Regulations made on 28 June 2013 under the Corporations Amendment Regulation 2013 (No.5) (Regulations) have clarified or confirmed significant matters relating to conflicted remuneration under the Future of Financial Advice (FOFA) reforms, particularly in connection with grandfathering of benefits. The Regulations will provide a degree of certainty to product issuers, platform operators and advisers operating in the post-1 July 2013 regulatory environment.
The Regulations were initially released on 4 March 2013 in draft form for consultation. The final Regulations are generally consistent with those draft Regulations, but some changes clarify how grandfathering is intended to operate.
Key issues dealt with in the Regulations:
For product issuers and other non- platform operators giving benefits that are conflicted remuneration, the position prior to the making of the Regulations was that certain benefits could be indefinitely grandfathered (so that the FOFA conflicted remuneration provisions would not apply to them), as long as they were given under an arrangement entered into before 1 July 2013.2
Under the Regulations, however, the ban on conflicted remuneration will apply to a benefit given by a non-platform operator in relation to the acquisition of a financial product on or after 1 July 2014 for the benefit of a retail client where the benefit relates to a client who did not hold an interest in the relevant financial product before 1 July 2014 (even where the benefit is given under a pre-1 July 2013 arrangement). On this point the Regulations are in substance the same as the draft Regulations released for consultation.
The Regulations also make it clear that, for non-platform operators, benefits that do not necessarily relate to a financial service provided on or after 1 July 2014, and otherwise would be conflicted remuneration, are nevertheless subject to the ban on conflicted remuneration. The explanatory statement to the Regulations gives, as an example, a marketing or sponsorship payment from a product issuer to a licensee that is designed to incentivise the licensee to recommend the issuer's products. Even if such payments do not relate to a specific client (and so are not given in relation to the acquisition of a financial product for the benefit of a retail client) and are paid under a pre-1 July 2013 arrangement, they will still be subject to the ban on conflicted remuneration from 1 July 2014. This Regulation seems to have been included to fill a gap that otherwise would have existed in relation to benefits that do not relate to a specific acquisition of a financial product by a retail client.
The general rule about acquisitions on or after 1 July 2014 is subject to an exception under which grandfathering will continue to apply if, on or after 1 July 2014, a retail client acquires a further interest in a managed investment scheme in which they had an interest before that date.3 This is consistent with the draft Regulations.
A new feature of the final version of the Regulations relates to multi-product offerings, i.e. multiple financial products offered under one Product Disclosure Statement (PDS), where the client can switch between the products. If the benefit is to be paid by the PDS issuer, and the client's account in the multi-product offering was opened before 1 July 2014, then an acquisition of an interest or further interest in any of the financial products in the multi-product offering is not subject to the general rule about acquisitions on or after 1 July 2014.4
For a platform operator acting in that capacity, the Regulations introduce grandfathering for a benefit given by the platform operator under a pre-1 July 2013 arrangement. However, a benefit will not be grandfathered if it relates to an acquisition of a financial product on the instructions of a person who had not given an instruction to the platform operator to open an account before 1 July 2014.
Where a benefit given by a platform operator does not relate to a person who opened an account on the platform before 1 July 2014, the benefit will not be grandfathered from that date (even if there is a pre-1 July 2013 arrangement). As with non-platform operators, this Regulation seems to have been included to fill a gap that otherwise would have existed in relation to benefits that do not relate to a specific acquisition of a financial product by a retail client.
For both platform operators and non-platform operators, the Regulations provide that, even if there is a change of a party to a pre-1 July 2013 arrangement, the arrangement is taken to have continued in effect for the purposes of grandfathering arrangements. The explanatory statement to the Regulations notes, however, that restructuring simply in order to continue or increase grandfathered payments may attract the operation of the anti-avoidance provision (s.965 of the Corporations Act 2001). Further, if the changes to an arrangement extend beyond a change to a party, the parties will need to give consideration to whether the changes are sufficiently material to trigger a new arrangement.
If a pre-1 July 2013 arrangement is terminated because the arrangement provided for the giving of remuneration that would not be permissible under FOFA, a benefit will be grandfathered if it is paid under a new arrangement entered into after 1 July 2013, provided that the only difference to the post 1 July 2013 arrangement is that it does not provide for the prohibited remuneration. This is a new feature of these final Regulations that was not included in the draft of the Regulations released for comment in March 2013. This part of the Regulations should not be required for those arrangements that are documented under an agreement (or deed) that includes a clause that operates to sever any illegal or offending provisions from the agreement (or deed); absent other considerations, parties would, presumably, simply rely on the severance clause to eliminate the offending provision from the agreement, instead of entering into a new agreement (or deed) after 1 July 2013.
A significant new provision in the Regulations relates to pass through benefits. This provision is intended to ensure that, if a licensee receives conflicted remuneration that is paid under grandfathering provisions, it can pass that remuneration on (e.g. to its representatives) without being subject to the ban on conflicted remuneration, as long as the benefit passed on was given under a pre-1 July 2013 arrangement. The benefit passed through must be consistent with the purposes of the arrangement under which the grandfathered benefit is paid. Further, the total amount, as passed through, must not exceed 100 percent of the grandfathered benefit.5 If these conditions are met, the benefit is not conflicted remuneration. This provision should provide some certainty in relation to arrangements where, for example, a product issuer gives conflicted remuneration to a dealer group under a pre-1 July 2013 arrangement, and the dealer group then passes on the remuneration to its representatives who provide retail client advice and who were not parties to the arrangement. It seems likely that, without these Regulations, the payment of the conflicted remuneration from the dealer group to its representatives would have been caught by the conflicted remuneration provisions.
Briefly, other matters dealt with under the Regulations are:
Confirmation that benefits are excluded from the ban on conflicted remuneration if they are given to a financial services licensee (or its representative) in relation to the purchase or sale of a financial advice business under "buyer of last resort" arrangements. This applies where the price of the business is calculated using a formula that is based on the number or value of financial products held by clients, and in which the weighting attributed to the financial products issued by the licensee or related body corporate or another person is the same as the weighting attributed to other similar financial products; and
Additional detail in relation to the circumstances in which, because of grandfathering, the FOFA conflicted remuneration provisions will not apply to benefits given under a remuneration arrangement between an employer and an employee. Separate arrangements are provided for benefits given under an enterprise agreement (or collective agreement-based transitional instrument) and benefits given under an agreement that is not a collective agreement.
1 The grandfathering provisions deal differently with platform operators and persons who are not platform operators that give conflicted remuneration. A platform operator is a financial services licensee or RSE (Registrable Superannuation Entity) licensee that offers to be the provider of a custodial arrangement. A custodial arrangement is an arrangement where the client may instruct the platform operator to acquire certain financial products, and then the products are either held on trust for the client, or the client retains some interest in the product.
2 This note assumes that the relevant application day for the commencement of the conflicted remuneration provisions is 1 July 2013, although it was possible for persons subject to FOFA to opt-in to FOFA so that its provisions would apply to them prior to that date.
3 The draft regulations also dealt with superannuation products, however the explanatory statement to the Regulations now indicates that superannuation is covered by s.761E(3A) of the Corporations Act 2001, under which the making of a further contribution to a superannuation product of which the client is already a member is not the issue of a financial product.
4 In addition to this, the explanatory statement makes it clear that in relation to financial products generally, if the client can change the nature of their interest without this resulting in the acquisition of a different underlying product, this will not cause grandfathering to cease (e.g. switching between investment options within a managed investment scheme).
5 According to the explanatory statement, this is intended to exclude any GST attached to the actual payment of benefit.
The past year has undoubtedly been challenging for companies in the lithium, rare earth and critical minerals sectors. To provide some context, lithium carbonate, lithium hydroxide and spodumene...
Recent cases have highlighted whether an ASX-listed entity must make a market disclosure to the ASX if it receives a confidential compulsory investigation notice under section 155 of the...
In recent years, several cases have involved a party seeking preliminary discovery against another party to determine whether to commence proceedings against that party for conduct that breaches...