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Draft Regulations and legislations released for FOFA

By: Jeff Mazzini| Tags:

The Assistant Treasurer has released for public consultation draft regulations and legislation (and accompany explanatory materials) to enact the Government’s announced reforms to the Future of Financial Advice (FOFA) regime. The drafts are the Draft Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014 and the Draft Corporations Amendment (Streamlining of Future of Financial Advice) Regulation 2014.

Senator Sinodinos said although the Government was supportive of the FOFA principles, the previous Government’s reforms were “unwieldy, burdensome and unnecessarily complex”. He said the proposed changes “will reduce the burden on industry and pressures on the cost of advice to consumers”.

Consistent with its announcement on 20 December 2013, Senator Sinodinos said the Government’s key amendments include:

  • removing the opt-in requirements – that is, removing the need for clients to renew their ongoing fee arrangement with their adviser every two years;
  • making the requirement for advisers to provide an annual Fee Disclosure Statement (FDS) only applicable to clients who entered into their arrangement after 1 July 2013. The Government has committed to making the annual FDSs prospective only. In other words, an FDS will only need to be sent to clients charged an ongoing fee during a period of 12 months or more who entered into the arrangement after 1 July 2013. It will not be required for arrangements entered into prior to 1 July 2013;
  • removing para 961B(2)(g) of the Corporations Act, the “catch-all” provision, from the list of steps an advice provider may take in order to satisfy the best interests obligation. The existing law requires advice providers to act in their client’s best interests when providing personal advice. Subsection 961B(2) of Corporations Act lists a number of steps that an adviser may take in order to satisfy the best interests duty (commonly referred to as the “safe harbour”). It consists of seven parts including a “catch-all” provision, which states that a provider must prove that they have “taken any other step [in addition to the six preceding ones] that … would reasonably be regarded as being in the best interest of the client”. The Government has committed to removing the catch-all provision. This will mean advisers need only satisfy the remaining six parts of the safe harbour;
  • explicitly allowing for clients and advisers to agree on the scope of any scaled advice provided. Scaled advice is advice about a specific area of a client’s needs, such as insurance or superannuation;
  • exempting general advice from the ban on conflicted remuneration. The ban will continue to apply to benefits given to a licensee or a representative that could reasonably be expected to influence the personal advice provided or the financial products recommended to a retail client in the course of providing personal advice. Other changes concerning the conflicted remuneration ban include: 
   – the ban on conflicted remuneration will only apply to monetary benefits paid in relation to life risk insurance products inside superannuation in circumstances where no personal financial advice about life risk insurance has been provided, or where coverage is provided in relation to MySuper;   
   – the execution-only exemption will be expanded so that it applies where no advice has been provided to the client by the individual performing the execution service in the previous 12 months; 
   – the exemption from the ban on conflicted remuneration for the provision of training will be expanded to include broader forms of training relevant to a financial services business; and
  • amending grandfathering to allow for adviser movements. The Draft Corporations Amendment (Streamlining of Future of Financial Advice) Regulation 2014 proposes amendments to the grandfathering arrangements. The grandfathering arrangements provide that certain benefits given under arrangements (typically between product issuers and licensees) entered into prior to the application day of the ban on conflicted remuneration and that relate to clients who had interest in the relevant platform or product prior 1 July 2014 are not subject to Div 4 of Part 7.7A of the Act. The Draft regulations propose to insert a new sub-regulations 7.7A.16A(5A) to clarify that when a business is sold (and that business is acting in the capacity of a platform operator), the rights to the grandfathered benefits are transferred to the purchaser, who can then receive the ongoing benefit. The purchaser may therefore acquire the same rights to the grandfathered benefits that the seller held prior to the sale taking place. Proposed new sub regulations 7.7A.16B(4A) would have same effect as 16A(5A) except that it would refer to the sale of businesses which are not acting in the capacity of a platform operator. In addition, proposed sub regulations 7.7A.16B(5A) would provide that when a retail client elects to switch from the growth phase to the pension phase within the same superannuation interest, this will not be treated as the acquisition of a new financial product for the purposes of reg 7.7A.16B. This would allow grandfathered benefits to continue to accrue where the client held the superannuation interests prior to 1 July 2014 and made the election after this date.

The Government says its approach is that time sensitive FoFA amendments will be dealt with through regulations, to the extent allowed under the relevant regulation-making powers, and then locked into legislation. Consequently, the removal of the opt-in requirement, changes to FDSs, removal of the “catch-all” provisions under the best interests obligation, the facilitation of the provision of scaled advice and the clarification of the meaning of “intra-fund” advice will all be implemented via regulation, and subsequently repealed once the proposed changes receive Royal Assent. The changes to the ban on conflicted remuneration will also be implemented via regulation; however, some changes will not be subsequently locked into legislation, such as the stockbroking-related exemptions and the grandfathering arrangements for the ban.

Until the amendments are in place, and consistent with ASIC’s stance during the introduction of other major policy reforms, ASIC announced on 20 December 2013 that it would take a facilitative approach to the FoFA reforms until mid-2014. In light of this approach, ASIC will not take enforcement action in relation to the specific FoFA provisions that the Government is planning to repeal. For example, ASIC will not take action for breaches of the section which requires FDSs to be provided to retail clients with ongoing fee arrangements entered into before 1 July 2013. However, the Government says ASIC’s stance does not remove a client’s right to take private action against a provider in the event they feel they are disadvantaged.

The Government intends that the regulations be made at the end of March 2014 and that a Bill be introduced in Parliament during the 2014 Autumn sitting period with passage scheduled for the Winter sitting period.

Proposed date of effect

The amendments will commence on the day after the Bill receives the Royal Assent.

  • The removal of the “opt-in” requirement will apply in relation to an ongoing fee arrangement for those renewal notice days for the arrangement that occur on or after the day after Royal Assent.
  • The changes to FDSs will apply in relation to an ongoing fee arrangement for those disclosure days for the arrangement that occur on or after the day after Royal Assent.
  • The removal of the “catch-all” provision, and the changes to the operation of scaled advice, will apply to personal advice provided on or after the day after Royal Assent.
  • The exemption of general advice from the ban on conflicted remuneration, and the changes to the ban on volume-based shelf-space fees, will apply to benefits given on or after the day after Royal Assent, that are not otherwise grandfathered.

Comments

Comments are due by 19 February 2014 and should be sent to: 
General Manager, Retail Investor Division, The Treasury, Langton Crescent, PARKES ACT 2600; Email: futureofadvice@treasury.gov.au. 
Enquiries should be directed to Bede Fraser on (02) 6263 3555 or Xenia Stathopoulos on (02) 6263 3209.

Source: Assistant Treasurer’s media release, 29 January 2014


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