to product fees, Raetze doesn’t believe the revision goes far enough.
“You still have to have a pre-1 July 2013 arrangement in place to get the benefit of grandfathering till 1 July 2014. If you don’t have a pre-1 July 2013 arrangement, your fees aren’t grandfathered,” she said.
This could lead to having to run two different types of fee arrangements – one to cater for new distributors or licensees who don’t have a pre July 1 arrangement, and one for those grandfathered.
“This is inefficient and administratively burdensome,” she said.
Multiple revenue sources
Paul Derham, a partner with financial services lawyers, Holley Nethercote, agrees.
“Licensees who rely too heavily on the grandfathering clauses will have to monitor multiple revenue sources,” he said.
“We love our grandfathers, but eventually they all die.”
Unlike the ban on conflicted remuneration, the prohibition against charging asset-based fees on borrowed amounts used to acquire financial products is not grandfathered to July 1 2014.
“This means that if an existing retail client invests using a new borrowed amount (like a margin loan or line of credit), it’s unlikely that asset-based fees can be charged,” said Derham.
Claire Wivell Plater, managing director of The Fold Legal, said that, under the draft regulation, employee salary packages were remuneration arrangements that were grandfathered like any other arrangements.
This would have meant that conflicted remuneration such as a share of commissions or fees that was part of such a pre-July 1 2013 package could be continue to be paid, provided there was no material change to the arrangement.
Theoretically, such an arrangement could continue unchanged for a long time.
“The regulation that was passed on June 28 tightens this up. So now, arrangements for payment of conflicted remuneration to an employee MUST come to an end on July 1 2014. Remember though, that advisers can be paid a share of asset based fees (or commissions if they are grandfathered) if the client gives their clear consent and direction to the payment,” she said.
Grandfathering ends in 2014
Similarly, if an adviser has entered into a remuneration arrangement with a platform prior to 2013, benefits paid in respect to any investments made at any time into the future by clients who first invested through the platform before July 1 2014 were grandfathered indefinitely under the draft regulation.
“The regulation that was passed on June 28 2013 limits the grandfathering to investments made by clients through platforms prior to July 1 2014 (and any additional contributions to or limited switching within those investments thereafter). Benefits paid for new investments made through a platform after July 1 2014 are not grandfathered, regardless of when the client first invested through the platform or when the adviser’s arrangement with the platform provider started,” said Wivell Plater.
“The effect of this is the grandfathering pretty much ends for all employment arrangements and all new investments after July 1 2014.”
