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Australia’s Future of Financial Advice (FOFA) regime commences

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Denisenko Jason
Jason Denisenko

Partner

Sydney

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Hugh Griffin

Counsel

Sydney

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15 July 2013

The most comprehensive reforms to ever affect the Australian financial advice industry, FOFA is focused on improving retail investor protection and confidence in financial advice. 

Since commencement of voluntary compliance on 1 July 2012, government and industry have been working together to address the operational details of FOFA, including some unforeseen technical issues in the application of the legislation1. For instance, there has been significant ongoing uncertainty in relation to the form of the grandfathering regime – final regulations dealing with this aspect were only made late on 28 June 2013 (see below).

The interpretation of the regime by the Australian Securities & Investments Commission (ASIC) (which is the regulator responsible for enforcement) has also led market players to reconsider the scope of the regime.

FOFA regime – highlights

The key elements of FOFA are as follows:

  • a best interest obligation requiring financial advisers to act in the best interest of their retail clients, ensuring advice is appropriate to the client’s needs and financial objectives, and ensuring priority is given to the client’s interest if there is a conflict;
  • a disclosure and renewal (opt-in) requirement that requires financial advisers to provide an annual disclosure statement and a renewal statement every two years (or, alternatively, be bound by a regulator-approved code of conduct that obviates the need to comply with the opt-in requirement). Clients must opt-in to continue the financial advice arrangement, or the arrangement terminates; and
  • a ban on conflicted remuneration which is any benefit given to a financial adviser who provided advice to a retail client that would reasonably influence the advice given. The ban extends to conflicted remuneration given by a product issuer or seller. Charging asset-based fees on geared (borrowed) funds used or to be used by the client to acquire financial products is also banned under FOFA.

There is also an anti-avoidance provision to ensure arrangements are not entered into for the purpose of avoiding the application of FOFA.

FOFA’s conflicted remuneration grandfathering regime

The original FOFA legislation provided for “arrangements” that existed prior to 1 July 2013 to be grandfathered from the ban on conflicted remuneration. However, the government made some last minute changes to these grandfathering arrangements.

In particular, benefits paid by new clients under existing pre-FOFA arrangements will only be grandfathered where those clients have acquired an interest in the relevant financial product before 1 July 2014. The effect of the regulations is that it is no longer possible to bring new clients or new money onto an investment platform or into a new financial product after 1 July 2014, even if the relevant arrangement has been grandfathered. The new regulations also clarify that an arrangement entered into before 1 July 2013 will not lose the benefit of grandfathering merely because the party to the arrangement changes.

The regulations also clarify that, generally speaking, a grandfathered conflicted benefit that is passed on to a third party (eg an employed adviser) will not lose the protection of grandfathering so long as it is passed on for a purpose that is consistent with the original purpose for which it was paid.

Footnotes

1. Corporations Amendment (Future of Financial Advice) Act 2012 and Corporations Amendment (Further Future of Financial Advice Measures) Act 2012.

Contributed by Jason Denisenko and Hugh Griffin