The Assistant Treasurer and Minister for Financial Services and Superannuation has released an Exposure Draft of the Corporations Amendment (Future of Financial Advice) Bill 2011 as the first tranche of draft legislation of the Future of Financial Advice (FOFA) reforms for public consultation.
The first tranche of the draft Bill covers a number of key components of the FOFA reforms, including opt-in, the best interest duty and the increase in ASIC’s powers to enforce the new elements of these reforms.
The second tranche, which will be release for public consultation soon, will include the ban on conflicted remuneration (covering commissions
and volume payments), the ban on ‘soft dollar’ benefits, the ban on asset-based fees (when there is gearing), and the definition of intra-fund advice.
The Assistant Treasurer will also be announcing at that time his decision on the replacement of the accountants’ exemption.
Treasury will release a public consultation paper by the end of the year on restricting the term ‘financial planner’ in the Corporations Act.
First tranche
The best interest duty requires financial planners and advisers to act in the best interests of the client, and to give priority to the interests of the client in the event of conflict between the interests of the client and the interests of the individual providing the advice, or their employer.
The draft Bill also includes an obligation on licensees to take reasonable steps to ensure their representatives’ compliance with the best interests obligations. Further, there is an exemption created for authorised representatives, so they do not breach the obligations in situations where the breach resulted from reasonable reliance by the authorised representative on information or material provided by the licensee.
The penalty for breaches of the obligations by the authorised representative or licensee will have a maximum penalty of $250,000 for individuals and $1 million of corporate entities.
Amendments are also made to the existing requirements in the Corporations Act to have a reasonable basis for advice and to warn clients in particular situations.
Opting-in
The ‘opt-in’ measure requires a financial adviser or planner who charges on-going fees to send a renewal (‘opt-in’) notice every two years to new clients, as well as an annual fee disclosure statement to all clients including the dollar amount of fees.
The opt-in will apply to new clients from 1 July 2012.
If the client does not renew the adviser’s services by ‘opting in’ to the renewal notice, they are assumed to have opted out and an ongoing advice fee can no longer be charged. The client is also entitled to recoup any ongoing fees that are charged in the event that the adviser fails to send either a fee disclosure or renewal notice. Only those advisers intending to charge ongoing advice fees to retail clients need to provide the notices.
Enhancements to ASIC’s powers
The draft Bill contains provisions to enhance the ability of the Australian Securities and Investments Commission (ASIC) to supervise the financial
services industry through changes to its licensing and banning powers.
These amendments include:
•A change to the level at which ASIC can refuse or cancel or suspend a licence when a person is likely to contravene its obligations;
•An extension to the statutory tests so that ASIC can ban a person who is not of good fame and character or not adequately trained or competent to provide financial services (in essence they are not a fit and proper person);
•A change to the banning threshold so that ASIC can ban a person if they are likely to contravene a financial services law; and
•Clarification that ASIC can ban a person who is involved, or is likely to be involved, in a contravention of obligations by another person.
Treatment of insurance commissions
The Government will ban up-front and trailing commissions and like payments for individual and group life insurance in all superannuation products (including both Default/MySuper products and Choice products) and to commissions on any life insurance policies in a Default/MySuper product from 1 July 2013. This means that commissions on individual life insurance policies within superannuation would only be allowable on Self Managed Superannuation Funds and Choice products.
By 1 July 2013 the industry will be required to unbundle disclosure so the dollar and percentage value of commissions are disclosed for all new and renewed policies. This will enable customers to see the impact of commissions on their premiums.
A claw-back provision enables life insurance companies to recover some or all of the commission paid if a policy turns over early.
Extension of ban on soft dollar benefits
The Government has announced an extension of the ban on soft dollar benefits to include non investment linked life insurance outside of superannuation (but not general insurance) in addition to a ban on retail investment financial products and life insurance within superannuation.
The ban on conflicted remuneration (including the ban on commissions) will not apply to existing contractual rights of an adviser to receive ongoing product commissions.
This means that, in relation to trail commissions on individual products or accounts, any existing contract where the adviser has a right to receive a trail commission will continue after 1 July 2012, or in the case of certain risk insurance policies in superannuation, 1 July 2013.
This would mean that an adviser could not accept a soft dollar benefit unless it explicitly relates to a general insurance product, or is otherwise permissible according to legislation and/or regulations.
Application of the reforms to stockbrokers
The Assistant Treasurern has clarified that there will be a carve-out to allow “stamping fees” or similar payments relating to capital raising in order to preserve an important channel for companies to continue accessing the retail investor market in order to raise capital.
Employee brokers can continue to be remunerated on the brokerage they generate, including where their remuneration is set as a percentage share of the firm’s income from broking fees.
The Assistant Treasurer confirmed that other aspects of the reforms, including the obligation to act in the best interests of clients, would have full application to brokers where they provide financial advice to retail clients.
Grandfathering of existing arrangements
Following legal advice from the Australian Government Solicitor, the Government has determined that the ban on conflicted remuneration (including the ban on commissions) will not apply to existing contractual rights of an adviser to receive ongoing product commissions.
This means that, in relation to trail commissions on individual products or accounts, any existing contract where the adviser has a right to receive a trail commission will continue after 1 July 2012, or in the case of certain risk insurance policies in superannuation, 1 July 2013. This means that trail commissions will continue to be paid in these circumstances.
However, it is proposed that the ban on conflicted remuneration (including volume payments) would have some application to existing trail arrangements from platform operators to licensees or dealer groups. The reforms will prohibit future payments to licensees (or their representatives) in respect of new investments through a platform, but will grandfather future payments to licensees (or their representatives) in respect of investments in a platform accumulated prior to 1 July 2012. In short, this means that the level of volume payments from platform providers to dealer groups will ‘crystallise’, and should not increase in size after the commencement of the reforms on 1 July 2012.
In relation to the ongoing fee (or ‘opt-in’) arrangements, this measure will apply prospectively to new arrangements with new clients entered into after 1 July 2012. This means that opt-in will not apply at all to existing clients.
The best interest duty will have full application to anyone providing personal financial advice to retail clients from 1 July 2012.
