The Future of Financial Advice (FoFA) regime in Australia
10 May 2013
Conflicted remuneration is, broadly speaking, any payment given to a financial adviser, who provides financial product advice to retail clients, that could reasonably influence the advice given. Currently, the ban on payment of "conflicted remuneration" does not apply to benefits given by an operator of an investment platform or any other entity if the benefits are given under an "arrangement" that was entered into before 1 July 20135 – such arrangements are grandfathered.6 On a broad reading of the existing grandfathering regime, it is possible that "new" clients could be brought into an existing grandfathered arrangement – any fees paid by that client would then be grandfathered from the conflicted remuneration restrictions.
Proposed changes to the grandfathering rules
The proposed regulations seek to amend the legislation7 to provide that benefits paid by new clients under existing pre-FoFA arrangements will only be grandfathered where those clients have acquired an interest in the relevant product before 1 July 2014.
- In the case of platforms, grandfathering will apply to benefits paid by a platform operator under contractual arrangements entered into before the application day, where:
- the benefit relates to a "regulated acquisition" on a platform by a client; and
- the client had already given an instruction for a "regulated acquisition" on the platform before 1 July 2014.
Consequently, the conflicted remuneration restrictions in relation to "new" investments on that platform after 1 July 2014 will only be grandfathered if the relevant client held an investment through the platform before 1 July 2014.
- In the case of other financial products, grandfathering will apply to any benefit given by anyone other than a platform operator to an Australian financial services licensee including an authorised representative of the licensee, who offers financial products to retail clients, pursuant to an arrangement that was in place before 1 July 2013, except where the client acquires an interest in a financial product after 1 July 2014, where the client did not already have an interest in that financial product (even if the client entered into the arrangement with the financial adviser before 1 July 2013).
The effect of the proposed regulations is that it will no longer be possible to bring new clients or new money onto a platform or into a new financial product after 1 July 2014, even if the relevant arrangement has been grandfathered. Further, the regulations propose that arrangements entered into before 1 July 2013 will not lose the benefit of grandfathering merely because the party to the arrangement changes.
Significant risks remain in attempting to restructure arrangements prior to 1 July 2013 merely in order to continue or increase grandfathered payments which may attract the operation of the anti-avoidance regime (which has been in effect since 1 July 2012).
4 The Corporations Amendment Regulation 2013 (No F) Exposure Draft released 27 February 2012.
5 In the event a party "opted in" to the FoFA regime prior to 1 July 2013, that earlier date will apply.
6 Pursuant to s1528 of the Corporations Act 2001 and Regulation 7.7A.16 of the Corporations Regulations 2001.
7 The Corporations Act 2001 and the Corporations Regulations 2001.