When financial anthropologists pick over the legacy of the Future of Financial Advice reforms in years to come, the first week of March is likely to be marked as significant – as much for what didn’t happen as what did.
The major developments were the Australian Securities and Investments Commission releasing Regulatory Guidance 246, its final guidance on conflicted remuneration and Treasury releasing an exposure draft of regulations dealing with grandfathering and buyer of last resort arrangements.
The closing date for submissions on the draft regulations is March 18.
“The draft regulations propose to clarify once and for all that grandfathering will not apply to new products acquired after July 1, 2014,” says Richard Batten, a partner with Minter Ellison Lawyers.
In effect this means that grandfathering will have two phases. During July 1, 2013 to June 30, 2014, grandfathering will apply to new client and new investments where payments are made under an arrangement entered before July 1, 2013.
From July 1, 2014, grandfathering will only apply to investments made before July 1, 2014 where payments are made under an arrangement entered before July 1, 2013.
“Further investments in a managed investment scheme or super fund after June 1, 2014 will however be grandfathered where the client had invested in the same scheme or fund before July 1, 2013,” says Batten.
“The Explanatory Statement seems to contemplate this extending to switching between schemes, at least outside platforms, as well as superannuation investment options. However, the proposed language would not permit this.
“Interestingly, the new draft grandfathering regulations provide that grandfathering is not lost simply because a party to an arrangement changes. This seems to apply both where a party depends and where a party is replaced both for existing and the new party.”
Strange provision
Batten singles out a “very strange provision” in draft regulation 7.7A.17, which provides that failure to comply with the conflicted remuneration ban does not affect the validity or enforceability of an arrangement that would be contrary to the ban.
“The Explanatory Statement states that this is intended to preserve grandfathered arrangements,” he says. “However, the provision is not confined to such arrangements.”
The draft regulations also propose to exclude buyer of last resort (BOLR) arrangements from the ban on conflicted remuneration, provided the arrangement gives the same value to all financial products.
On ASIC’s RG 246 detailing the regulation of conflicted remuneration, Batten makes the point that the final guidance is very similar to its predecessor, Consultation Paper 189.
“ASIC has not taken the opportunity to provide more detailed guidance on many of the issues industry is confronting in implementing the ban on conflicted remuneration and has in some areas watered down its guidance, particularly as previously flagged by removing the 5-per-cent and 7-per-cent thresholds for employee performance benefits,” he says.
Benefit exemption
In Batten’s view, one of the more important elements of the regulatory guidance is ASIC’s focus on the client-given benefit exemption and makes the following observations:
• It will administer the law on the basis that clear consent is sufficient but mere disclosure is not. Consent must be genuine, express and specific.
• The exemption can be used to pass on benefits to representatives where authorised by the client.
• However, the licensee cannot have discretion about the proportion of benefit that is passed on. ASIC does not address whether the benefit can be reduced for non-compliance or other performance related issues.
• The application form, which authorises sharing the benefit with the representative, can be filled in by the representative provided it is done so before the client signs the form and they are told about it before doing so.
Further, ASIC seems to believe that the position of issuers who give advice is uncertain. “On the one hand, ASIC recognises that asset-based fees charged by product issuers which also give advice may fall within the client given benefit exemption,” says Batten.
“However, ASIC later states that management fees may prevent issuers from giving advice but ASIC will not take any action where no personal advice is given, other than superannuation intra-fund advice.”
The regulator has also retained the guidance that benefits passed on to clients are unlikely to be conflicted remuneration and provides some additional flexibility by indicating that they would need to be passed on within three months.
