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ASIC has released guidance on its approach to administering the conflicted remuneration provisions of Part 7.7A of the Corporations Act 2001 (Act): Regulatory Guide 246 (RG 246). These provisions generally apply to benefits given or accepted under arrangements entered into on or after 1 July 2013 (however, there are proposed changes to grandfathering, discussed below). This note discusses some of the key points of RG 246.
What is conflicted remuneration?
Section 963A of the Act provides that:
Conflicted Remuneration means any benefit, whether monetary or non-monetary, given to a licensee or their representative, 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 financial services licensee and its representatives must not accept conflicted remuneration: s.963H. Product issuers and sellers may not give conflicted remuneration: s.963K. In addition, employers of an AFS licensee or representative may not give their AFS licensee or representative employees conflicted remuneration for work they carry out as an employee: s.963J.
Volume-based benefits (i.e. benefits related to the number or value of financial products recommended or acquired) are presumed to be conflicted remuneration: s.963L.
Part 7.7A of the Act also deals with other types of remuneration:
Some of the key points discussed in RG 246 are:
For example, where the increased use of the platform or other product would increase the benefit given to the AFS licensee (e.g. management fees for the product) and thus the benefit is volume based, the onus will be on the AFS licensee to rebut the presumption in s.963L and show that the volume-based benefits are not conflicted remuneration: RG 246.99. The licensee can do this by showing that the benefit could not reasonably be expected to influence the advice given. If the benefit is not volume based, it is still conflicted remuneration if the benefit could reasonably be expected to influence the advice given.
ASIC's position seems to relate only to the situation where one AFS licensee entity provides both advice services and products, and thus the AFS licensee automatically obtains the benefit of any increase in management fees.
1 So, for example, a benefit that influences a financial adviser to choose to recommend the acquisition of financial products, rather than choosing to provide strategic advice that does not include a product recommendation, can be conflicted remuneration. That is, it is possible for a product-neutral benefit (a benefit that is the same regardless of which financial products a client acquires) to be conflicted remuneration (RG 246.55).
2 In RG 246, an asset fee is a fee paid by a client to a financial adviser, the amount of which is determined by the amount of funds that the adviser holds on the client's behalf.
3 The conflicted remuneration provisions, unlike a number of other provisions of Part 7.7A of the Act, apply to both generaland personalfinancial product advice.
4 In relation to the responsible entity of a registered managed investment scheme, ASIC will also not take action for any breach of s.601FC(1)(k) (which requires, among other things, that all payments made out of scheme property are made in accordance with the Act).
5 Even if the presumption does not apply, because of the exclusions, it is still possible for the benefit to be a volume-based shelf-space fee (RG 246.152).
6 Something is reasonably apparentif it 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: s.964H. RG 246.179 states that this is an objective standard.
7 An AFS licensee or other person may lodge a notice with ASIC electing to comply with Pt 7.7A of the Act before this date, in which case the Pt 7.7A provisions (including conflicted remuneration) will apply from the date specified in the notice.
8 RG 246.207 - RG 246.211.
9 Set out in a Treasury draft Explanatory Statement for the relevant regulations. These proposed changes are mentioned, but not described in detail, in RG 246. ASIC proposes to update RG 246 when they are finalised: RG 246.190.
10 In relation to non-platform operators, clients will be able to increase their interest in an existing managed investment scheme or superannuation scheme without being taken to have acquired a new financial product. This means that non-platform operators will be able to continue to pay conflicted remuneration in relation to clients who increase their exposure to a product that the client held before 1 July 2014.
11 The effect of the anti-avoidance provision is that a person must not, either alone or with other people, enter into or carry out a scheme if (a) it would be concluded that they did so for the sole or non-incidental purpose of avoiding the application of any provision of Pt 7.7A; and (b) the scheme or part of the scheme has achieved - or, apart from s.965, would achieve, that purpose.
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