FoFA regulations finally made

As the Government’s final EOFY gift, the Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014 was made on 26 June and registered today. The amendments commence on 1 July 2014. A copy of the Regulation and Explanatory Statement is attached and can also be found here.

Key elements of the Regulation:

· important conflicted remuneration exemptions, including when passing on exempt remuneration, for general advice and low value performance bonuses

· extending the employee exemption by 1 year to 1 July 2015 (or 18 months after the nominal expiry date of the enterprise agreement)

· removing impediments to adviser movement

· changes to the best interests duty, and

· exemptions from opt-in notices and fee disclosure statements for existing clients.

Details of the main changes are set out below.

Conflicted remuneration

Pass through exemption applies to the extent that the benefit is calculated by reference to exempt remuneration, other than grandfathered remuneration: reg 7.7A.12J.

Although it is a pity this exemption does not extend to grandfathered benefits, it does avoid the need to seek client directions to pass on benefits to advisers.

General advice exemption for any individual representative (not limited to employees) giving general advice under the name of the licensee where:

• the benefit is not a commission – defined as a recurring payment or a payment made solely because a product is issued or sold
• no personal advice is given except in relation to banking, general insurance or consumer credit insurance, and
• the product is issued or sold by the licensee or a related company or another entity under the licensee’s name – ie it is a badged product: reg 7.7A.12FA.

This is a significant improvement to the exemption first proposed and reflects the concerns raised in submissions made on this exemption.

New performance bonus exemption for individuals which applies to representatives of all licensees, including individual authorised representatives, provided:

• the benefit is low in proportion to the individual’s total remuneration – the Explanatory Statement states that ‘a benefit is likely to be considered low if it comprises less than 10 per cent of the employee‘s total remuneration’
• the conflicted measure is ‘outweighed or balanced by’ the other measures: reg 7.7A.12EB.

‘Outweighed’ suggests the other measures must contribute more than 50% to the outcome, but balanced suggests that a 50-50 weighting could be enough. The Explanatory Statement does not appear to clarify this point.

Simplified stamping fee exemption and extend it to all listed managed investment schemes without limitation. The key to the exemption applying is that it the fee is ‘given to facilitate’ a raising funds for the issuer or seller of the product. It can be paid directly or indirectly by any person in connection with the offer: reg 7.7A.12B.

This change is welcome to avoid distortions in the capital markets.

Expand training exemption to allow training relevant to carrying on a financial services business: reg 7.7A.15A.

It is great to see the unnecessary limitation on this exemption removed.

Permitting execution-only exemption to apply where the representative has not given any retail advice to the client in relation to the product or other products in the same class: reg 7.7A.12EC.

Amending the banking and general insurance exemption so that the benefit does not have to relate only to those products and other general advice can be given at the same time. The exemption is also extended to consumer credit insurance: reg 7.7A.12H.

Amending the mixed benefit provision: reg 7.7A.12I.

Grandfathering

Extends the employee exemption by one year to 1 July 2015 (or 18 months after the nominal expiry date for employees under an enterprise agreement or equivalent): reg 7.7A.16C(3)-(5).

Permits adviser movement by permitting pass through of grandfathered remuneration where a representative becomes an authorised representative of another licensee: reg 7.7A.16F(b). The ability of the licensee to receive the remuneration in the first place is achieved by permitted benefits to be redirected without losing grandfathering: reg 7.7A.15B, 16.

Permits benefits to be transferred as part of a sale of business: reg 7.7A16BA.

However, this only applies to regs 7.7A.16, 16A and 16B. This is good for reg 7.7A.16 because it provides grandfathering for benefits given by platform operators. The other regulations restrict the application of grandfathering. Consequently, this does not provide an exemption for benefits provided by other parties, such as other product issuers or licensees.

Extends grandfathering after 1 July 2014 to pension switches from the accumulation phase: reg 7.7A16B(5A), (5B).

Best interests duty

Effectively removing the reference to ‘client instructions’ in the first step of the best interests duty safe harbour in relation to advice given before 1 January 2016: reg 7.7A.2.

Effectively repeals the catch-all step in relation to advice given before 1 January 2016, by providing that an adviser does not need to prove they have complied with it: reg 7.7A.3.

The references to 1 January 2016 enable the amendments to apply in ‘prescribed circumstances’ as required by the enabling provision. The Government has announced it will introduce a Bill to make these changes to the Act.

Extends the best interests duty banking exemption to non-cash payment facilities generally and to general and consumer credit insurance: reg 7.7A.4 & 6.

Permits the best interest duty general insurance exemption to apply where advice is given about other products: reg 7.7A.5.

Ongoing fee arrangements (OFAs)

Exemption from opt-in notice obligation between 1 July 2014 and 31 December 2015: reg 7.7A.7.

Exemption from fee disclosure statement obligation for clients who entered into OFA before 1 July 2013 for the period between 1 July 2014 and 31 December 2015: reg 7.7A.8.