Bills Digest No.
22, 2019–20
PDF version [630KB]
Paula Pyburne
Law and Bills Digest Section
6
September 2019
Contents
Purpose and structure of the Bill
Background
Coalition election commitment
Committee consideration
Policy position of non-government
parties
Position of major interest groups
Financial implications
Statement of Compatibility with Human
Rights
Key issues and provisions
Concluding comments
Date introduced: 1
August 2019
House: House of
Representatives
Portfolio: Treasury
Commencement: Sections
1–3 on Royal Assent; Schedule 1 on 1 January 2021.
Links: The links to the Bill,
its Explanatory Memorandum and second reading speech can be found on the
Bill’s home page, or through the Australian
Parliament website.
When Bills have been passed and have received Royal Assent,
they become Acts, which can be found at the Federal Register of Legislation
website.
All hyperlinks in this Bills Digest are correct as
at September 2019.
Purpose and
structure of the Bill
The purpose of the Treasury Laws Amendment (Ending
Grandfathered Conflicted Remuneration) Bill 2019 (the Bill) is to amend the Corporations Act
2001 to:
- remove
the grandfathering arrangements for conflicted remuneration in relation to
financial advice provided to retail clients and
- establish
a scheme by Regulation under which amounts that would otherwise have been paid
as conflicted remuneration are rebated to affected customers.
The Bill has two Parts, each of which deals with one of
the measures above.
Background
A number of financial product and services providers
collapsed in the wake of the Global Financial Crisis.[1]
These collapses left many investors, particularly those who had borrowed to invest,
with great challenges in repaying their debts, meeting living expenses and, in
some cases, keeping their homes. In the past 10 years, over 80,000 consumers
have been affected, with losses totalling more than $5 billion, or $4 billion
after compensation and liquidator recoveries.[2]
Ripoll
Report
In response to the corporate collapses, the Parliamentary
Joint Committee on Corporations and Financial Services (Joint Committee) conducted
an inquiry into financial products and services in Australia.[3]
The final report, known as the Ripoll Report
(after the Chair of the Inquiry, Bernie Ripoll MP) was released in November
2009 and identified conflicted remuneration as the leading cause of poor
financial advice provided to clients.
|
Payment of ongoing fees
Financial advisers are traditionally remunerated
differently from other occupations. For example, many advisers have
traditionally received commissions from product providers for placing clients
with particular products, sometimes paid as a percentage of funds under
management. Some commissions are ongoing in nature, forming what are known as
‘trail’ commissions.
In situations where the client pays a substantial
proportion of the adviser’s remuneration directly (known as ‘fee for
service’) it is common for this remuneration to be ongoing in nature. For
example, an adviser might charge a client an ongoing annual fee calculated as
a percentage of the client’s funds under management (known as an asset-based
fee) or a flat dollar amount. This annual fee generally covers a range of
advisory services provided to (or available to) clients.
As opposed to professions or other occupations that tend
to charge for transactional, one-off services or advice, advisers’
remuneration structure is partly reflective of the notion that the benefits
of financial advice tend to be realised over the medium to long-term, and
therefore remuneration structures tend to reflect the ongoing nature of the
adviser-client relationship.
|
Replacement
Explanatory Memorandum, Corporations Amendment (Future of Financial Advice)
Bill 2012, p. 5.
The Ripoll Report identified significant structural tensions
in the finance industry that give rise to conflicts of interest and affect the
advice consumers receive:
On one hand, clients seek out financial advisers to obtain professional
guidance on the investment decisions that will serve their interests,
particularly with a view to maximising retirement income. On the other hand,
financial advisers act as a critical distribution channel for financial product
manufacturers, often through vertically integrated business models or the
payment of commissions and other remuneration-based incentives.[4]
The Ripoll Report noted the different ways in which
advisers can be remunerated directly or indirectly by product manufacturers for
their clients' financial decisions concluding:
These payments place financial advisers in the role of both
broker and expert adviser, with the potentially competing objectives of
maximising [their own] remuneration via product sales and providing professional,
strategic financial advice that serves clients' interests.[5]
Some submitters to the Joint Committee suggested that the
quality of financial advice for consumers would be improved if commissions and
other conflicted remunerative practices were banned.[6]
The Ripoll Report made 11 recommendations that were
designed to enhance professionalism in the financial advice sector and enhance
consumer confidence and protection.[7]
It stopped short of recommending an immediate ban on conflicted
remuneration—recommending instead that ‘government consult with and support
industry in developing the most appropriate mechanism by which to cease
payments from product manufacturers to financial advisers’.[8]
Future of
financial advice reforms
On 26 April 2010, the Minister for Financial Services,
Superannuation and Corporate Law, Chris Bowen, announced the Future of
Financial Advice (FOFA) reforms.[9]
The FOFA reforms were a package of amendments to the Corporations
Act to change how financial advice is delivered to clients. The FOFA
reforms were concerned with the way that financial advisers behave when giving
advice, including how clients are charged and how fees are disclosed. According
to Treasury:
The FOFA reforms were developed to address the
recommendations of the Ripoll Report. They were aimed at improving the quality
of financial advice provided to retail consumers of financial services through
reducing conflicts of interests by better aligning the interests of the
financial advisers and consumers. As well as applying to financial advisers,
they apply to all Australian Financial Service licensees, representatives who
give financial product advice to retail clients (including front-line bank
staff, call centre staff and robo-advice providers).[10]
The Assistant Treasurer and
Minister for Financial Services and Superannuation, Bill Shorten, circulated
draft legislation relating to the proposed FOFA reforms on 28 August 2011.[11]
FOFA 1 Bill
The original form of the Corporations
Amendment (Future of Financial Advice) Bill 2011 (FOFA 1 Bill) proposed to
amend the Corporations Act to:
- require
a fee disclosure statement (FDS) to be provided by a financial adviser to a
client when charging advice fees for more than 12 months
- require
a FDS and renewal notice to be provided by a financial planner to a client when
charging advice fees for more than 24 months—known as opt-in—an
adviser who has an ongoing fee arrangement with their client must get their
client to renew the arrangement every two years. If the client does not opt-in,
the arrangement will terminate
- extend
ASIC’s licensing and banning powers.
The proposed amendments were to operate from 1 July 2012.
FOFA 2 Bill
The original form of the Corporations
Amendment (Further Future of Financial Advice Measures) Bill 2011 (FOFA 2
Bill) proposed to amend the Corporations Act to:
- require
those persons who are providing personal financial advice to retail clients to
act in the best interests of their clients, and to give priority to
their clients’ interests (see discussion below)
- impose
a ban on conflicted remuneration (see discussion below)
- ban
volume-based shelf-space fees from asset managers or product issuers to
platform operators and
- ban
asset-based fees on borrowed amounts.[12]
The proposed amendments were to operate from 1 July 2012.
About conflicted remuneration
The FOFA 2 Bill inserted section 963A into the Corporations
Act. It defines conflicted remuneration as any benefit,
whether monetary or non-monetary, given to a financial services licensee, or a
representative of a financial services licensee, who provides financial product
advice to persons as retail clients that, because of the nature
of the benefit or the circumstances in which it is given:
(a) could
reasonably be expected to influence the choice of financial product recommended
by the licensee or representative to retail clients or
(b) could
reasonably be expected to influence the financial product advice given to
retail clients by the licensee or representative.
The FOFA 2 Bill proposed to ban the receipt of conflicted
remuneration and its payment in certain circumstances. The ban relates to the receipt
by licensees[13]
and their representatives.[14]
It includes a ban on both monetary and non-monetary (soft-dollar) benefits. In
addition, the FOFA 2 Bill detailed certain monetary and non-monetary benefits
which would not be conflicted remuneration.[15]
The proposed amendments were to operate from 1 July 2012.
Report of
the Parliamentary Joint Committee
The FOFA 1 Bill was introduced into Parliament on 13 October
2011. On the same day, the House of Representatives referred the FOFA 1 Bill to
the Parliamentary Joint Committee on Corporations and Financial Services
(Parliamentary Joint Committee) for inquiry and report.
The FOFA 2 Bill was introduced into the Parliament on 24
November 2011. The House of Representatives immediately referred the FOFA 2 Bill
to the same Committee.[16]
The Parliamentary Joint Committee reported on the FOFA
reforms on 29 February 2012.[17]
The majority made 15 recommendations and agreed that the FOFA provisions should
generally commence on 1 July 2012.
The report included dissenting comments by the Coalition
members of the Committee who concluded that the reforms in the FOFA 1 and FOFA
2 Bills would ‘lead to increased costs and reduced choice for Australians
seeking financial advice’.[18]
The Coalition members of the Committee made 16 recommendations. These included,
but were not limited to:
- the
removal of the opt-in arrangements[19]
- the
requirement to provide fee disclosure statements should be prospective and
should not apply retrospectively to existing clients[20]
- changes
to the best interests duty[21]
- refinement
of the ban on receiving conflicted remuneration[22]
- a
start day of 1 July 2013 and a 12 month transition period.[23]
FOFA Bills
as enacted
FOFA 1
When the Corporations Amendment
(Future of Financial Advice) Act 2012 was enacted the application and
transitional provisions operated so that the law would apply only to new
clients from 1 July 2012.[24]
FOFA 2
Although the Corporations
Amendment (Further Future of Financial Advice) Act 2012 specifies a
commencement date of 1 July 2012, the government subsequently announced that
the FOFA reforms in both of the FOFA Acts would commence from 1 July 2012 with
the provisions being voluntary until 1 July 2013, after which the
legislation’s application would be mandatory.[25]
Government amendments during the passage of the legislation put those
arrangements into effect.[26]
Transitional
provisions
FOFA 2 contained transitional provisions.
Specifically, section 1528 of the Corporations Act relates to the
application of the ban on conflicted remuneration. The section operates so that
the conflicted remuneration provisions do not apply to a benefit given
to the holder of an AFSL or their representative if the benefit was given under
an arrangement that was entered into before 1 July 2013.
These benefits are considered to be grandfathered.
There were some concerns expressed about how the grandfathering
would operate if, for example, a financial adviser was to sell his or her
business. In particular there was concern that such a sale would have the
effect of altering the pre-1 July 2013 arrangement to such an extent that it
would be a new arrangement and thereby be captured by the FOFA 2 provisions.
Coalition election commitment
In the lead up to the 2013 Federal election, consistent
with the views expressed in the dissenting comments in the Parliamentary Joint
Committee report, the Coalition made a commitment to reduce the regulatory
burden and compliance costs on the financial services sector. In particular, it
was stated that ‘[t]he Coalition will amend the [FOFA] legislation to reduce
compliance costs for small business financial advisers and consumers who access
financial advice’.[27]
A number of amendments were suggested. Relevant to the measures in this Bill
was a commitment to refining the ban on commissions on risk insurance inside
superannuation.[28]
Abbott government amendments
Streamlining FOFA Bill 2014
The Corporations Amendment (Streamlining of Future of Financial Advice)
Bill 2014 (Streamlining FOFA Bill) was introduced
into the House of Representatives on 19 March 2014—that is, after the date of
commencement of the FOFA 1 and FOFA 2 reforms. The purpose of the
Streamlining FOFA Bill (in its original form) was to roll back some of the FOFA
reforms such as:
- remove
the need for clients to renew their ongoing fee arrangement with their adviser
every two years (the opt-in requirement)
- make
the requirement for advisers to provide a fee disclosure statement applicable
only to those clients who entered into their arrangement after 1 July 2013
- remove
from the list of steps an advisor may take in order to satisfy the best
interests obligation the requirement that advisers must generally act and
provide advice in the best interests of their clients (the catch-all
provision)
- facilitate
the provision of advice limited to, say, a particular product or product range
(known as scaled advice)—that is, personal advice that is limited in scope and
- provide
an exemption from the ban on conflicted remuneration for general advice, but
not personal advice, in certain circumstances.[29]
The Streamlining FOFA Bill also contained amendments to broaden
the circumstances under which conflicted remuneration could continue to be
paid. For instance, as long as a client maintained their interest in a
financial product, the proposed amendment would allow advisers to move
licensees and continue to access grandfathered benefits—thereby addressing the
concerns expressed in relation to FOFA 2.
According to the Explanatory Memorandum to the Streamlining
FOFA Bill (as introduced):
Most industry stakeholders argue that the current
grandfathering provisions have reduced adviser movements in the industry and
have effectively ‘frozen’ the market; few advisers are willing to move
licensees at all due to the loss of grandfathered benefits. Whilst the
amendment allows grandfathered benefits to continue for a longer period of
time, it is anticipated that industry will transition to a fee-for-service
model as advisers cannot receive conflicted remuneration on arrangements
entered into with new clients, and existing clients are likely to be
transferred into new products/arrangements over time.[30]
The Streamlining FOFA Bill was passed by the House of
Representatives on 28 August 2014 and was introduced into the Senate on 1
September 2014. However, debate on the Bill by the Senate did not proceed for
more than 12 months. The Bill was not finally passed by both Houses of the
Parliament until 1 March 2016. The Streamlining FOFA Bill was enacted as
the Corporations
Amendment (Financial Advice Measures) Act 2016 (Financial Advice
Measures Act).
Importantly, the Financial Advice Measures Act amended
the Corporations Act to broaden and clarify provisions that deem that
certain benefits were not conflicted remuneration.[31]
Streamlining Regulations
Following the election of the Abbott Government, then
Assistant Treasurer Arthur Sinodinos gave a speech to the Association of
Financial Advisers’ National Conference in which he stated that the Government
intended to implement its FOFA reforms and announced its intention to pass most
of the reforms through Regulations.[32]
Accordingly, the Government made a number of Regulations which
would implement its election promises in relation to the FOFA reforms as an
interim measure. The Regulations are set out in the table below.
Table 1: FOFA Regulations
Source: The Treasury, Future
of Financial Advice: Implementation, The Treasury website.
Effect of the Financial
Advice Measures Act
The premise for the FOFA reforms was that conflicts of
interests exist, must be recognised and should be regulated. The legislative
response made by the FOFA reforms did not seek to eliminate the conflicts.
Instead, the reforms sought to ameliorate the consequences of the conflicts.
The enactment of the Financial Advice Measures Act
did not change the fundamental elements of the FOFA reforms. However, the Financial
Advice Measures Act introduced exceptions to the ban on conflicted
remuneration.
Monetary
benefit that is not conflicted remuneration
Section 963B of the Corporations Act lists those
monetary benefits given to an AFSL or representative of an AFSL who provides
financial product advice to persons as retail clients which are not
conflicted remuneration.
For example, paragraph 963B(1)(c) exempts a monetary
benefit from the ban on conflicted remuneration if it is given in relation to
the issue or sale of a financial product, and the individual receiving the
benefit has not provided financial product advice to the client in relation to
the product that is to be issued or sold—or advice on a class of financial products
or which the product is one—in the previous 12 months.
Other exceptions
Section 963C of the Corporations Act lists the
non-monetary benefits which are given to an AFSL or representative of an AFSL
who provides financial product advice to persons as retail client which are not
conflicted remuneration.
Other exceptions exist in relation to benefits for employees
of ADIs.[34]
Importantly these are separate from, and in addition to, the
grandfathering arrangements which operate so that the conflicted remuneration rules
only apply to arrangements entered into on or after 1 July 2013.
Comments by the Royal Commission
The problems with the operation of the FOFA reforms are
summarised in the final report of the Royal Commission into Misconduct in the
Banking, Superannuation and Financial Services Industry (the Royal Commission):
... the FoFA reforms required the financial advice industry
to make a fundamental change to the way advisers were remunerated. Before
the introduction of those reforms, a significant source of revenue for
financial advisers was commissions on the products they recommended. As in the
case of mortgage brokers, financial advisers commonly received a combination of
upfront and trail commissions: upfront commissions when the product was sold,
and trail commissions in subsequent years.
While the compromises made in the FoFA reforms allowed
advisers to continue to receive many of those commissions – most notably, trail
commissions on products purchased before 1 July 2013, and upfront and trail
commissions on many life insurance products – the ban on conflicted
remuneration played an important role in shifting the financial advice industry
from a commission-based model to a fee-for-service model.[35]
[emphasis added]
Grandfathered commissions
The Royal Commission noted that certain arrangements made
before the FOFA reforms came into force in July 2013 that would otherwise have
fallen within the ban on conflicted remuneration were, and remain, excluded
from the definition of conflicted remuneration. According to the Royal
Commission:
... despite it being recognised that the grandfathered forms
of remuneration are conflicted remuneration (because they could reasonably
be expected to influence the choice of financial product recommended by a
licensee or representative to retail clients, or could reasonably be expected
to influence the financial product advice given to retail clients by the
licensee or representative), charging and receiving these exempted forms of
remuneration has been permitted to continue.[36]
[emphasis added]
And further:
At the time the grandfathering arrangements were first
introduced, participants in the industry could say that sudden change in
remuneration arrangements may bring untoward consequences for countervailing
benefits that would not outweigh the harms of disruption ... Even if the arguments relied on to
justify the grandfathering exception were valid when that exception was
introduced, it is now clear that they have outlived their validity.[37]
Accordingly, the Royal Commission recommended that the
grandfathering provisions be removed as soon as possible.[38]
The Treasury
Laws Amendment (Ending Grandfathered Conflicted Remuneration) Bill 2019 was
introduced into the House of Representatives on 1 August 2019 in response to
that recommendation.
Committee
consideration
Senate
Standing Committee for the Selection of Bills
At its meeting of 1 August 2019, the Senate Standing
Committee for the Selection of Bills recommended that the Bill not be referred
to Committee for inquiry and report.[39]
Senate
Standing Committee for the Scrutiny of Bills
At the time of writing this Bills Digest, the Senate
Standing Committee for the Scrutiny of Bills had not commented on the Bill.
Policy
position of non-government parties
Senator Rex Patrick noted that grandfathered trailing
commissions—where customers pay an ongoing fee to advisers for years after the
initial advice was given—were a central theme of the Royal Commission. He
committed to introduce a Private Senator’s Bill ‘to finally put an end to
grandfathered conflicted remuneration’ ... ‘if the banks fail to take action, and
if the government fails to take action’.[40]
On 19 February 2019 the Leader of the Opposition, Bill
Shorten, gave notice in the House of Representatives of his intention to
present a Bill being the Corporations Amendment (Banking Royal Commission
Recommendations Implementation—Ending Grandfathered Commissions) Bill 2019:
... to amend the Corporations Act to give
effect to recommendations of the Royal Commission into Misconduct in the
Banking, Superannuation and Financial Services Industry to end grandfathering
of commissions in financial advice, and for related purposes.[41]
Although the proposed Bill was not introduced, it is likely
that Australian Labor Party members and Senators will support the removal of
the grandfathering provisions as proposed in the Bill.
Position of
major interest groups
The Australian Banking Association reportedly has thrown
its support behind a grandfathering ban.[42]
In the final report of the Royal Commission, it was noted that ‘each of the
major banks has already announced steps to reduce or eliminate payments of
grandfathered commissions in their financial advice businesses’.[43]
In addition, the Royal Commission acknowledged each of the
four major banks had made statements to the effect that their financial
planning businesses would no longer retain grandfathered commissions.[44]
However, the Association of Independently Owned Financial
Professionals strongly argues against the Bill on the grounds that the reforms
are ‘not valid under the constitution and legal action would be lodged soon
after the legislation received royal ascent’.[45]
(This is discussed under the heading ‘Application of the Constitution’
below.)
Financial implications
According to the Explanatory Memorandum, the Bill will
have no financial impact.[46]
Statement of Compatibility with Human Rights
As required under Part 3 of the Human Rights (Parliamentary
Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s
compatibility with the human rights and freedoms recognised or declared in the
international instruments listed in section 3 of that Act. The Government
considers that the Bill is compatible.[47]
Parliamentary
Joint Committee on Human Rights
At the time of writing this Bills Digest, the
Parliamentary Joint Committee on Human Rights had not commented on the Bill.
Key issues
and provisions
Schedule 1–Part
1
Ending
grandfathering from 1 January 2021
The provisions in Part 1 of the Bill amend the
transitional provisions which were inserted into the Corporations Act at
the time of the FOFA reforms.
Currently subsection 1528(1) of the Corporations Act
sets out the application of the ban on conflicted remuneration. Under that
subsection, Division 4 of Part 7.7A (that is, the rules about conflicted
remuneration) does not apply to a benefit given to a financial services
licensee, or a representative of a financial services licensee, if:
- the
benefit is given under an arrangement entered into before the application
day and
- the
benefit is not given by a platform operator.
Existing subsection 1528(4) of the Corporations Act
defines the application day is 1 July 2013.
Item 1 of Part 1 of the Bill repeals subsection 1528(1)
and inserts proposed subsections 1528(1) and (1A) into the Corporations
Act. The amendment operates so that the conflicted remuneration rules will
apply to those benefits which are currently grandfathered—that is they arise
from an arrangement entered into before 1 July 2013. This will have effect from
1 January 2021.
Application
of the Constitution
Currently subsection 1528(3) of the Corporations Act provides
that Division 4 of Part 7.7A (that is, the rules about conflicted remuneration)
does not apply to a benefit given to a financial services licensee, or a
representative of a financial services licensee, to the extent that it would
result in an acquisition of property (within the meaning of paragraph 51(xxxi)
of the Constitution)
from a person otherwise than on just terms.
Item 2 of Part 1 of the Bill repeals and replaces
subsection 1528(3) to provide that section 1350 of the Corporations Act does
not apply in relation to the operation of Division 4 of Part 7.7A.
Under section 1350 a person who acquires the property is
liable to pay compensation of a reasonable amount to the person from whom the
property is acquired if:
- the
operation of the Corporations Act would result in the acquisition of
property otherwise than on just terms and
- the
acquisition would be invalid because of paragraph 51(xxxi) of the Constitution.
The Royal Commission dismissed claims that changing the
permitted forms of remuneration would lead to constitutional difficulties
because it would amount to an acquisition of property otherwise than on just
terms. It made the following points in relation to such an assertion:
- First,
where would be the acquisition? Who would acquire anything? What proprietary
benefit or interest would accrue to any person?
- Second,
if the point is good, it was good at the time when most forms of conflicted
remuneration were prohibited. Yet no-one sought then to challenge the validity
of the relevant provisions and the FOFA ban on conflicted remuneration has now
operated for more than five years without challenge.[48]
Volume-based
shelf-space fees
A platform operator is a financial services licensee that
offers to be the provider of a custodial arrangement.[49]
The term custodial arrangement is defined in the existing section
1012IA of the Corporations Act as an arrangement where the client may
instruct the platform to acquire certain financial products, and the products
are then either held on trust for the client, or the client retains some
interest in the product. A platform operator must not accept a volume-based
shelf-space fee—that is, a fee which is wholly or partly dependent on the
number or value of a funds manager’s financial products to which the custodial
arrangement relates.[50]
Currently subsection 1529(1) of the Corporations Act
applies to grandfather the benefits to a financial services licensee of
volume-based shelf-space fees in equivalent terms to the grandfathering of
conflicted remuneration in section 1528 of the Corporations Act as
discussed above. Items 3 and 4 of Part 1 of the Bill amend section 1529
so that the ban on volume-based shelf-space fees will apply where they arise
from an arrangement entered into before 1 July 2013. This will have effect from
1 January 2021.
Asset-based
fees
Section 964F of the Corporations Act provides that a fee
for providing financial product advice to a person as a retail client is an asset-based
fee to the extent that it is dependent upon the amount of funds used or
to be used to acquire financial products by or on behalf of the person. Section
1531 of the Corporations Act provides that the conflicted remuneration
rules apply to asset-based fees only if they are charged on or after 1 July
2013 on borrowed amounts, provided that those amounts are used or to be used to
acquire financial products on or after that day.
Item 7 of Part 1 of the Bill repeals subsection
1531(2) of the Corporations Act and inserts proposed subsections
1531(1A) and (2) so that the grandfathering of asset-based fees is removed
with effect from 1 January 2021.
Schedule 1–Part 2
Rebate of
conflicted remuneration
Item 9 of Part 2 of the Bill inserts proposed
Subdivision D—Rebate of conflicted remuneration into Part 7.7A of the Corporations
Act so that Regulations may provide for a scheme under which amounts that
would otherwise have been paid as conflicted remuneration are rebated to
affected customers.
Who is covered?
Within new Subdivision D, proposed
section 963M of the Corporations Act
covers the following persons:
- a
person who is legally obliged to give, on or after 1 January 2021, the
conflicted remuneration to another person and
- a
person who is prohibited from accepting the conflicted remuneration.
Proposed
subsection 963M(3) provides, for the absence of doubt, that the section
does not cover a person in relation to conflicted remuneration if Regulations
made for the purpose of the subsection specify certain conditions in relation
to conflicted remuneration and those conditions are met.
Application of Regulations
Proposed section 963N
of the Corporations Act sets out a broad Regulation-making power to provide
for a scheme under which a person covered by proposed section 963M
must pay certain amounts based on the conflicted remuneration, or provide
monetary benefits based on that conflicted remuneration.
Under proposed subsection 963N(2) this will be
required in the following circumstances:
- a
financial services licensee, or a representative of a financial services
licensee provided (or was legally obliged to provide) financial product advice
to one or more persons as retail clients, in connection with the conflicted
remuneration and
- the
financial product advice relates to a particular financial product or class of financial
products.
Proposed subsection 963N(4) further provides that the
Regulations may make different provision in respect of any of the following:
- different
classes of person covered by section 963M
- different
classes of financial product
- different
classes of product holder
- different
classes of conflicted remuneration and
- different
classes of circumstances in which conflicted remuneration arises.
Under proposed subsection 963N(6) the Regulations
may also provide for any of the following matters:
- the
identification of product holders
- the
timeframe for making payments or providing monetary benefits
- a
method or methods of determining amounts of payments, or amounts of monetary
benefits and
- a
method or methods of making payments or providing monetary benefits.
Proposed
section 963P of the Corporations Act provides that a failure to pay
moneys to a person covered by section 963M as required by the Regulations
gives rise to a civil penalty.[51]
Regulations
exposure draft
On 28 March 2019 circulated an exposure draft of
the Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration)
Regulations 2019 and an Explanatory Statement for comment.
The exposure draft amends the Corporations
Regulations 2001 by inserting proposed Subdivision 4A—Ban on conflicted
remuneration (rebates).
If the conflicted remuneration can be attributed to a
single client then proposed subsection 7.7A.15AL(2) of the Corporations
Regulation requires a covered person must provide a cash rebate to the affected
retail client on a dollar-for-dollar basis within 10 business days.[52]
Proposed section 7.7A.15AM sets out the
requirements where conflicted remuneration relates to a group of clients—for
instance because of the volume of products sold. In that case the amount paid,
or the amount of the monetary benefit provided,[53]
to each of the clients must be an amount that is just and equitable in the
circumstances.[54]
The following matters are to be taken into account in determining whether an
amount is just and equitable:
- the
amount of the conflicted remuneration
- the
total amount invested by the clients in the financial products to which the
conflicted remuneration relates
- the
amount invested by each client expressed as a proportion of the total amount
invested in the financial product to which the conflicted remuneration relates
- the
structure of the fees (if any) that the clients have paid in respect of
financial products to which the conflicted remuneration relates
- the
extent to which the sum of the amounts to be paid, and the amount of the
monetary benefits to be provided, to the clients equals the amount of the conflicted
remuneration and
- any
other relevant matter.[55]
The exposure draft would also impose requirements on
covered persons to keep records of how and when conflicted remuneration was
rebated after 1 January 2021.
The exposure draft contains application provisions which
will operate to override existing grandfathering provisions contained in the
Corporations Regulations with effect from 1 January 2021.
Concluding
comments
The FOFA reforms were first recommended in 2009. Now, in
the light of scathing comments by the Royal Commission, they are to apply to
financial arrangements entered into prior to 1 July 2013. The end to
grandfathering and the enactment of the rebate scheme in the Regulations will
remove existing incentives to maintain clients in unsuitable financial
products.
What remains though, are the exceptions to the general
rules about what constitutes conflicted remuneration, which are not altered by
the Bill.
[1]. For instance
Storm Financial and Opes Prime: see Parliamentary Joint Committee on
Corporations and Financial Services, Inquiry into
financial products and services in Australia, 23 November 2009; See
also N Prior, ‘ASIC
to take legal action on $300m Westpoint collapse’, The West Australian,
9 November 2007, p. 45; and G Wilkins, ‘Banksia
signed off on “bad loan book” before merger’, The Sydney Morning Herald,
22 November 2014, p. 2.
[2]. Treasury, Key reforms in
the regulation of financial advice, Background paper 8, prepared for
the Royal Commission into Misconduct in the Banking, Superannuation and
Financial Services Industry, [13 April 2018], p. 5.
[3]. The
terms of reference, submissions to the Parliamentary Joint Committee on
Corporations and Financial Services and the final report of the Committee are
available on the inquiry
homepage.
[4]. Parliamentary
Joint Committee on Corporations and Financial Services, Inquiry into
financial products and services in Australia, op. cit., pp. 69–70.
[5]. Ibid.,
p. 75.
[6]. Ibid.,
p. 116.
[7]. Ibid.,
Chapter 7: Conclusions: Recommendations for reform, pp. 149–151.
[8]. Ibid.,
recommendation 4, p. 151.
[9]. C
Bowen (Minister for Financial Services, Superannuation and Corporate Law), Overhaul
of financial advice, media release,
26 April 2010.
[10]. Treasury, Key
reforms in the regulation of financial advice, op. cit.
[11]. B
Shorten (Assistant Treasurer and Minister for Financial Services and Superannuation),
Future
of financial advice reforms—draft legislation, media release, 29 August
2011.
[12]. Parliament of
Australia, Corporations
Amendment (Further Future of Financial Advice Measures) Bill 2012 homepage,
Australian Parliament website.
[13]. Corporations
Act, section 963E.
[14]. Corporations
Act, section 963G.
[15]. Corporations
Act, sections 963B–963D.
[16]. The
terms of reference for the inquiry, submissions to the Parliamentary Joint
Committee on Corporations and Financial Services and the Committee’s final
report are available on the inquiry
homepage.
[17]. Parliamentary
Joint Committee on Corporations and Financial Services, Corporations
Amendment (Future of Financial Advice) Bill 2011 and Corporations Amendment
(Further Future of Financial Advice) Bill 2011, February 2012.
[18]. Coalition
members, Dissenting
report, Parliamentary Joint Committee on Corporations and Financial
Services, Corporations Amendment (Future of Financial Advice) Bill 2011 and
Corporations Amendment (Further Future of Financial Advice) Bill 2011, p.
153.
[19]. Ibid.,
recommendation 3, p. 163.
[20]. Ibid.,
recommendation 4, p. 166.
[21]. Ibid.,
recommendations 6 and 7, pp. 168, 170.
[22]. Ibid.,
recommendations 10 and 11, pp. 176, 179.
[23]. Ibid.,
recommendation 2, p. 160.
[24]. Replacement
Explanatory Memorandum, Corporations Amendment (Future of Financial Advice)
Bill 2011, p. 16.
[25]. B
Shorten (Minister for Financial Services & Superannuation), Smoother
transition for financial advice reforms,
media release, 14 March 2012.
[26]. Treasury, ‘Future
of financial advice: implementation’, Treasury website; B Shorten (Minister
for Financial Services and Superannuation), Government's
financial advice reforms pass the parliament, media release,
20 June 2012.
[27]. Liberal Party of
Australia and the Nationals, The
Coalition’s policy to boost productivity and reduce regulation,
Coalition policy document, Election 2013, p. 26.
[28]. Ibid.
[29]. Explanatory
Memorandum, Corporations Amendment (Streamlining of Future of Financial
Advice) Bill 2014, p. 4.
[30]. Explanatory Memorandum,
Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014,
p. 85.
[31]. Revised
Explanatory Memorandum, Corporations Amendment (Streamlining of Future of
Financial Advice) Bill 2014, p. 30.
[32]. A Sinodinos (Assistant
Treasurer), Future
of financial advice (FOFA) amendments released for public consultation,
media release, 29 January 2014.
[33]. M Cormann
(Acting Assistant Treasurer), Agreement
reached to re-instate broadly supported elements of FOFA reforms, media release, 26 November 2014; In order to
achieve this, the Government successfully moved
a motion in the Senate to partially rescind the disallowance motion of the Corporations
Amendment (Streamlining Future of Financial Advice) Regulation 2014 from 19
November 2014. The motion rescinded the disallowance motion to the extent
necessary to permit certain provisions to be remade under an agreement with the
Opposition.
[34]. Corporations
Act, section 963D.
[35]. Royal Commission into
Misconduct in the Banking, Superannuation and Financial Services Industry, Final report,
volume 1, 2019, pp. 131–132.
[36]. Ibid., p. 182.
[37]. Ibid.,
p. 185.
[38]. Ibid.
[39]. Standing
Committee for the Selection of Bills, Report,
4, 2019, The Senate, Canberra, 1 August 2019.
[40]. J
Mather, ‘Senator
in push to ban all commissions’, The Australian Financial Review, 17
August 2018, p. 10.
[41]. B
Shorten, Notices,
House of Representatives, Debates, 19 February 2019, p. 13980.
[42]. J
Frost, ‘Advisers’
high anxiety ahead of Hayne’, The Australian Financial Review, 30
January 2019, p. 19.
[43]. Royal
Commission into Misconduct in the Banking, Superannuation and Financial
Services Industry, Final report, volume 1, 2019, p. 183.
[44]. Ibid.,
pp. 183–184.
[45]. J
Moullakis, ‘Advisers
set for legal battle over commissions’, The Australian, 1 August
2019, p. 17.
[46]. Explanatory
Memorandum, Treasury Laws Amendment (Ending Grandfathered Conflicted
Remuneration) Bill 2019, p. 3.
[47]. The
Statement of Compatibility with Human Rights can be found at page 11 of the Explanatory
Memorandum to the Bill.
[48]. Royal Commission into
Misconduct in the Banking, Superannuation and Financial Services Industry, Final
report, volume 1, 2019, p. 18.
[49]. Corporations
Act, subsection 1526(1).
[50]. Corporations
Act, subsection 964A.
[51]. Corporations
Act, subsection 1317E(3).
[52]. Explanatory
Statement, Treasury Laws Amendment (Ending Grandfathered Conflicted
Remuneration) Regulations 2019 (exposure draft), p. 1.
[53]. Ibid.,
p. 2. The monetary benefit may be by way of a reduction in fees.
[54]. Treasury
Laws Amendment (Ending Grandfathered Conflicted Remuneration) Regulations 2019
(exposure draft), proposed regulation 7.7A.15AM(3).
[55]. Treasury
Laws Amendment (Ending Grandfathered Conflicted Remuneration) Regulations 2019
(exposure draft), proposed regulation 7.7A.15AM(4).
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