Licensees, product issuers and their representatives who rely on grandfathering and exemptions from the Future of Financial Advice ban on conflicted remuneration will need to document their positions under the Australian Securities and Investment Commission’s new proposals.

Firms without formal records covering these issues will have an uphill battle demonstrating compliance should the regulator come calling.

In Consultation Paper 214: Updated record-keeping obligations for AFS licensees, ASIC notes that licensees are required by the law to keep adequate records about their financial services business. This includes an obligation to keep adequate records in relation to financial product advice provided to retail clients.

Consultation Paper 214 is largely devoted to updates around personal advice record-keeping and intra-fund advice arrangements, but also outlines proposals in relation to conflicted remuneration, which (given that the ban covers both personal and general advice scenarios) cover a much broader cross section of the industry.

ASIC is proposing to modify the law to require licensees to keep records of all grandfathered arrangements and changes to those arrangements, as well as any payments made or accepted under them. In addition, where exemptions are relied on, records will be required demonstrating the circumstances on which the reliance is based. The records can be kept in hard copy or electronic form and ASIC has said it will take a facilitative approach to compliance with these record-keeping obligations until June 30, 2014.

For firms which have not documented pre-commencement fee arrangements or have not formally recorded how they rely on applicable exemptions, ASIC’s proposals may force a revisitation of position. For this reason, firms may be justified in arguing that explicit record-keeping requirements for conflicted remuneration should have been signalled much earlier. This would have allowed firms to factor them into FoFA projects before the mandatory commencement of the legislation.

From a risk management perspective, firms will generally be better placed in the face of civil or regulatory action if they can evidence compliance with their licensing obligations. This is particularly the case where, over time, key individuals leave the organisation and take corporate memory with them.

Due to the lack of visibility among consumers regarding conflicted remuneration arrangements, the risk of any action in this context is more likely to come out of regulatory surveillance than investor-led claims or disputes. However, as we have seen in a number of recent high profile cases, the potential for regulatory action is not something firms should take lightly. Firms will need to take their documentation obligations seriously so they are able to defend their position.

Jon Ireland is senior associate at Henry Davis York.

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