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ISSN 1328-8091
Parliament of Australia Departmentof Parliamentary Services
Contents
Purpose .................................................................................................................................................... 3
Background .............................................................................................................................................. 3
Basis of policy commitment ................................................................................................................ 5
Committee consideration ................................................................................................................... 5
Position of significant interest groups ................................................................................................ 6
Best interests obligation ................................................................................................................ 6
Scaled (limited) advice ................................................................................................................... 7
Conflicted remuneration, other banned remuneration ................................................................ 8
Carve outs ...................................................................................................................................... 9
Coalition policy position ................................................................................................................... 10
Financial implications ............................................................................................................................. 11
Main issues............................................................................................................................................. 11
Key provisions ........................................................................................................................................ 11
Best interests obligation .............................................................................................................. 12
Conflicted remuneration ............................................................................................................. 14
Exceptions to conflicted remuneration requirements ................................................................ 15
Volume-based shelf-space fees and asset-based fees ........................................................... 17
Penalties ...................................................................................................................................... 18
Application and transitional provisions ....................................................................................... 19
Best interests obligation ......................................................................................................... 19
Conflicted remuneration and other remuneration ................................................................ 19
BILLS DIGEST NO. 96, 2011-12 7 February 2012
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
Margaret Harrison-Smith Law and Bills Digest Section
Volume-based shelf-space fees .............................................................................................. 20
Asset-based fees on borrowed amounts ................................................................................ 20
Concluding comments ........................................................................................................................... 20
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 3
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Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
Date introduced: 24 November 2011
House: House of Representatives
Portfolio: Treasury
Commencement: Sections 1-3 will commence on the day the Act receives the Royal Assent. Schedule 1 will commence immediately after the commencement of the Corporations Amendment (Future of Financial Advice) Act 2011, on 1 July 2011.
Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill's home page, or through http://www.aph.gov.au/bills/. When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.
Purpose
The Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 (the Bill) amends the Corporations Act 2001 (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. The Bill also applies existing regulatory mechanisms under the Corporations Act more directly to individual advisers as well as to licensees.
Additionally, the Bill amends the Corporations Act to ban the payment and receipt by those persons providing financial advice of certain remuneration considered to have the potential to influence the advice provided to retail clients with respect to certain financial products.
Background
This is the second of two Bills making amendments to the Corporations Act to implement the Future of Financial Advice (FOFA) reforms announced by the Government in 2010.1
1. C Bowen (Minister for Human Services, Financial Services, Superannuation and Corporate Law), The Future of Financial Advice, Information pack, 26 April 2010, viewed 16 January 2012, http://ministers.treasury.gov.au/Ministers/ceba/Content/pressreleases/2010/attachments/036/Future_of_Financial _Advice_Information_Pack.pdf
4 Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
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The first Bill is the Corporations Amendment (Future of Financial Advice) Bill 2011 (first FOFA Bill), which was introduced into the Parliament in October 2011.2
The FOFA reforms constitute the Government’s response to the 2009 report by the Parliamentary Joint Committee on Corporations and Financial Services of its inquiry into Financial Products and Services (PJC report).3 The PJC inquiry and report followed a number of significant corporate collapses, including Storm Financial and Opes Prime.4
The first FOFA Bill will, when enacted, insert Part 7.7A—Best interests obligations and remuneration, and Divisions 1 and 3 into the Corporations Act. It seeks to enhance disclosure requirements for fees and services associated with the provision of ongoing financial advice, and to strengthen the powers of the ASIC with respect to financial advisers.
This Bill inserts into Part 7.7A a new obligation on financial advisers to act in the best interests of their retail clients (new Division 2), and a prospective ban on conflicted remuneration structures (new Divisions 4 and 5).
The FOFA reforms have been the subject of extensive consultation. Details of this consultation are outlined in the Bills Digest for the first FOFA Bill.5
Regulation Impact Statement
The Regulation Impact Statement (RIS) for the Bill canvasses six reform options:
A. retaining the status quo
B. introduction of a prospective legislative ban on conflicted remuneration structures and introduction of new adviser charging rules
C. industry led action to address conflicted remuneration structures, with government support
D. introduction of a statutory duty to prefer the client’s interests over the interests of the adviser (client first rule)
2. Corporations Amendment (Future of Financial Advice) Bill 2011, viewed 16 January 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query%3DId%3A%22legislation%2Fbillhome%2Fr468 9%22
3. Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into financial products and services in Australia, Commonwealth of Australia, Canberra, November 2009, viewed 16 January 2012, http://www.aph.gov.au/Senate/committee/corporations_ctte/fps/index.htm
4. Ibid., terms of reference, p. vii. 5. M Harrison-Smith, Corporations Amendment (Future of Financial Advice) Bill 2011, Bills Digest, no. 72, 2011-12, Parliamentary Library, Canberra, 8 November 2011, viewed 25 January 2012, http://parlinfo.aph.gov.au/parlInfo/download/legislation/billsdgs/1211769/upload_binary/1211769.pdf;fileType%3D
application%2Fpdf
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 5
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E. introduction of a rule banning advisers who have a conflict of interest from providing advice (no conflict rule), or
F. introduction of a fiduciary-like statutory duty to act in the best interest of clients subject to a ‘reasonable steps’ qualification and to place clients’ best interests ahead of their own.6
The RIS indicates that:
A combination of Options B and F was found, on balance of the potential costs, benefits and risks considered for each option, to yield the greatest net benefit to the community. The analysis of impacts however, was limited because there was insufficient quantitative evidence about the costs and benefits associated with each option. The impact analysis and recommendations is largely based on a high level assessment of the potential qualitative impacts. The recommended options are however expected to have a very significant impact in this market.
7
Basis of policy commitment
The introduction of a statutory fiduciary duty for financial advisers requiring them to act in the best interests of their clients ahead of their own when providing personal advice to retail clients, and a prospective ban on conflicted remuneration structures were two of the key reforms proposed in the FOFA response to the PJC report.8
Committee consideration
The Bill was referred to the Joint Committee on Corporations and Financial Services on 24 November 2011 for inquiry and report by 29 February 2012.9
The Bill was also referred to the Senate Economics Legislation Committee on 25 November 2011 for inquiry and report by 14 March 2012.10
At the time of the preparation of this Bills Digest, the reports of neither of these inquiries were available.
6. Explanatory Memorandum, Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, pp. 51-68. 7. Ibid., p. 72.
8. C Bowen (Minister for Human Services, Financial Services, Superannuation and Corporate Law), The Future of Financial Advice, op. cit., p. 2. 9. Details of the inquiry can be viewed at the inquiry’s webpage at: http://www.aph.gov.au/Senate/committee/corporations_ctte/future_fin_advice/index.htm 10. Details of the inquiry can be viewed at the inquiry’s webpage at:
http://www.aph.gov.au/Senate/committee/economics_ctte/Corps_Amendment_Future_of_Financial_Advice_2011/i ndex.htm
6 Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
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Position of significant interest groups
The following is a selection of stakeholder views on the key amendments in this Bill.
Best interests obligation
The Australian Securities and Investments Commission (ASIC) considers that the ‘best interests duty … will improve the quality of personal financial advice provided in Australia by more closely aligning the interest of advisers with their clients’.11
Of section 945A of the Corporations Act, which the Bill seeks to replace with the new best interests obligation, ASIC says:
We do not consider that s945A sets a high standard as there may be products and strategies that are broadly appropriate for the client, but not necessarily in their best interests. 12
However, some stakeholders are concerned at the form taken in the Bill of the proposed new obligation, considering that it is too prescriptive, and that it could encourage a ‘tick-a-box' mentality.13
Australian Institute of Superannuation Trustees (AIST) supports the best interests duty but would prefer it to be worded less prescriptively. AIST contrasts the approach taken in the Bill with that under section 52(2)(c) of the Superannuation Industry (Supervision) Act 1993 (SIS Act) relating to the obligation for superannuation trustees to act in the best interests of super fund members.14
The Law Council of Australia (LCA) suggests that the best interests obligation is ‘mislabelled and is more akin to the adviser’s duty of care at general law rather than to their fiduciary duties’. LCA submits that this ‘gap between what the general law says about a best interests duty (as well as the case law interpreting a superannuation trustee’s duty to act in the best interests of their members under section 52(2)(c) of the [Superannuation Industry (Supervision) Act 1993]) and what section
11. Australian Securities and Investments Commission, Submission to the Senate Economics Legislation Committee, Inquiry into the Corporations Amendment (Future of Financial Advice) Bill 2011 [and] Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, p. 12, viewed 17 January 2012, http://www.aph.gov.au/Senate/committee/economics_ctte/Corps_Amendment_Future_of_Financial_Advice_2011/ submissions.htm
12. Ibid., p. 10. 13. Industry Super Network, Submission to Senate Economics Legislation Committee, Inquiry into the Corporations Amendment (Future of Financial Advice) Bill 2011 [and] Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, p. 2, viewed 3 February 2012,
https://senate.aph.gov.au/submissions/comittees/viewdocument.aspx?id=3749f490-4ce5-44da-b7e9-1bcf0689dea4 14. Australian Institute of Superannuation Trustees, Supplementary Submission to Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Corporations Amendment (Future of Financial Advice) Bill 2011
[and] Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, 14 December 2011, viewed 3 February 2012, https://senate.aph.gov.au/submissions/comittees/viewdocument.aspx?id=a1b2d644-bc0a-4046-b23a-8226c11e4673
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 7
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961B calls a best interests duty will raise significant uncertainty for the providers of advice and their advisers in determining what is required by a provider in order to discharge their duty and to satisfy the steps set out in section 960B(2)’.15
Scaled (limited) advice
There are varying views amongst stakeholders on whether or not the proposed best interests obligation would limit the capacity of financial advisers to provide limited or scaled advice, that is advice on one area of an investor’s needs, such as insurance, or about a limited range of issues.
Some stakeholders are critical of the proposed best interests obligation on the basis of its possible impact on scaled (limited) advice.
Westpac Group submits that as presently drafted, the best interests obligation does not enable affordable scaled advice; it does not require the agreement of the adviser and client on the scope of the advice; providing scaled advice through a computer program is not possible under the current drafting; the appropriate advice requirement must be judged according to the client’s relevant circumstances and the agreed scope of advice; and the requirement to ensure information is complete and accurate is too broad.16
Professional Investment Services (PIS) submits that:
…an adviser cannot simply agree the subject matter of the advice with the client and be considered to have met the best interest duty within the scope of that advice if it expressly or implicitly is in the client’s interest to broaden the scope of that advice’. 17
Without the capacity to limit the scope of the advice and to be deemed to have met the client’s best interests, PIS submits that ‘it is difficult to foresee how scalable advice can be widely offered’.18
15. Law Council of Australia, Submission to Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Corporations Amendment (Future of Financial Advice) Bill 2011 [and] Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, 22 December 2011, p. 4, viewed 3 February 2012, https://senate.aph.gov.au/submissions/comittees/viewdocument.aspx?id=d1921b8c-3578-4702-8d53-c5b7eca88e29
16. Westpac Group, Submission to Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Corporations Amendment (Future of Financial Advice) Bill 2011 [and] Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, 10 January 2012, p. 4, viewed 3 February 2012, https://senate.aph.gov.au/submissions/comittees/viewdocument.aspx?id=111b713c-986f-40fb-a4f8-bdbeb3bd889f
17. Professional Investment Services, Supplementary Submission to Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Corporations Amendment (Future of Financial Advice) Bill 2011 [and] Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, 22 December 2011, p. 5, viewed 3 February 2012, https://senate.aph.gov.au/submissions/comittees/viewdocument.aspx?id=0778323a-9fd2-4525-880f-ea650ecfb899
18. Ibid.
8 Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
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Burrell Stockbroking and Superannuation submits that the Bill ‘goes some way to utilizing the concept of scalable advice’, but that ‘to clarify the issue, it is our view that the legislature should specifically reference and define the concept of scalable advice …’.19
ASIC, on the other hand, believes that scaled advice can be given in a way that meets the best interests duty for advisers. It indicates that it has produced a number of publications to assist advisers in identifying what is, and what is not, scaled advice—for instance, its 2009 Regulatory Guide 200, Access to advice for super fund members, and a supplementary Consultation Paper 164, Additional guidance about how to scale advice (CP 164). ASIC notes that it will finalise its guidance in 2012, taking into account the best interests duty proposed in the Bill.20
Industry Super Network also considers that ‘*t+here is nothing in the best interests duty as drafted…which is inconsistent with the delivery of scaled or limited financial advice’.21
Conflicted remuneration, other banned remuneration
While supporting the banning of conflicted remuneration and other banned remuneration, some stakeholders are also concerned at the scope of provisions.
Westpac Group submits, for example, that the ‘current model goes further by banning legitimate, commercial business-to-business arrangements which do not relate to specific underlying products or investments’.22 Westpac claims that product neutral platform products, legitimate payments between product providers for outsourcing arrangements and client-directed fee for service payments through a product would be captured.23
However, the Joint Consumer Submission (JCS)24 considers that the bans imposed by the Bill on shelf-space fees to platform operators25 and on asset-based fees26 should be widened.27
19. Burrell Stockbroking and Superannuation, Submission to Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Corporations Amendment (Future of Financial Advice) Bill 2011 [and] Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, 24 November 2011, p. 5, viewed 3 February 2012, https://senate.aph.gov.au/submissions/comittees/viewdocument.aspx?id=04ba87b4-47c2-46f8-b232-aa4e8b09bc92
20. Australian Securities and Investments Commission, Supplementary Submission to Senate Economics Legislation Committee, Inquiry into the Corporations Amendment (Future of Financial Advice) Bill 2011 [and] Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, December 2011, p. 11, viewed 3 February 2012, https://senate.aph.gov.au/submissions/comittees/viewdocument.aspx?id=91411a34-0ce2-495e-853b-90e03ad2455e
21. Industry Super Network, Submission to Senate Economics Legislation Committee, op. cit., p. 2. 22. Westpac Group, Submission to Parliamentary Joint Committee on Corporations and Financial Services, op. cit., p. 4. 23. Ibid.
24. Choice, Australian Shareholders’ Association, CITRA, COTA, Consumer Action Law Centre, NICRI and the Australian Investors Association. 25. A platform operator is defined as a financial services licensee or RSE licensee (as defined in the Superannuation Industry (Supervision) Act 1993 that offers to be the provider of a custodial arrangement. ‘Custodial arrangement’ is
defined in the existing section 1012IA of the Corporations Act as an arrangement where the client may instruct the
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 9
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Carve outs
Some stakeholders are concerned at the scope of the carve outs from the new best interests and conflicted remuneration obligations for insurance and banking products.
The JCS suggests that some of the carve-outs from the definition of ‘conflicted remuneration’ ‘will significantly undermine the effectiveness of the ban on receipt of conflicted remuneration and, consequently, retail clients may still receive financial product advice tainted by conflicted remuneration’.28
The submission points, for instance, to the carve-out for information technology software or support provided by product providers, and for monetary or non-monetary benefits given to agents or employees of Australian authorised deposit-taking institutions (ADIs) as remuneration for work done when recommending basic banking products.
JCS also considers that under the Bill the duty of the adviser ‘for basic banking product advice and general insurance advice the duty of the adviser is lower than under the current law’, that is, section 945A of the Corporations Act.29
The Joint Accounting Bodies30 express similar concerns, submitting that ‘all payments deemed to be conflicted remuneration should be regulated consistently’, and that ‘the proposed carve-outs may in fact weaken the effectiveness of the overall reforms and add a further level of administrative and compliance complexity’.31
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. Explanatory Memorandum, p. 35. 26. The term ‘asset-based fees’ is defined in proposed section 964F in the Bill. 27. Joint Consumer Group, Supplementary Submission to Senate Economics Legislation Committee, Inquiry into the
Corporations Amendment (Future of Financial Advice) Bill 2011 [and] Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, 22 December 2011, p. 2, viewed 3 February 2012, https://senate.aph.gov.au/submissions/comittees/viewdocument.aspx?id=7fe31502-a7e0-450f-9961-878a2c7226c0 28. Ibid., p. 6. 29. Joint Consumer Group, Submission to Senate Economics Legislation Committee, op. cit., p. 4. 30. The Joint Accounting Bodies are CPA Australia, Institute of Chartered Accountants of Australia and Institute of Public Accountants. 31. Joint Accounting Bodies, Submission to Senate Economics Legislation Committee, Inquiry into the Corporations Amendment (Future of Financial Advice) Bill 2011 [and] Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, 19 January 2012, p. 3, viewed 3 February 2012, https://senate.aph.gov.au/submissions/comittees/viewdocument.aspx?id=d4a506fd-fff6-404f-9f96-81d846468e51
10 Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
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The Australian Bankers’ Association considers, however, that the carve out for basic banking products ‘should be clear and absolute’ and that the legislation ‘should not apply elements of the best interests duty or the conflicted remuneration provisions to basic banking products’.32
ANZ Wealth considers that the proposed reforms will ‘unduly inhibit the distribution of a significant number of financial products by banks including products such as simple and low cost superannuation’. They say that this is despite the fact that banks ‘have strict controls in place by adopting the balanced scorecard approach to remunerate good staff performance’ and are subject to the Australian Prudential Regulatory Authorities ADI standards.33
Abacus Australian Mutuals also expresses concern at best interests obligations that will remain under the Bill for basic banking products, notwithstanding the carve out. They say that advisers will be further discouraged than they are presently from providing advice on such products, and that it would be preferable to preserve and clarify the existing requirement for advice to be ‘reasonable’ and ‘appropriate’ as in section 945A of the Corporations Act (to be repealed by the Bill).34
The National Insurance Brokers Association considers that stand alone life risk insurance products should be treated in the less onerous manner that is accorded by the Bill to general insurance products.35
Coalition policy position
The Coalition ‘supports the introduction of a statutory best interest duty’ but ‘does not support Labor's push to force people to re-sign contracts with their advisers on a regular basis’.36
32. Australian Bankers’ Association, Submission to Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Corporations Amendment (Future of Financial Advice) Bill 2011 [and] Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, 12 January 2012, p. 3, viewed 3 February 2012, https://senate.aph.gov.au/submissions/comittees/viewdocument.aspx?id=bcb9c1cf-792f-4f9d-abd1-f405eefcafe1
33. ANZ, Supplementary Submission to Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Corporations Amendment (Future of Financial Advice) Bill 2011 [and] Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, 22 December 2012, p. 2, viewed 3 February 2012, https://senate.aph.gov.au/submissions/comittees/viewdocument.aspx?id=df6a8e38-9d2d-4c1b-af8d-811927b0ce53
34. Abacus Australian Mutuals, Supplementary Submission to Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Corporations Amendment (Future of Financial Advice) Bill 2011 [and] Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, 9 January 2012, p. 5, viewed 3 February 2012, https://senate.aph.gov.au/submissions/comittees/viewdocument.aspx?id=27cfcd0b-06bb-43a8-916e-f747ebb8264c
35. National Insurance Brokers Association, Supplementary Submission to Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Corporations Amendment (Future of Financial Advice) Bill 2011 [and] Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, 27 January 2012, p. 7, viewed 3 February 2012, https://senate.aph.gov.au/submissions/comittees/viewdocument.aspx?id=0db07f72-5426-44fd-81db-93af746c5607
36. M Cormann (Shadow Assistant Treasurer, Shadow Minister for Financial Services and Superannuation), Shorten conflict undermines FOFA reform effort, media release, 29 August 2011, viewed 10 January 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressrel%2F1178405%22
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 11
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In expansion of this view, the Coalition considers that:
With the best interest duty in place, appropriate transparency of fees charged and an ongoing capacity for clients of financial advisers to opt out there is adequate consumer protection without the need to impose additional red tape. 37
Financial implications
The Explanatory Memorandum states that the Bill would have no significant financial impact on Commonwealth expenditure or revenue.38
Main issues
The benefits for retail clients of the institution of a best interests obligation for financial advisers and a ban on conflicted remuneration are generally understood. However the sorts of advice and remuneration to which the amendments will, and should, apply has prompted uncertainty and some opposing views from stakeholders.
There are differing views on the likely effectiveness of the best interests obligation, the second arm of which some believe to be too specific, while others consider that this will be of assistance. The possible impact of the best interests obligation on their ability to provide scaled advice is also of concern to some stakeholders, while for others, it poses no problem. There are also opposing views on the appropriate scope of the carve out for general insurance and basic banking products.
It is to be anticipated that ASIC will play a significant role in allaying many of these concerns, by providing stakeholders with information, at an early stage, on how the reforms will be applied.
A number of stakeholder comments are included in this Bills Digest. Additional comments may be accessed through the links provided under the heading ‘Committee consideration’.
Key provisions
Schedule 1 of the Bill inserts three new Divisions into the Corporations Act. Items 10-21 insert new definitions relevant to the provisions in those new Divisions into existing section 960 of the Corporations Act.
37. Ibid.
38. Explanatory Memorandum, p. 4.
12 Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
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Best interests obligation
Item 23 inserts new Division 2 in Division 7.7A (when enacted).
The amendments in new Division 2 require a person providing financial advice to a retail client to act in the best interests of the client and to give priority to the client’s interests.
These obligations are in addition to current obligations in the Corporations Act relating to potential conflicts of interest, disclosure of remuneration and interests capable of influencing advice and the appropriateness of advice for the client.
The best interests obligation would replace existing requirements in the Corporations Act to have a reasonable basis for providing advice (section 945A), and to alert clients if advice is based on inaccurate or incomplete information (section 945B). There is presently no obligation to act in the client’s best interests.39
The new Division also includes amendments to existing regulatory requirements in the Corporations Act to make them more directly applicable to individual financial advisers as well as licensees and authorised representatives.40
Proposed subsection 961B(1) establishes a general obligation on the part of a ‘provider’ to act in the best interests of their client.
A ‘provider’ is defined in proposed section 961. The definition includes a person who is a representative of a financial services licensee and who provides the advice on behalf of the licensee. It also extends to a person who provides personal advice through a computer program.
Proposed subsection 961B(2) supplements the general best interests obligation in proposed subsection 961B(1) with steps that the ‘provider’ can use to prove that they have satisfied the general obligation. Whereas proposed paragraphs 961B(2)(a)-(f) set out comparatively specific steps, proposed paragraph (g) requires the ‘provider’ to prove that they have taken any other step that would reasonably be regarded to be in the best interests of the client, given the client’s relevant circumstances.
The Explanatory Memorandum suggests that while the scaling (limiting) of advice would have to be in the client’s best interests, proposed subparagraph 961B(2)(b)(i) would accommodate the provision of such advice, and that:
As long as the provider acts reasonably in the process and bases the decision to narrow the subject matter of the advice on the interests of the client, the provider will not be in breach of their obligation to act in the client’s best interests. 41
39. ASIC, Submission to Senate Economics Committee, op. cit., p. 10. 40. A comparative table of the new and the current law is set out in the Explanatory Memorandum, p. 7.
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According to the Explanatory Memorandum, the steps in proposed subsection 961B(2) ‘are not intended to be an exhaustive and mechanical checklist’, and that a provider may otherwise be able to satisfy the ‘best interests’ obligation. However, in determining whether or not the general obligation has been satisfied, recourse would naturally be had to proposed subsection [961B](2).42
The Explanatory Memorandum also clarifies that because proposed subsection 961B(2) affords the provider a means of demonstrating its compliance with the best interests obligation, the onus will be on the provider to prove, on the balance of probabilities, that it has met the necessary requirements. However, it remains for the person taking action against a provider under proposed subsection 961B(1) to establish that the provider has failed to satisfy the necessary obligation under that provision.43
Proposed subsections 961B(3) and 961B(4) reduce the number of the standards in proposed subsection 961(2) that would apply to ‘basic banking products’44 and general insurance. The rationale for their different treatment is that these products are ‘simple in nature and more widely understood by consumers’.45
Proposed sections 961C and 961D contain definitions of the terms ‘reasonably apparent’ and ‘reasonable investigation’ used in proposed subsection 961B(2), while proposed section 961E explains what would reasonably be regarded as being in the client’s best interests.
Proposed sections 961G and 961H respectively require the advice given by a ‘provider’ to be reasonably appropriate to the client, and where it is reasonably apparent that advice is or may be based on incomplete or inaccurate information, require that the provider must warn the client at the time they provide the advice.
Proposed section 961J requires a ‘provider’ to give priority to the interests of the client where they know, or reasonably ought to know, there to be a conflict between the interests of the client and those of a provider, a licensee for whom the provider is a representative, or an authorised representative who has authorised the provider to provide a specified financial service on behalf of a licensee under subsection 916B(3). To avoid possible circumvention of the provision, the obligation also extends to conflicts arising as a result of the interests of an associate, as defined in sections 10-17 of the Corporations Act.46
41. Ibid., p. 12. 42. Ibid., p. 10. 43. Ibid., p. 11. 44. The term ‘basic banking product’ is defined in proposed section 961F. 45. Explanatory Memorandum, p. 16. 46. Ibid., p. 18.
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Basic banking and general insurance products are excluded from the priority obligation under proposed subsections 961J(2) and 961J(3). The rationale for this is the same as for the best interest obligation.47
Proposed section 961K provides that a licensee breaches a civil penalty provision if they, or a representative, other than an authorised representative, breach the best interests obligation under proposed sections 961B, G, H or J. Similar provision is made for authorised representatives (proposed subsection 961Q(1)). However, an authorised representative will not be in breach if their non-compliance was the result of reasonable reliance on information or instructions provided to the authorised representative by the licensee (proposed subsection 961Q(2)).
Proposed section 961L requires licensees to take reasonable steps to ensure that their representatives comply with proposed sections 961B, 961G, 961H or 961J. The Explanatory Memorandum indicates that this is consistent with an existing obligation under the Corporations Act for licensees to ensure that their representative complies with financial services law.48
Regardless of whether it is the licensee or authorised representative that breaches the best interest obligation, a person suffering loss or damage as a result of the breach can recover that amount from the licensee (proposed section 961M).
Conflicted remuneration
Item 24 inserts new Divisions 4 and 5 in Part 7.7A (when enacted).
The new Division 4 contains amendments banning the payment and receipt of certain sorts of remuneration that could reasonably be expected to affect the choice of advice given by a licensee to a retail client.49
Proposed section 963A defines ‘conflicted remuneration’ as any money or non-monetary benefit given to a licensee or representative that could reasonably be expected to influence the choice of financial product advice being recommended or otherwise, more generally, influencing the product advice given.50
Proposed sections 963E, 963G and 963H proscribe the acceptance of conflicted remuneration by a licensee, a licensee’s authorised representative or any other representative. However, the obligation does not apply where an authorised representative is able to establish that they reasonably relied on information from their licensee that the benefit was not conflicted remuneration (proposed subsection 963G(2)).
47. Ibid., p. 19. 48. Ibid., pp. 19-20. 49. A comparative table of the new and the current law is set out in the Explanatory Memorandum, pp. 25-26. 50. The concept of ‘conflicted remuneration’ covers volume payments from platform operators to financial advice dealer
groups and ‘soft-dollar’ (non-monetary) benefits as well as traditional product commissions. Ibid., p. 27.
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Licensees are also required to take reasonable steps to ensure that their representatives do not accept conflicted remuneration (proposed section 963F).
Exceptions to conflicted remuneration requirements
Monetary benefits which are not to be regarded as ‘conflicted remuneration’ are outlined in proposed section 963B. They include a benefit given to a licensee or representative solely in relation to a general insurance product (proposed paragraph 963B(1((a)) or a life insurance product other than a ‘group life policy for the benefit of members of a superannuation entity’51 or a member of a default superannuation fund (proposed paragraph 963B(1)(b)); monetary commissions or incentive payments where the product is sold with no advice provided to the retail client (proposed paragraph 963B(1)(c)); and where the monetary benefit is given by the client (proposed paragraph 963B(1)(d)).
Westpac Group submits that large financial services institutions will not be able to rely on the exemption in proposed paragraph 963B(1)(c) ‘due to the fact that advice is likely to have been provided previously in marketing campaigns, in material issued by product issuers or by other advisers’.52
Financial Planning Association of Australia suggests that the exemption for life risk insurance products in proposed paragraph 963B(1)(b) ‘goes further than the intended policy’ and:
… does not take into consideration that under the choice environment within superannuation many super funds are offering ‘group life’ style arrangements for individual retail clients for administrative convenience and to be able to provide retail clients with access to group style premium rates.
53
Joint Accounting Bodies suggests that:
⢠all commissions on life risk insurance products, including those sold within or outside of
superannuation, should be consistently regulated ⢠execution-only sales should not be carved-out … as this exclusion may lead to an inherent conflict
between remuneration models where advice is and is not provided. Further, it may also encourage licensees (and financial planners) to move away from providing financial advice
51. The definition of the term ‘group life policy for members of a superannuation entity’ is contained in proposed subsection 963B(2). 52. Westpac Group, Submission to Parliamentary Joint Committee on Corporations and Financial Services, op. cit., p. 22. 53. Financial Planning Association of Australia, Submission to Parliamentary Joint Committee on Corporations and
Financial Services, Inquiry into the Corporations Amendment (Future of Financial Advice) Bill 2011 [and] Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, 22 December 2011, p. 21, viewed 3 February 2012, https://senate.aph.gov.au/submissions/comittees/viewdocument.aspx?id=f93c2d2c-b017-4ccc-aaa3-5a58b3b420e3
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⢠a platform operator should only be allowed to receive an asset management fee discount in the
form of a rebate on the basis that it represents reasonable scale of efficiencies and if the value of this rebate is passed on to the clients invested in the respective fund, and ⢠asset based fees should be banned where there is any leverage involved in the retail client's
investment portfolio to ensure the reform achieves the correct policy outcomes.54
Further exceptions may be prescribed by regulation (proposed paragraph 963B(1)(e)). The Explanatory Memorandum indicates that it is proposed to exclude certain stockbroking activities from constituting ‘conflicted remuneration’, by allowing those undertaking such activities to receive third party ‘commission’ payments from companies where those activities relate to capital raising. However, draft regulations were not available at the time of writing this Bills Digest so this remains no more than a proposal.55
Non-monetary benefits which are not to be regarded as ‘conflicted remuneration’ are set out in proposed section 963C. They include benefits given solely in relation to general insurance products (proposed paragraph 963C(a)); benefits under the amount prescribed by the regulations, so long as they are not identical or similar and provided on a frequent or regular basis (proposed paragraph 963C(b)); benefits with a genuine educational or training purpose, or which are relevant to the provision of financial product advice to retail clients (proposed paragraph 963C(c)); benefits that are the provision of information technology software or support related to the provision of financial product advice to retail tenants (proposed paragraph 963C(d)) and non-monetary benefits provided by retail clients (proposed paragraph 963C(e)).
Proposed paragraph 963C(f) provides for the prescription by regulation of other non-monetary exceptions to the ban on ‘conflicted remuneration’.56
Professional Investment Services submits that:
Limiting the professional development exemption to domestic basis will significantly undermine Australia’s international financial services exposure and is inconsistent with the government’s objectives of promoting Australia as a financial services hub. 57
A number of other submitters are also critical of this proposed limitation. For instance, the Association of Financial Advisers submits that:
In terms of conflicted remuneration, where it is a licensee event, there is no meaningful difference between a domestic or an Asia Pacific conference. 58
54. Joint Accounting Bodies, Submission to Senate Economics Legislation Committee Inquiry, op. cit., p. 3. 55. Explanatory Memorandum, p. 30. 56. The Explanatory Memorandum indicates that regulations under proposed paragraph 963(f) may include prescribing a number of additional criteria under the exception for benefits with a genuine education or training purpose
including that the professional development must be conducted in Australia or New Zealand. Ibid., p. 31. 57. Professional Investment Services, Supplementary Submission to Parliamentary Joint Committee on Corporations and Financial Services, op. cit. p. 14.
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Proposed section 963D provides an exception to the ban on ‘conflicted remuneration’ for arrangements where employees of an ADI (or of an agent of an ADI) advise on and sell basic banking products. This would permit an employee to receive sales incentives from their ADI employer, even where they are volume based. However, the exception will not apply if the employee provides advice on financial products other than basic banking products.
Abacus Australian Mutuals is critical of this limitation, suggesting that although general insurance is not subject to the ban on conflicted advice, the limitation could mean that the exemption would not apply where an employee advised on general insurance products as well as basic banking products.59
Volume-based shelf-space fees and asset-based fees
Item 24 also inserts new Division 5 into Part 7.7A of the Corporations Act (when enacted).
New Division 5 contains provisions relating to the banning of the receipt by ‘platform operators’60 of volume-based shelf space fees, and ‘asset-based fees’61 on borrowed amounts where a licensee or licensee’s representative provides financial product advice to a retail client.
Proposed subsection 964A(1) provides that a platform operator must not accept a volume-based shelf-space fee. A benefit is presumed to be this type of fee if it, or its value, is wholly or partly dependent on the number or value of a fund manager’s financial products to which the custodial arrangement relates (proposed subsection 964A(2)). However, a benefit is presumed not to be a volume-based shelf-space fee where an operator can prove that all, or part, of the benefit is of a kind specified in proposed paragraph 964A(3)(a) or 964A(3)(b).
A ‘platform operator’ is defined in proposed section 964 as a financial services licensee or a registrable superannuation entity (RSE)62 that offers to be the provider of a custodial arrangement. A ‘custodial arrangement’ has the same meaning as in section 1012A of the Corporations Act (see proposed subsections 964(2) and 964(3)).63
58. Association of Financial Advisers, Submission to Parliamentary Joint Committee on Corporations and Financial Services, op. cit., p. 15. 59. Abacus Australian Mutuals, Submission to Parliamentary Joint Committee on Corporations and Financial Services, op. cit., p. 6. 60. The term ‘platform operator’ is defined in proposed section 964 in the Bill. 61. The term ‘asset-based fees’ is defined in proposed section 964F in the Bill. 62. An ‘RSE’ is defined in section 10 of the Superannuation Industry (Supervision) Act 1993 as a regulated superannuation
fund, an approved deposit fund or a pooled superannuation trust, but does not include a self-managed superannuation fund. 63. For further information see the Explanatory Memorandum, op. cit., p. 35.
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New Division 5 also bans a licensee or a licensee’s representative from charging an asset-based fee to a retail client on a borrowed amount (proposed sections 964D and 964E).64
The ban does not apply to an asset-based fee if, on an objective test, it is not ‘reasonably apparent’ that the amount used to acquire a financial product by or on behalf of a client is borrowed (proposed subsections 964D(3) and 964E(2)).65 However this does not absolve a licensee or an authorised representative from acting in their clients’ best interests (proposed subsections 964D(5) and 964E(4)).
An ‘asset-based fee’ is defined in proposed section 964F as a fee for providing financial product advice that is dependent on the amount of funds to be used to acquire financial products.66
The term ‘borrowed’ is defined in proposed section 964G as meaning borrowed in any form, including secured or unsecured, through a credit facility within the meaning of the regulations, or a margin lending facility.
Burrell Stockbroking and Superannuation considers the banning of asset-based fees unnecessary:
Placing a ban on asset-based fees on borrowed funds is not the way to stop over gearing, the like of which lead to the Storm Financial collapse. If an adviser has correctly and diligently obtained a client’s information and objectives, then appropriate advice would mean a client is not over geared. … It is our opinion that the ‘best interest duty’ would be sufficient to ensure gearing is controlled.
67
Penalties
Items 28 and 30 repeal paragraphs 1317E(1)(j)-(jaae) and subsections 1317G(1E)-(1G) of the Corporations Act respectively, replacing them with the provisions that are subject to civil penalties for new Divisions 2, 4 and 5 and Division 3 of Part 7.7A (when enacted). The maximum civil penalties provided for are $200 000 for an individual and $1 000 000 for a body corporate.
The Stockbrokers Association of Australia supports the use of civil penalties:
We are pleased to see that the new best interests obligation is to be a civil penalty provision and is therefore decriminalised. …it is anomalous and disproportionate that breaches of s945A&B
64. A licensee also contravenes proposed section 964D if a representative of the licensee, other than an authorised representative, charges the proscribed fee: proposed subsection 964D(2). 65. The term ‘reasonably apparent’ is defined in proposed section 964H as being something which would be apparent to a person with a reasonable level of expertise in the subject matter of the advice that has been sought by the
client, were that person exercising care and objectively assessing the information given to the financial services licensee, or the representative of the financial services licensee, by the client. 66. A fee partially falling within this definition is an ‘asset-based fee’ to that extent. 67. Burrell Stockbroking and Accounting, Submission to Parliamentary Joint Committee on Corporations and Financial Services, op. cit., p. 7.
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were made serious criminal offences by the financial services reforms which came into effect in 2004. 68
Westpac Group suggests that proposed subsection 1317G(1E) should have an additional requirement that ‘the contravention be serious or significant in some way (e.g. material detriment to the recipient of the advice)’.69
Item 27 repeals the definition of ‘financial services civil penalty provision’ in section 1317DA, substituting it with a definition that includes the civil penalty provisions for new Divisions 2 and 4, and Divisions 5 and 6 of Part 7.7A (when enacted). The effect is that compensation orders under section 1317HA of the Corporations Act will be available for the contravention of these provisions.
Item 25 amends paragraph 965(a) (when enacted) of the first FOFA Bill so as to ‘capture a broader range of schemes designed to avoid the application of the FOFA reforms’.70
Application and transitional provisions
Item 33 adds new Part 10.18 setting out transitional provisions for the FFOFA Act (when enacted). The following is a short summary. Further detail is provided in the Explanatory Memorandum.71
Best interests obligation
Proposed section 1527 provides that the obligations in new Division 2 apply to advice provided to a retail client on or after 1 July 2012, whether or not the request for advice was made before or after that date.
Conflicted remuneration and other remuneration
With a number of exceptions, the ban on the payment and receipt of certain sorts of remuneration that could reasonably be expected to affect the choice of advice given by a licensee to a retail client (by new Division 4) would apply from the day of commencement of the Corporations Amendment (Further Future of Financial Advice Measures Act (when enacted) (proposed sections 1528 and 1529). In relation to conflicted remuneration, the amendments would not apply to benefits given
68. Stockbrokers Association of Australia, Submission to Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Corporations Amendment (Future of Financial Advice) Bill 2011 [and] Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, 25 November 2011, p. 3, viewed 6 February 2012, https://senate.aph.gov.au/submissions/comittees/viewdocument.aspx?id=2d37632a-04a0-49c9-9005-473adab98f38
69. Westpac Group, Submission to Parliamentary Joint Parliamentary Committee on Corporations and Financial Services, op, cit., p. 10. 70. Explanatory Memorandum, p. 38. 71. Ibid., pp. 38-39.
20 Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
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under an arrangement entered into before the day of commencement. Although the regulations would be able to prescribe circumstances in which the obligations will apply to such arrangements, this would not include conflicted remuneration given by a platform operator, the obligations in Division 4 (when enacted) applying to those arrangements from the date of commencement.
Volume-based shelf-space fees
The amendments would not apply to benefits given under an arrangement entered into before the day of commencement. Although the regulations would be able to prescribe circumstances in which the obligations will apply to such arrangements, they would not apply to the extent that their operation would result in acquisition of property other than on just terms.
Asset-based fees on borrowed amounts
The amendment would apply to fees paid after the commencement, but only to the extent that the borrowed amounts are to be used to acquire financial products after that date. However, the ban would not apply to fees charged after that date to the extent that it would result in acquisition of property other than on just terms.72
Concluding comments
The varying views expressed by stakeholders about the scope of these amendments, and the extent and nature of the carve outs that should be made from them, indicate that an independent review of the operation of this legislation within a prescribed period from the date of commencement will be essential.
The Review should be conducted after ASIC has published its proposed guidance on the best interests obligation and scaled advice, and stakeholders have had sufficient time to understand how these FOFA reforms will be administered.
72. These exceptions are fully outlined in the Explanatory Memorandum. Ibid., p. 39.
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