Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2010-2011-2012
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
CORPORATIONS AMENDMENT (FURTHER FUTURE OF FINANCIAL ADVICE
MEASURES) BILL 2011
REPLACEMENT EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Minister for Financial Services and Superannuation, the Hon Bill Shorten MP.)
THIS MEMORANDUM REPLACES THE EXPLANATORY MEMORANDUM
PRESENTED TO THE HOUSE OF REPRESENTATIVES ON
24 NOVEMBER 2011
Table of contents
Glossary .................................................................................................. 1
General outline and financial impact ....................................................... 3
Chapter 1 Best interests obligations ............................................... 5
Chapter 2 Conflicted remuneration and other banned
remuneration................................................................ 23
Chapter 3 Regulation impact statement ....................................... 43
Index ..................................................................................................... 77
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
ADI Authorised deposit-taking institutions
ASIC Australian Securities and Investments
Commission
Bill Corporations Amendment (Further Future of
Financial Advice Measures) Bill 2011
Corporations Act Corporations Act 2001
FOFA Future of Financial Advice
Licence Australian Financial Services Licence
Licensee Holder of an Australian Financial Services
License
PJC Inquiry Inquiry into Financial Products and Services
in Australia by the Parliamentary Joint
Committee on Corporations and Financial
Services (2009)
SIS Act Superannuation Industry (Supervision) Act
1993
1
General outline and financial impact
Outline
On 26 April 2010, the then Minister for Financial Services,
Superannuation and Corporate Law, the Hon Chris Bowen MP,
announced the Future of Financial Advice (FOFA) reforms.
The FOFA reforms represent the Government's response to the 2009
Inquiry into Financial Products and Services in Australia by the
Parliamentary Joint Committee on Corporations and Financial Services
(PJC Inquiry), that considered a variety of issues associated with
corporate collapses, including Storm Financial and Opes Prime.
The Corporations Amendment (Further Future of Financial Advice
Measures) Bill 2011 (the Bill), along with the Corporations Amendment
(Future of Financial Advice) Bill 2011, implements the FOFA reforms.
The reforms focus on the framework for the provision of financial advice.
The underlying objective of the reforms is to improve the quality of
financial advice while building trust and confidence in the financial advice
industry through enhanced standards which align the interests of the
adviser with the client and reduce conflicts of interest. The reforms also
focus on facilitating access to financial advice, through the provision of
simple or limited advice. To this end, the Bill sets up a framework with
the following features:
· a best interests obligation for financial advisers requiring
them to act in the best interests of their clients and to place
the interests of their clients ahead of their own when
providing personal advice to retail clients (best interests
obligation);
· a ban on conflicted remuneration (including product
commissions), where licensees or their representatives
provide financial product advice to retail consumers;
· a ban on volume-based shelf-space fees from asset managers
or product issuers to platform operators; and
· a ban on asset-based fees on borrowed amounts.
The reforms also include a requirement for ongoing advice fees to be
actively renewed by retail clients every two years, and an enhancement of
ASIC's powers to deal with unscrupulous operators. These measures are
3
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
contained in the Corporations Amendment (Future of Financial Advice)
Bill 2011.
It should be noted that the Rice Warner research referred to in the attached
Regulatory Impact Statement was updated in January 2012 to take account
of policy changes made since the research was conducted in March 2010.
Rice Warner now estimates that total adviser employment will be 17,068
at 30 June 2022 compared to 17,711 at 30 June 2012.
Date of effect: The reforms commence on 1 July 2012. In some
circumstances, under grandfathering arrangements included in the Bill, the
proposed provisions in Divisions 4 and 5 of Part 7.7A banning certain
kinds of remuneration do not apply to remuneration provided after
commencement under arrangements entered into before commencement.
Regulations may prescribe circumstances in which the provisions do
apply to such remuneration and do not apply to other kinds of
remuneration.
Proposal announced: On 26 April 2010, the then Minister for Financial
Services, Superannuation and Corporate Law, the Hon Chris Bowen MP,
announced the Future of Financial Advice (FOFA) reforms.
On 28 April 2011, further detail on the operation of the FOFA reforms
was announced by the Assistant Treasurer and Minister for Financial
Services and Superannuation, the Hon Bill Shorten MP.
Financial impact: This Bill has no significant financial impact on
Commonwealth expenditure or revenue.
4
Chapter 1
Best interests obligations
Outline of chapter
1.1 Schedule 1 to the Corporations Amendment (Further Future of
Financial Advice Measures) Bill 2011 (the Bill) amends the Corporations
Act 2001 (Corporations Act) to require persons providing personal advice
to retail clients to act in the best interests of the clients and to give priority
to the interests of the client. Schedule 1 also amends existing regulatory
requirements so they apply more directly to individual advisers.
[Schedule 1, item 23, Division 2]
Context of amendments
1.2 Under the structure of the financial advice industry in Australia,
individuals involved in the provision of personal advice to retail clients
may receive remuneration from parties other than the client. The most
common example of such a form of non-client remuneration is a
commission paid from a product provider to a financial adviser, in
situations where a client of the adviser acquires a product from the
product issuer.
1.3 The Corporations Act does not currently prohibit such non-client
remuneration, but it implicitly recognises its ability to influence the
provision of financial advice to clients. Given this, the Corporations Act
requires licensees to have adequate arrangements in place to manage
conflicts of interests (paragraph 912A(1)(aa)) and for information about
remuneration and interests that are capable of influencing the advice to be
disclosed to clients through the statement of advice (section 947B when
the statement of advice is provided by licensees and section 947C when
the statement of advice is provided by the authorised representative). In
addition, the Corporations Act places an obligation on licensees and
authorised representatives to ensure that the advice is appropriate for the
client (section 945A).
1.4 However, there are no provisions in the Corporations Act that
require a financial adviser to act in the best interests of the client or to
give priority to the interests of the client when providing advice. This
means that as long as the advice meets the standard of being appropriate
and the necessary disclosures have been made, the adviser is not
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Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
prohibited by the Act from giving advice that benefits the adviser rather
than, and in preference to, the client.
1.5 In its report on Financial Products and Services in Australia, the
Parliamentary Joint Committee on Corporations and Financial Services
(PJC) recommended a `duty on financial advisers requiring them to place
their clients' interests ahead of their own'. Further, the PJC noted `[t]here
is no reason why advisers should not be required to meet this professional
standard, nor is there any justification for the current arrangement
whereby advisers can provide advice not in their clients' best interests, yet
comply with section 945A of the Corporations Act'.
1.6 In response to this recommendation, the Government announced
in April 2010 that it would introduce a statutory duty to require financial
advisers to act in the best interests of their clients. The duty would also
clarify that in no circumstances is it permissible for advisers to place their
own interests ahead of their clients' interests.
1.7 In addition, the amendments aim to address concerns that the
existing regulatory obligations in relation to the provision of financial
advice impose requirements on licensees and authorised representatives
rather than on the individual providing the advice. In situations where
advice was provided that breached these requirements (for example, the
advice was inappropriate contrary to section 945A), while action could be
taken against the relevant licensee or authorised representative, it was
difficult to take action against the individual adviser.
Summary of new law
1.8 The Bill amends the Corporations Act to require individuals
who provide personal advice to retail clients to:
· act in the best interests of the client in relation to that advice,
and sets out a number of reasonable steps that may be taken
as complying with the duty; and
· give priority to the interests of the client in the event of
conflict between the interests of the client and the interests of
either the individual providing the advice, the licensee, or the
authorised representative (or any associate of these entities).
1.9 In addition, the Bill replaces the existing requirements in the
Corporations Act to have a reasonable basis for providing advice
(section 945A) and to warn clients if the advice is based on incomplete or
inaccurate information (section 945B) with new provisions in order to:
6
Best interests obligations
· clarify the relationship between the new best interest
obligations and these requirements; and
· impose these requirements on the individual who provides
the advice.
1.10 In situations where the obligations imposed have been
contravened by an individual adviser, penalties following from that breach
will rest with the relevant licensee or authorised representative. The
individual adviser who contravened the obligation may face
administrative action in the form of a banning order.
1.11 In addition to the obligations directly imposed on individuals
who provide personal advice, the amendments impose a direct obligation
on the licensee to take reasonable steps to ensure the licensee's
representatives comply with their obligations.
Comparison of key features of new law and current law
New law Current law
Statutory obligation for individuals There is no existing statutory
who provide personal advice to act in obligation for individuals who
the best interests of client. provide personal advice to act in the
best interests of clients.
Statutory obligation for individuals There is no existing statutory
who provide personal advice to give obligation for individuals who
priority to the interests of the client in provide personal advice to give
the event of a conflict of interest. priority to the interests of the clients.
Statutory obligation for individuals Statutory obligation on the licensee
who provide personal advice to or authorised representative to ensure
ensure that the advice is appropriate. that the advice is appropriate.
Statutory obligation for individuals Statutory obligation on the licensee
who provide personal advice to warn or authorised representative to warn
clients if the advice is based on clients if the advice is based on
incomplete or inaccurate information. incomplete or inaccurate information.
Penalties for breaching obligations to Penalties for breaching obligations to
give appropriate advice and warn the give appropriate advice and warn the
client are civil penalty provisions. client are criminal in nature.
Statutory obligation on licensees to Statutory obligation on the licensee to
take reasonable steps to ensure their take reasonable steps to ensure
representatives comply with the compliance with the obligation to
obligation to provide appropriate provide appropriate advice only.
advice only.
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Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
Detailed explanation of new law
Preliminary
1.12 The obligations imposed under Division 2 of item 23 apply in
relation to personal advice as defined under the Corporations Act. In
situations where only general advice is being provided, the obligations
under Division 2 will not apply. [Schedule 1, item 23, Division 2,
subsection 961(1)]
1.13 In addition, the application of the obligations is limited to the
provision of advice to retail clients. This is consistent with the broader
Future of Financial Advice reforms where the focus is on advice to retail
clients given the need to ensure a higher standard of consumer protection
for retail clients. Financial advice to wholesale clients is not covered by
the obligations. [Schedule 1, item 23, Division 2, subsection 961(1)]
1.14 The obligations under Division 2 are intended to directly apply
to the individual who is to provide the advice. This individual is referred
to in the Division as the `provider'. [Schedule 1, item 23, Division 2,
subsection 961(2)] An individual may be a provider even if the individual is
a representative of a licensee and is to provide advice on behalf of the
licensee. [Schedule 1, item 23, Division 2, subsection 961(4)] Placing obligations
directly on the individual is a shift from many of the existing provisions in
the Corporations Act where obligations have been imposed at the level of
the licensee or the authorised representative.
1.15 This shift in focus to the individual facilitates administrative
action to stop individual advisers who give poor quality advice from
providing advice in the future (for example, by use of banning orders).
This outcome is more difficult to achieve in situations where the
obligations are imposed only at the level of the licensee or the authorised
representative. The shift also gives individual advisers a clear standard
for them to meet in providing advice. Any penalties flowing from the
breach of an obligation will continue to flow through to the licensee or
authorised representative rather than the individual adviser (unless that
individual is also the licensee or authorised representative).
1.16 In situations where two or more individuals are to provide the
advice, the obligations imposed under Division 2 will apply to both
individuals. This is to avoid any uncertainty in how the obligations apply
in situations where multiple individuals are to provide the advice.
[Schedule 1, item 23, Division 2, subsection 961(3)]
1.17 Where it is not reasonably possible to identify the individual
who is to provide the advice, the obligations will flow onto the person that
8
Best interests obligations
is to provide the advice. This will be a licensee or authorised
representative of a licensee who may be structured as a corporate entity.
[Schedule 1, item 23,Division 2, subsection 961(5)]
1.18 The reforms are also designed to take into account the growing
use of computer programs to deliver advice to clients. In such cases, often
no person, whether individual or artificial, can be said to provide each
individual piece of advice. In this situation, the person that offers the
advice through the computer program is subject to the obligations
imposed in the Division. This person will need to ensure that the
computer program is able to operate in a manner that complies with the
obligations imposed through Division 2. [Schedule 1, item 23, Division 2,
subsection 961(6)]
1.19 In the limited situations where a licensee is to provide advice as
an authorised representative of another licensee, for the purposes of
Division 2, the licensee that is to provide the advice is considered to do
this in its capacity as an authorised representative (not a licensee) and
should be treated accordingly. This is aimed at clarifying the situation
where the licensee is acting under a binder in accordance with section
916E of the existing Corporations Act. [Schedule 1, item 23, Division 2,
section 961A]
Act in the best interests of the client
1.20 Subdivision B, Division 2 of Part 7.7A establishes the
framework for the obligation to act in the best interests of the client.
[Schedule 1, item 23, Division 2, Subdivision B]
1.21 There is a general obligation on providers of advice to act in the
best interests of the client. [Schedule 1, item 23, Division 2, subsection 961B(1)]
This general obligation is supplemented by a provision setting out steps
that, if the provider can prove they have taken, will be taken to satisfy the
general obligation. These steps have been set out based on the specific
conditions under which advisers currently operate. This approach is
needed given the broad nature of a best interests obligation; it may allow a
provider to demonstrate that it has complied with the obligation by
proving it took certain steps.
1.22 The principle guiding the application of the best interests
obligation is that meeting the objectives, financial situation and needs of
the client must be the paramount consideration when going through the
process of providing advice. This principle is embedded in the framework
for the best interests obligation.
1.23 There are steps that providers may prove they have taken to
demonstrate that they have acted in the best interests of the client.
9
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
These steps recognise that
[Schedule 1, item 23, Division 2, subsection 961B(2)]
the requirement to act in a client's best interests is intended to be about the
process of providing advice, reflecting the notion that good processes will
improve the quality of the advice that is provided. The provision is not
about justifying the quality of the advice by retrospective testing against
financial outcomes.
1.24 Whether a provider has acted in the best interest of the client
will be tested according to what would objectively and reasonably be
considered appropriate for the client, as outlined in section 961G (as is the
case under the existing section 945A of the Corporations Act). Issues
around what is expected of providers when faced with a conflict of
interest are dealt with under the obligation to give priority in section 961J.
To a certain extent, the process of providing advice (as regulated in
section 961B), the quality of advice (as regulated in section 961G) and
conflicts of interests (as regulated in section 961J) are interrelated issues.
Together, the provisions operate to implement the policy framework for
ensuring financial advisers act in all circumstances in the best interests of
the client.
1.25 The steps set out in subsection 961B(2) are not intended to be an
exhaustive and mechanical checklist of what it is to act in the best
interests of the client. A provider may be able to demonstrate that it has,
in fact, acted in the best interests of the client under subsection (1),
without having recourse to subsection (2). However, as a general
principle of statutory interpretation, it is expected that the interpretation of
the general obligation in subsection (1) will be informed by the steps set
out in subsection (2). Those steps provide an indication of what, as a
minimum, is expected of providers in order to be considered to have acted
in the best interests of the client. [Schedule 1, item 23, Division 2,
subsection 961B(2)]
1.26 The steps that will be taken to satisfy the best interests
obligation have the notion of `reasonableness' built into them. For
example, they require `reasonable inquiries' to obtain accurate
information from the client, and a `reasonable investigation' into relevant
financial products. This reflects the notion that the type of behaviour that
is expected of providers in order to comply with the duty is behaviour that
is reasonable, given the client's objectives, financial situation and needs.
1.27 The list of steps in subsection (2) that may be taken to satisfy the
best interests obligation includes a number of relatively specific steps
(paragraphs (a) to (f), several of which incorporate a `reasonableness'
element) as well as a more general step (paragraph (g)) requiring the
provider to demonstrate that it has taken any step that would reasonably
be regarded as being in the best interests of the client, given the client's
relevant circumstances, at the time the advice was given.
10
Best interests obligations
1.28 Because subsection 961B(2) affords the provider a means of
demonstrating its compliance with the best interests obligation, it requires
the provider to prove that it has met the requirements of the subsection.
That is, if a provider wishes to rely on subsection (2), the provider must
prove on the balance of probabilities that it took each of the steps in
paragraphs (a) to (g). It remains for the party taking action against the
provider to demonstrate that the provider has failed to satisfy the best
interests obligation under subsection (1), and the provider may challenge
the party taking action on the basis that it has met the requirements of
subsection (2).
1.29 Requiring the provider to demonstrate it has satisfied the steps in
subsection (2) reflects the fact that it is the provider, rather than the client
or the regulator, that is best placed to prove whether or not the steps were
taken. This does not relieve the party taking action for breach of the best
interests duty of the onus of proving non-compliance with that duty.
1.30 Below is an outline of the steps that a provider may demonstrate
were taken, to satisfy the best interests obligation.
Steps that may be taken, together, to satisfy the best interests obligation
1.31 Consistent with the principle outlined above, the starting point is
for the provider to identify the objectives, financial situation and needs of
the client as disclosed to the provider through the client's instructions.
[Schedule 1, item 23,Division 2, paragraph 961B(2)(a)] Identifying the objectives,
financial situation and needs of the client is core to personal advice as
reflected in the definition of personal advice in the Corporations Act.
1.32 From there, the provider must identify the subject matter of the
advice sought by the client. [Schedule 1, item 23, Division 2,
paragraph 961B(2)(b)(i)] This could be a simple process where the client
does not have complex needs or objectives, for example, the client is
seeking advice from bank teller about which deposit account is suitable
given the client's lifestyle.
1.33 However, in some cases, particularly where the client has
complex needs or objectives, it is recognised that clients may not be
immediately able to identify the subject matter of the advice they are
seeking. In these situations, it may be necessary for the provider to enter
into a discussion with the client about what subject matter of advice would
be in their best interests. This can take into account considerations like
how much the client is willing to spend on the advice. However, the
provider cannot enter into a contract to be exempted from this obligation
merely by seeking formal agreement from the client that the subject
matter of the advice that has been given by the provider is what has been
requested by the client and is therefore in the client's best interests. In
11
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
identifying the advice that has in effect been sought by the client
(including advice implicitly sought by the client), the provider must take
into account the client's relevant circumstances.
1.34 This process is designed to accommodate the provision of
limited advice (also referred to as `scaled advice') that only looks at a
specific issue (for example, single issue advice on retirement planning)
and `holistic' advice that looks at all the financial circumstances of the
client. In some situations, the client might prefer to receive more targeted
advice on a matter that is particularly concerning them rather than
comprehensive advice. As long as the provider acts reasonably in this
process and bases the decision to narrow the subject matter of the advice
on the interests of the client, the provider will not be in breach of their
obligation to act in the client's best interests. The scaling of advice by the
provider must itself be in the client's best interests, especially since the
client's instructions may at times be unclear or not appropriate for his or
her circumstances.
1.35 Once the provider has identified the subject matter of the advice
sought by the client, the provider can use this to identify the objectives,
financial situation and needs that would reasonably be considered as
relevant to the subject matter of the advice. This is referred to as the
client's relevant circumstances. [Schedule 1, item 23, Division 2,
paragraph 961B(2)(b)(ii)]
1.36 The provider cannot solely rely on the instructions from the
client, but is also obligated (if it is to demonstrate compliance under
subsection (2)) to make further inquiries in situations where it is
reasonably apparent that the information provided by the client about their
relevant circumstances is incomplete or inaccurate. This is only necessary
if the information is considered relevant to the client's relevant
circumstances; it is not necessary for providers to ensure every piece of
information provided by the client is complete or accurate. [Schedule 1,
item 23, Division 2, paragraph 961B(2)(c)]
1.37 The test for what is reasonably apparent is determined by
reference to what would be apparent to a person with a reasonable level of
expertise in the subject matter of the advice. This is an objective test
based on the specific subject matter of the advice in question and
professional standards in the industry. This means that the test is of a
higher standard when the subject matter of the advice is highly complex
and technical in nature. [Schedule 1, item 23, Division 2, section 961C]
1.38 If, having made reasonable inquiries, it is still reasonably
apparent that the information about the client's relevant circumstances is
incomplete or inaccurate, the provider can still give the advice; however,
the provider is under an obligation to warn the client. [Schedule 1, item 23,
12
Best interests obligations
Division 2, section 961H] If the information provided by the client in relation
to their needs and objectives illustrates the client has unrealistic or
conflicting expectations (for example, the client wants high returns but is
not willing to accept any level of risk), the provider should explain to the
client that their expectations cannot be met and seek further information
from the client about how the relationship should proceed.
1.39 The next step in subsection 961B(2) requires an assessment of
whether the provider has the necessary expertise to provide advice on the
subject matter sought by the client. If the provider does not have this
expertise, the provider must decline to provide that advice. In most cases,
as long as the provider is competent for the purposes of the Corporations
Act to provide advice for that class of financial product, the provider
would satisfy this requirement. However, in the situation where the client
requests advice on a particularly technical or complex aspect of the
financial product, the provider may not have the expertise to provide this
advice even though they are generally competent to provide advice about
that class of product. In this situation, in order to act in the client's best
interests, the provider should decline to provide the advice. [Schedule 1,
item 23, Division 2, paragraph 961B(2)(d)]
1.40 In situations where it is reasonable for a provider to consider
recommending a financial product to the client, the provider must conduct
a reasonable investigation into the financial products that might achieve
those objectives and meet those needs of the client considered relevant to
the advice. The provider must assess the information gathered as part of
the reasonable investigation. [Schedule 1, item 23, Division 2,
paragraph 961B(2)(e)]
1.41 A reasonable investigation into financial products does not
require an investigation into every product that is available on the market,
given that in many cases this would be impractical and costly. The
provider is required to scope their product selection based on the needs
and objectives of their client. The provider is expected to exercise
professional judgement to determine whether this requires going beyond
the provider's approved product list (if the provider operates using such a
list). This is will ultimately depend on the nature and range of products
on their approved product list and the needs and objectives of the specific
client. Additionally, providers should investigate any specified financial
product the client requests be considered. [Schedule 1, item 23, Division 2,
section 961D]
1.42 The next step requires providers to base all judgements in
advising clients on the objectives, financial situation and needs of the
client. This is an explicit statement of the guiding principle, identified
above, that it is the objectives, financial situation and needs of the client
13
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
that is of paramount consideration when acting in the best interests of the
client. [Schedule 1, item 23, Division 2, paragraph 961B(2)(f)]
1.43 In recognition of the myriad of circumstances that could form
the backdrop of the advice, the final step in subsection 961B(2) requires
that the provider take any step, additional to those in paragraphs (a) to (f),
that would reasonably be regarded as being in the best interests of the
client, given the client's relevant circumstances at the time of the advice.
That is, in satisfying this final step, a provider will need to go further than
in the previous more specific steps, and will have to take any step
necessary to demonstrate that it has acted in the best interests of the client.
For example, where a provider with a conflict of interest has made a
financial product recommendation, it should be able to demonstrate that
an adviser with a reasonable level of expertise and without a conflict of
interest would have considered the steps taken reasonable in the
circumstances. This means that, if the provider wishes to rely on
subsection (2), it must demonstrate that it did anything else that it would
reasonably be regarded as being in the best interests of the client to do.
[Schedule 1, item 23, Division 2, paragraph 961B(2)(g)]
1.44 This is an objective standard based on the client's relevant
circumstances, the provider's relevant expertise and the subject matter of
the advice sought. A particular step would reasonably be regarded as
being in the best interests of the client if a person with a reasonable level
of expertise in the subject matter, exercising care and objectively
assessing the client's relevant circumstances would regard it as in the best
interests of the client to take that step. This is in keeping with the broad
obligation in subsection (1) to act in the best interests of the client.
[Schedule 1, item 23, Division 2, section 961E]
1.45 Steps that may reasonably be regarded as being in the best
interests of the client may also be informed by professional standards and
ethics that may be reflected in industry codes and any responses flowing
from the work of the Advisory Panel on Standards and Ethics for
Financial Advisers (the Advisory Panel). The Advisory Panel was
established by the Government in 2010 to provide recommendations to the
Government on professional and ethical standards in the financial product
advice industry, including the possible development of a best practice
guide for persons providing financial product.
1.46 It is important to note that there nothing in the best interests duty
that should be interpreted as prohibiting a provider from charging the
client for the services that have been performed by the provider. Nor
should the best interests duty be interpreted as mandating or prescribing
how much the provider can charge the client. The cost of financial advice
services is ultimately determined by competitive market forces.
14
Best interests obligations
1.47 Further, there is nothing in the best interest obligation that
necessarily prohibits a provider from receiving remuneration other than
from the client (for example, a commission from an insurance provider).
However, a provider in receipt of this remuneration must be able to
demonstrate that it is complying with the steps above and is giving
paramount consideration to the objectives, financial situation and needs of
the client. This Bill also imposes some restrictions on remuneration
received by a provider under the new Division 4 of Part 7.7A (see
Chapter 2).
Arrangements for particular financial products
Basic banking products
1.48 Particular arrangements are established dealing with the
provision of advice solely about basic banking products given by an
employee or agent of an Australian ADI or someone otherwise acting by
arrangement with an ADI under the name of an ADI. [Schedule 1, item 23,
Division 2, subsection 961B(3)]
1.49 Basic banking products are: a basic deposit product or non-cash
payment facility relating to a basic deposit product; a first home saver
account; a travellers' cheque facility; and other products prescribed by
regulation. This provides flexibility to add additional products in the
future if it is considered appropriate for them to fall within this
arrangement, given the constant rate of development in the financial
product market. [Schedule 1, item 23, Division 2, section 961F]
1.50 When an employee or agent of an Australian ADI provides
advice in relation to these products, they are deemed to have complied
with the best interests duty obligation if they:
· identify the objectives, financial situation and needs of the
client;
· identify the subject matter of the advice; and
· make reasonable enquires to obtain further information
relevant to the subject matter of advice if it is reasonably
apparent the information provided by the client is incomplete
or inaccurate.
[Schedule 1, item 23, Division 2, subsection 961B(3)]
1.51 These obligations are based on what is already expected of
providers under the obligation in the existing section 945A of the
Corporations Act to have a reasonable basis for advice. Providers who are
15
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
subject to the provision need not demonstrate compliance with the other
steps mentioned in subsection 961B(2). In particular, the arrangements do
not require a provider to conduct a reasonable investigation. This means
that there is no obligation on providers to consider products outside of
those offered by the ADI for which they are working.
General insurance products
1.52 The arrangements that apply in relation to basic banking
products also apply in relation to the provision of advice solely about
general insurance. The arrangements for general insurance apply
regardless of whether the advice is provided by an employee or agent of a
general insurer or through another source (like an insurance broker). This
is to avoid any regulatory distortion in the provision of advice about
general insurance. [Schedule 1, item 23, Division 2, subsection 961B(4)]
1.53 Basic banking products and general insurance are recognised as
being simple in nature and are more widely understood by consumers.
This means that there is a lower risk of consumer detriment in relation to
the provision of advice on these products. For this reason, a modified best
interests obligation more appropriately balances the benefits to consumers
with the compliance costs to providers.
Regulations
1.54 The regulations can add or remove particular steps, in prescribed
circumstances, that the provider must prove to comply with the
requirement in subsection 961C(1). The regulations may also prescribe
circumstances in which the requirement in subsection 961C(1) does not
apply. It is important for there to be this degree of flexibility around the
more detailed aspects of the best interests obligation because of the
diversity and complexity of the financial services industry. [Schedule 1,
item 23, Division 2, subsection 961B(5)]
1.55 This regulation-making power will allow the legislation to be
updated in a timely manner in the event that the application of a particular
step (or steps) is found to result in undesirable consequences in the light
of advancements in the financial services industry or the provision of
advice in unique and unforeseen circumstances.
Appropriate advice
1.56 The Bill repeals existing section 945A of the Corporations Act
[Schedule 1, item 6] and
introduces provisions dealing with appropriate
advice that take account of the best interest obligations.
[Schedule 1,item 23,Division 2, section 961G]
16
Best interests obligations
1.57 In contrast with existing section 945A, the provision does not
contain the process-related elements in paragraphs 945A(1)(a) and (b) that
have now been incorporated into the steps of the best interest obligation.
This has been done to avoid overlap between the provider's best interest
obligations and the obligation to give appropriate advice. Incorporating
these process elements into the best interest obligation is not intended to
lessen the standard of conduct expected of providers. Providers are still
expected to follow a `know your client' and `know your product' process
in providing advice as is currently required by paragraphs 945A(1)(a)
and (b). The steps required by the best interests obligations are more
expansive than previously required by existing paragraphs 945A(1)(a)
and (b) and would be expected to raise the standard of conduct of
advisers.
1.58 The obligation in relation to appropriate advice is placed directly
on the person that provides the advice rather than the licensee or
authorised representative. Currently only licensees and authorised
representatives are required to comply with existing section 945A. As
noted previously, this change is necessary to ensure that administrative
actions may be taken against providers that fail to comply with the
obligation. The penalties resulting from any breach will flow to the
relevant licensee or authorised representative. [Schedule 1,item 23, Division 2,
section 961G]
1.59 The obligation to give appropriate advice takes direct account of
the best interest obligations. This means that, regardless of whether the
provider has actually complied with its best interest obligations, in testing
whether the advice is appropriate it is assumed that the provider has all the
knowledge that it would have had if it had complied with the best interest
obligation. That is, when a court considers whether advice is appropriate
it will have regard to what the provider would have known had it fully
complied with the best interests obligation. If the appropriate advice
obligation did not make this assumption, providers that did not comply
with their best interest obligations may be held to a lower standard than
providers that do comply. [Schedule 1,item 23, Division 2, section 961G]
Incomplete or inaccurate information
1.60 The Bill repeals existing section 945B of the Corporations Act
[Schedule 1, item 6] and introduces an arrangement for disclosure when the
provider has incomplete or inaccurate information. The amendments
ensure that the disclosure arrangements for incomplete or inaccurate
information are consistent with the best interests obligation. [Schedule 1,
item 23, Division 2, section 961H]
17
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
1.61 As with the other provisions, this obligation is imposed directly
on the provider. The provider is required to warn the client in situations
when, even following any reasonable inquiries made as part of the best
interests obligation, it is reasonably apparent that there is information that
is either incomplete or inaccurate. [Schedule 1, item 23, Division 2,
section 961H]
1.62 For the avoidance of doubt, the provision makes it clear that the
arrangements for disclosure do not reduces or diminish a provider's best
interest obligations, particularly as they relate to the obligation to make
reasonable inquiries to obtain complete and accurate information.
[Schedule 1, item 23, Division 2, subsection 961H(5)]
Priority of interests
1.63 The provider must give priority to the interests of the client in
situations where the provider knows, or reasonably ought to know, there is
a conflict between the interests of the client and the interests of the:
· provider; or
· licensee of whom the provider is a representative; or
· authorised representative that authorised the provider (where
relevant).
[Schedule 1, item 23, Division 2, section 961J]
1.64 The obligation to give priority to the interests of the client also
extends to conflicts arising as a result of the interests of an associate (as
defined in the Corporations Act) of the provider, licensee or authorised
representative. This is designed to prevent the use of related parties as a
means of circumventing the obligation. [Schedule 1, item 23, Division 2,
section 961J]
1.65 However, the obligation is only triggered in situations where the
provider knows, or reasonably ought to know, there is a conflict of
interests. This means that in situations where the provider has no
knowledge of a conflict of interest (for example, because the client did not
disclose a particular interest to the provider), the provider will not be in
breach if it failed to give priority to the interests of the client unless it can
be established that that the provider ought to have known about the
conflict. [Schedule 1, item 23, Division 2, section 961J]
1.66 The obligation to give priority to the interests of the client does
not mean that the provider can never pursue its own interests or the
interests of another party (for example, the licensee). However, the
18
Best interests obligations
provider will breach this obligation if, in pursuing its own interests or the
interests of another party, the provider fails to give priority to the interests
of the client if there is a conflict.
1.67 Consistent with the best interest obligations, there is nothing in
the obligation to give priority to the interests of the client that should be
interpreted as prohibiting a provider from charging the client for the
services that have been performed by the provider. Nor should the
obligation be interpreted as mandating or prescribing how much the
provider can charge the client. The cost of financial advice services is
ultimately determined by competitive market forces.
1.68 Further, a provider does not breach the obligation to give
priority merely by accepting remuneration from a source other than the
client (for example, a commission paid by an insurance provider).
However, if the provider gives priority to maximising a non-client source
of remuneration over the interests of the client, the provider will be in
breach of the obligation. This Bill also imposes some restrictions on
remuneration received by a provider under the new Division 4 of
Part 7.7A (see Chapter 2).
1.69 Providers of advice solely about basic banking products or
general insurance are excluded from the obligation to give priority to the
interests of the client. [Schedule 1, item 23, Division 2, subsections 961J(2) and (3)]
1.70 As outlined in relation to the obligation to act in the best
interests of clients, basic banking products and general insurance are
recognised as being simple in nature and are more widely understood by
consumers. This means that there is a lower risk of consumer detriment in
relation to the provision of advice on these products. For this reason,
exclusion from the obligation to give priority to the interests of the client
more appropriately balances the benefits to consumers with the
compliance costs to providers.
Licensee obligations
1.71 A licensee must take reasonable steps to ensure that its
representatives comply with the obligation to act in the client's best
interest, giving appropriate advice, warning clients and giving priority to
the interests of the client. [Schedule 1, item 23, Division 2, section 961L]
1.72 This is consistent with the general obligation imposed on
licensees under existing paragraph 912A(1)(ca) of the Corporations Act to
take reasonable steps to ensure that its representatives comply with
financial services law. It also reflects the current approach adopted for the
obligation to give appropriate advice in existing section 945A of the
19
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
Corporations Act (prior to the passage of the Bill), where the licensee is
under an obligation to take reasonable steps to ensure an authorised
representative complies with the obligation.
1.73 For example, in the context of the best interests obligations, in
order to take reasonable steps to ensure compliance a licensee would be
expected to explain to providers that they are obligated not to recommend
a product from an approved product list if there is no product on the list
that would meet the needs and objectives of the client. Further, licensees
will need to take positive steps to ensure that providers do comply with
this (for example, through periodic audits of advice given to clients).
1.74 Determining whether there is no product on the approved
product list that would meet the objectives and needs of the client will be
based on the provider's professional judgement, once the provider meets
the client and understands the client's needs and objectives. As the
licensee often does not have direct contact with the client, the licensee
cannot be expected to make this determination. However, the narrower an
approved product list constructed by a licensee is, the more likely it is that
its providers will not be able to recommend a product from that list. This
means that it is in the interests of the licensee to construct approved
product lists that are suited to their target clients.
Penalties and action for loss or damage
1.75 As previously noted, even though most of the obligations in
Division 2 are imposed on the individual that provides the advice, the
penalties resulting from any breach flow through to the relevant licensee
or authorised representative. [Schedule 1, item 23, Division 2, Subdivision F]
1.76 Breaches of any of the obligations in Division 2 may result in a
civil penalty. Although criminal penalties are currently available for the
existing obligations to give appropriate advice (section 945A) and to warn
clients (section 945B), the interrelationship between these obligations and
the best interest obligations imposed in this Bill makes it desirable to have
consistent penalty arrangements. The enforcement arrangements for the
whole of Part 7.7A will be based on civil penalties and provision for
compensation for loss or damage.
1.77 The licensee breaches a civil penalty provision if a
representative, other than an authorised representative, breaches the
obligation to act in the best interests of the client, the obligation to give
appropriate advice, the obligation to warn the client or the obligation to
give priority to the interests of the client. [Schedule 1, item 23, Division 2,
section 961K]
20
Best interests obligations
1.78 Similar penalty arrangements to those that apply to licensees
also apply to authorised representatives. [Schedule 1, item 23, Division 2,
section 961Q] However, given the degree of control that a licensee is
potentially able to exercise over its authorised representative, an
authorised representative does not contravene the requirement in
situations where the breach resulted from reasonable reliance by the
authorised representative on information or material provided by the
licensee. The onus is on the authorised representative to establish that the
exception applies. This is intended to reflect the existing defence
provision available to authorised representatives under
subsection 945A(2) of the Corporations Act. [Schedule 1, item 23, Division 2,
subsection 961Q(2)]
1.79 As noted above, licensees also have a general obligation to take
reasonable steps to ensure that their representatives (including authorised
representatives) comply with their obligations. The penalty for a licensee
that breaches this obligation is the same as the penalty for the obligation
that the licensee failed to take reasonable steps to ensure compliance.
[Schedule 1, item 23, Division 2, section 961L]
1.80 Consistent with the existing section 953B of the Corporations
Act, regardless of whether it is the licensee or authorised representative
that incurs the penalty for a breach of an obligation, a person that suffers
loss or damage resulting from the breach is able to recover that amount
from the licensee. This reflects the fact that, under the Corporations Act,
it is ultimately the licensee that is accountable for the advice that is
provided by one of its representatives, and the Corporation Act imposes
an obligation on licensees -- not representatives -- to have in place
arrangements for compensating clients that suffer loss or damage (see
existing section 912B). [Schedule 1, item 23, Division 2, section 961M]
Application and transitional provisions
1.81 The obligations in Division 2 apply to personal advice provided
to a retail client on or after 1 July 2012, whether or not the request for
advice was made before this date. [Schedule 1, item 33, section 1527]
Consequential amendments
1.82 Existing Subdivision B of Division 3 of Part 7.7 (that contains
sections 945A and 945B) is repealed, as the requirements are replaced by
sections 961G and 961H of Division 2 in item 17. [Schedule 1, item 6] As a
consequence, references to the existing section 945B in
paragraphs 947B(2)(f) and 947C(2)(g) of the Corporations Act are
21
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
updated to refer to section 961H (as this will replace section 945B).
[Schedule 1, items 7 and 8]
1.83 In addition, references to sections 945A and 945B in
paragraph 953B(1)(c) of the existing Corporations Act are removed.
Sections 961G and 961H of Division 2 in item 23 that replace the existing
sections 945A and 945B have their own section dealing with actions for
loss or damage (in section 961M of Division 2 in item 23), and therefore
are not included in section 953B. [Schedule 1, item 9]
22
Chapter 2
Conflicted remuneration and other banned
remuneration
Outline of chapter
2.1 Schedule 1 to the Bill amends the Corporations Act to ban the
payment and receipt of certain remuneration which has the potential to
influence the advice licensees provide to retail clients in respect of certain
financial product advice. [Schedule 1, item 24, Divisions 4 and 5]
Context of amendments
2.2 Australian Financial Services Licensees that provide financial
advice to retail clients are traditionally remunerated differently from many
other occupations. For example, many advisers have traditionally
received commissions from product providers for placing clients with
particular products, often paid as a percentage of funds under
management. Some commissions are ongoing in nature, forming what are
known as `trail' commissions.
2.3 Product commissions may encourage advisers to sell products
rather than give unbiased advice that is focused on serving the interests of
the clients. Financial advisers have potentially competing objectives of
maximising revenue from product sales and providing professional advice
that serves the client's interests.
2.4 There is some evidence that these conflicts affect the quality of
advice. The 2006 Shadow Shopping exercise of the Australian Securities
and Investments Commission (ASIC) found that advice that was clearly or
probably non-compliant was around six times more common where the
adviser had an actual conflict of interest over remuneration. The conflict
of interest may lead to advice that is not compliant and not in the client's
interests.
2.5 In its 2009 report the PJC noted that the ineffectiveness of
current disclosure of conflicts, and conduct rules that allow an adviser to
favour their own interests over the interests of clients, are more likely to
lead to sub-optimal investment strategies or excessive fee arrangements
than to catastrophic outcomes for investors.
23
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
2.6 In its report, the PJC noted it received considerable evidence
suggesting that the most effective way to improve the quality of financial
advice for consumers is to remove conflicts altogether by banning
commissions and other conflicted remuneration practices. In responding
to the PJC report, the Government decided that product commissions
should be banned, the guiding principle being that the interests of advisers
and clients should be more closely aligned.
Summary of new law
2.7 The Bill amends the Corporations Act to define `conflicted
remuneration' and to ban its receipt and payment in certain circumstances.
The Bill establishes the ban on the receipt by licensees and their
representatives, and on the payment by product issuers or sellers, of
remuneration that could reasonably be expected to influence the financial
product advice given to retail clients.
2.8 The ban on conflicted remuneration includes a ban on both
monetary and non-monetary (soft-dollar) benefits. In relation to monetary
benefits, there are areas that the ban on conflicted remuneration does not
apply to:
· general insurance;
· life insurance which is not bundled with a superannuation
product;
· individual life policies which are not connected with a
default superannuation fund; and
· execution-only (non-advice) services.
2.9 In relation to non-monetary benefits, there are also areas that the
ban on conflicted remuneration does not apply to:
· general insurance;
· benefits under the amount prescribed in regulations
(proposed to be $300), so long as those benefits are not
identical or similar and provided on a frequent or regular
basis;
· benefits for education and training purposes or information
technology (IT ) software or support, which meet the criteria
prescribed in the regulations; and
24
Conflicted remuneration and other banned remuneration
· benefits in relation to execution-only (non-advice) services.
2.10 The Bill bans certain product commissions to financial advisers
and their dealer groups, as well as volume rebates from platform operators
to dealer groups. It also bans volume-based shelf-space fees from funds
managers to platform operators, and the charging of asset-based fees to
retail clients on borrowed amounts.
Comparison of key features of new law and current law
New law Current law
Licensees must not accept There is no existing statutory
remuneration which could reasonably prohibition on advisers from
be expected to influence the financial receiving conflicted remuneration.
product advice or recommendations Relevant information about advisers'
provided to retail clients (with the remuneration (including
exception of certain insurance or commissions) is required to be
execution-only services). disclosed, including in the initial
Statement of Advice provided to the
retail client.
Licensees must not accept soft-dollar There is no existing statutory
benefits over the prescribed amount prohibition on advisers from
that could reasonably be expected to receiving soft-dollar benefits. There
influence the financial product advice are disclosure obligations. Various
or recommendations provided to industry codes also self-regulate in
retail clients (with the exception of this area to some extent.
certain insurance or execution-only
services, and excepting certain
benefits for education or training
purposes, and certain information
technology benefits).
Employers of financial services There is no existing statutory
licensees (or their representatives) prohibition on employers paying
must not pay the licensee or its conflicted remuneration to licensees
representatives conflicted or their representatives. Employers
remuneration. can currently pay incentives to
advisers to sell a certain type or a
certain volume of products.
Product issuers or sellers must not There is no existing statutory
provide conflicted remuneration to prohibition on product issuers from
licensees or their representatives. paying conflicted remuneration to
licensees or their representatives.
Various industry codes purport to
self-regulate in this area to some
extent.
25
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
Volume rebates paid by platform There is no existing statutory
operators to licensees will be banned. prohibition on platform-licensee
rebates.
Licensees and platform operators There is no existing statutory
must not accept volume-based fees prohibition on the receipt of
the purpose of securing `shelf-space' volume-based shelf-space fees.
on an adviser's or platform's product
list.
Advisers must not charge asset-based There is no existing statutory
fees (fees dependent upon the amount prohibition on the charging of
of funds held or invested) to a retail percentage-based fees to retail clients.
client to the extent that the amount is
borrowed.
Detailed explanation of new law
Preliminary
2.11 Like the obligations to be imposed by the new Division 2 of
Part 7.7A, where a licensee is to provide advice as an authorised
representative of another licensee, for the purposes of Division 4 the
licensee that is to provide the advice is considered to do this in the
capacity of an authorised representative (not a licensee) and should be
treated accordingly. This is aimed at clarifying the situation where the
licensee is acting under a binder in accordance with section 916E of the
existing Corporations Act. [Schedule 1, item 24, Division 4, section 963]
2.12 Unlike the obligations in Division 2, the provisions in Division 4
apply to both personal and general advice. This reflects the fact that,
while it is not in the nature of general advice for the provider to take the
kinds of steps envisaged by the best interests duty, the provision of
general advice may still be susceptible to influence by conflicted
remuneration.
Conflicted remuneration
2.13 The Bill broadly defines the term `conflicted remuneration' and
proceeds to outline those persons who should not accept or pay conflicted
remuneration. [Schedule 1, item 24, Division 4]
2.14 Conflicted remuneration means any monetary or non-monetary
benefit given to a licensee or representative that could reasonably be
expected to influence financial product advice, by either influencing the
choice of financial product being recommended or by otherwise
influencing the financial product advice more generally. [Schedule 1,
26
Conflicted remuneration and other banned remuneration
It is recognised that a broad range of benefits could be
item 24, section 963A]
interpreted as possibly influencing advice. However, benefits which
would only have a remote influence on advice will not be caught.
2.15 If an activity does not involve providing financial product advice
within the meaning of section 766B of the Corporations Act, then benefits
given in relation to that activity cannot be conflicted remuneration. For
example, section 766B(9) provides that the provision of a Product
Disclosure Statement (PDS) or a Financial Services Guide (FSG) does not
constitute the provision of financial product advice (except in prescribed
circumstances (regulation 7.1.08(1))). As such, benefits given in relation
to the provision of a PDS or FSG to a retail client cannot be conflicted
remuneration.
2.16 The concept of conflicted remuneration covers a broad range of
monetary and non-monetary benefits, covering both traditional product
commissions, volume payments from platform operators to financial
advice dealer groups, and `soft-dollar' (non-monetary) benefits.
2.17 Section 963L sets up a statutory presumption that certain kinds
of benefits are conflicted remuneration, unless the contrary is proved. The
kinds of benefits included in this section relate to the volume of financial
products recommended or funds invested. The list of volume-based
incentives presumed to be conflicted remuneration includes benefits
which are dependent on:
· the value of financial products of a particular class
recommended or acquired; and
· the number of financial products of a particular class
recommended or acquired.
[Schedule 1, item 24, Division 4, section 963L]
2.18 Where a volume-based payment of this kind is made,
section 963L requires the party alleged to have paid or accepted conflicted
remuneration to prove that the payment is not conflicted remuneration.
That is, if that party has paid or received a volume-based benefit of the
type described, it will have to demonstrate that, in the circumstances, the
benefit was not in fact conflicted remuneration.
2.19 In an industry as complex and fast-evolving as the financial
services industry, there are and will always be a wide range of
remuneration arrangements. However, volume-based payments of the
kind described in section 963L appear on the face of it to be inherently
conflicted, since the financial adviser will have a financial incentive to
maximise the value of the payments irrespective of the suitability of the
27
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
products or investments for the client. It would be legislatively
impractical to define and categorise all remuneration arrangements
precisely, and to prescribe in advance which are conflicted and which are
not. Where there are volume-based benefit structures that are not
inherently conflicted, this will be peculiarly within the knowledge of those
paying and receiving the benefits. It is therefore appropriate that those
parties be required to demonstrate that the benefits are not conflicted.
Example 2.1
One licensee (the product provider) provides a white label equity
trading platform to another licensee (the promoter), who labels the
facility as their own and markets the facility to their clients. The
promoter only provides general advice to clients in the form of
independent market reports and analysis and has strong internal
controls to prevent `churning'. The client is charged a product neutral
percentage-based fee on all transactions which is collected by the
product provider. The product provider passes a proportion of that fee
to the promoter. The proportion of the fee that is passed on to the
promoter will be presumed to be conflicted under section 963L
because the fee is volume-based. However, as the scope for influence
in this case is remote, the product provider and promoter are likely to
be able to establish that the payment is not conflicted remuneration.
2.20 The structure of the ban on conflicted remuneration recognises
that employees in the financial services industry are remunerated in a
variety of different ways. It also recognises that performance pay can be
an important part of any remuneration arrangement, and reflects the need
to strike a balance between rewarding performance and avoiding
inappropriate influence over financial advice. This is why the
presumptions in section 963L are linked to the potential influence of the
remuneration over the advice. If an employee is remunerated based on a
range of performance criteria, one of which is the volume of financial
product(s) recommended, the part of the remuneration that is linked to
volume is presumed to be conflicted. However, if it can be proved that, in
the circumstances, the remuneration could not reasonably be expected to
influence the choice of financial product recommended, or the financial
product advice given, to retail clients (section 963A), the remuneration is
not conflicted and is not banned. This will depend on all of the
circumstances at the time the benefit is given or received. Factors that
will be relevant in assessing whether a benefit could reasonably be
expected to influence the advice will include the weighting of the benefit
in the total remuneration of the recipient, how direct the link is between
the benefit and the value or number of financial products recommended or
acquired and the environment in which the benefit is given. For example,
if the benefit was based on the total profitability of the licensee, it was on
a small percentage of the total remuneration of the recipient, and in order
to qualify for the benefit, the recipient must also satisfy other criteria, such
28
Conflicted remuneration and other banned remuneration
as criteria based on consumer satisfaction and compliance with internal
processes and legal requirements, it would be less likely of being able to
influence the recommendations or advice provided to retail clients.
Section 963L provides the industry with the flexibility to maintain broadly
based performance-based remuneration arrangements without
compromising the advice provided to retail clients.
2.21 The volume-based payments described in section 963L are not
an exhaustive definition of what constitutes conflicted remuneration. To
the extent that other benefits, by their nature or circumstances in which
they are given, could reasonably be expected to influence financial
product advice given by the licensee or representative, those benefits will
be considered conflicted and be subject to the obligations under
Division 4. While the presumptions in section 963L all relate to volume,
a benefit need not be volume-based in order to be conflicted remuneration.
For example, any flat payment received by a licensee for product
distribution would, on its face, be conflicted remuneration. [Schedule 1,
item 24, Division 4, section 963A]
2.22 It is noteworthy that although most conflicted remuneration will
be in the form of `payments', the definition is sufficiently broad and will
capture other modes of disseminating `benefits' that conflict advice. In
the context of payments from platform operators to financial advice dealer
groups, volume-based benefits can take numerous forms without
appearing as a discernable payment from one entity to another. For
example, some platform-dealer group arrangements involve a bundled fee
which is paid by the client for administration or trusteeship services as
well as distribution services which is then split between the platform and
dealer group (with distribution to the latter sometimes labelled a
`promoter fee'). To the extent the share of the fee between the platform
and dealer group is dependent on volume (which could reasonably be
expected to influence financial product advice), any volume-based margin
accessed by the dealer group would be treated as conflicted remuneration.
Exceptions from conflicted remuneration
Monetary benefits
2.23 Section 963B sets out monetary benefits given in certain
circumstances which are not treated as conflicted remuneration. The list
contains benefits that would otherwise be caught within the meaning of
conflicted remuneration. [Schedule 1, item 24, Division 4, section 963B]
2.24 A benefit given to the licensee or representative solely in
relation to a general insurance product is not conflicted remuneration.
This ensures that the Bill does not prohibit the payment of monetary
29
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
commissions in the general insurance industry. [Schedule 1, item 24,
Division 4, paragraph 963B(1)(a)]
2.25 In the case of a benefit from a life insurance company to a
licensee or representative, the benefit will not be conflicted remuneration
if it is given in relation to a life risk insurance product other than: a group
life policy for the benefit of members of a superannuation entity; or a life
policy for a member of a default superannuation fund. This ensures that
commissions on group risk inside superannuation are prohibited, and
commissions are also prohibited on any life insurance policies which are
for the benefit of members of a default superannuation fund.
Commissions will still be permissible on individual life risk
(non-investment-linked) policies within superannuation for non-default
(`choice') funds. Commissions will still be permissible on life risk
(non-investment-linked) policies sold outside superannuation. [Schedule 1,
item 24, Division 4, paragraph 963B(1)(b)]
2.26 Monetary commissions or incentive payments in relation to
execution-only sales or issues of financial products (that is, where the
product is sold with no advice having been provided to a retail client in
the past 12 months) are not conflicted remuneration. Where there is
advice, but that advice is provided to someone in their capacity as a
wholesale client only, a monetary commission is not conflicted
remuneration. [Schedule 1, item 24, Division 4, paragraph 963B(1)(c)]
2.27 Where the monetary benefit is given by the client in relation to
the issue or sale of a product or in relation to financial product advice
provided to the client, this is not conflicted remuneration. This ensures
that `fee for service' arrangements -- where the client is the person
paying the adviser -- are not conflicted remuneration (even where the
client pays a volume-based fee). The provision is intended to exclude
from the definition of conflicted remuneration any fee for service paid by
the retail client, whether the benefit is given directly by the retail client or
is given by another party at the direction, or with the clear consent, of the
retail client. [Schedule 1, item 24, Division 4, paragraph 963B(1)(d)]
2.28 Subparagraph 963B(1)(e) creates a regulation-making power to
prescribe a benefit, or circumstances in which a benefit is given, that is
excluded from the definition of conflicted remuneration. [Schedule 1,
item 24, Division 4, paragraph 963B(1)(e)]
2.29 It is proposed to exclude certain stockbroking activities from
being considered conflicted remuneration, by allowing persons
undertaking these stockbroking activities to receive third party
`commission' payments from companies where those payments relate to
capital raising. The precise breadth of the exception would be subject to
further consultation, but it is proposed that the receipt of `stamping fees'
30
Conflicted remuneration and other banned remuneration
from companies for raising capital on those companies' behalf not be
considered `conflicted remuneration' where the broker is advising on
and/or selling certain capital-raising products to the extent that they are
(or will be) traded on a financial market. It is proposed that the exception
would apply to any person authorised to undertake the relevant
stockbroking activities pursuant to the capital raising exception, including
both direct and indirect market participants.
2.30 The regulations will also ensure that the traditional remuneration
arrangements of employee brokers (often paid as a percentage of
brokerage) are not unduly impacted by the conflicted remuneration
measures.
Non-monetary (soft-dollar) benefits
2.31 The Bill includes non-monetary or `soft-dollar' benefits within
the definition of conflicted remuneration. To the extent that a soft-dollar
benefit could reasonably be expected to influence financial product
advice, it will be conflicted remuneration. [Schedule 1, item24, Division 4,
section 963A]
2.32 Goods that are purchased for market value (such as investment
research) will not generally fall within the definition of conflicted
remuneration because while such goods could be said to influence advice,
there is no benefit because the good has been paid for.
2.33 The ban on conflicted remuneration is also not generally
intended to cover the services provided by a licensee to its representatives
(including authorised representatives and employees) for the purposes of
the representative providing financial services on behalf of the licensee.
These services would only be captured by the ban if the services were
provided in such circumstances that they could reasonably be expected to
influence financial product advice. Services such as training and technical
support provided by a licensee to its representatives could not generally be
said to `influence financial product advice' unless, for example, they were
provided as a `reward' for meeting sales targets.
2.34 There are a number of soft-dollar benefits which are not
regarded as conflicted remuneration. [Schedule 1, item 24, Division 4, section
963C]
General insurance
2.35 Non-monetary benefits given in relation to a general insurance
product will not be conflicted remuneration [Schedule 1, item 24, Division 4,
section 963C(a)]
31
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
Benefits under $300
2.36 Non-monetary benefits which are under an amount prescribed in
the regulations (proposed to be $300) will not be conflicted remuneration
so long as those benefits are not identical or similar and provided on a
frequent or regular basis. [Schedule 1, item 24, Division 4, section 963C(b)] It is
intended that the regulations will specify that the amount prescribed
applies per employee rather than per licensee.
Example 2.2
Nine employees of a financial services licensee annually attend a
Christmas party held by a product provider on whose products the
employees advise. The cost of the Christmas party is $250 per head.
The benefit will not be conflicted remuneration because the cost of the
benefit is under the amount prescribed and the benefit is not given on a
frequent or regular basis.
Example 2.3
An authorised representative receives a gift card worth $275 from a
product provider every fortnight they sell a given number of the
provider's products. The gift card is likely to be conflicted
remuneration because even though it is worth less than the prescribed
amount, it is being provided on a regular basis and will therefore not
meet the criteria for the exemption in s963C(b).
Education and training
2.37 Benefits given to a licensee or representative (including
authorised representatives and employees) that have a genuine education
and training purpose and are relevant to the provision of financial advice
to retail clients will not be regarded as conflicted remuneration. [Schedule
1, item 24, Division 4, section 963C(c)] There are no restrictions in the
legislation on who may give such benefits: it may be a product issuer, a
licensee or authorised representative.
2.38 The types of benefits that may have a genuine education and
training purpose include professional development activities (however
delivered), self-assessment materials and research or analysis that would
further an adviser's knowledge of a particular matter relating to financial
product advice.
2.39 The subject matter of the education and training benefit must
also be relevant to the provision of financial product advice to persons as
retail clients. This could be product specific (for example, written
materials on the tax implications of a wealth management product) or
general (for example, training on client relationship skills). An education
or training benefit is unlikely to be relevant to the provision of financial
32
Conflicted remuneration and other banned remuneration
product advice to persons as retail clients, if the subject matter of the
benefit does not relate to the adviser-client relationship and the advice
provided thereunder.
2.40 It is intended that other criteria will be specified in the
regulations for the education and training exemption. [Schedule 1, item 24,
Division 4, paragraph 963C(c)]
2.41 While it is envisaged that there will be further consultation on
the regulations, it is currently intended to prescribe the criteria set out
below for professional development activities.
· Majority time requirement -- where 75 per cent of the
time (during standard day of 8 hours or equivalent time) is
spent on professional development. In a standard 8 hour day,
this takes into account a one hour lunch break, as well as
another hour that might be applied to other activities such as
networking.
· Expenses -- any travel costs, accommodation and
entertainment outside of the professional development
activity must be paid for by participants or its employer or
licensee.
2.42 It is not generally intended that the ban on conflicted
remuneration cover a person who is remunerated for work undertaken at
the professional development activity, for example, speaking at a
conference or running seminars. It is a question of whether any benefit
received in these circumstances from any entity could reasonably be
expected to influence financial product advice; if it could, it would be
captured by the ban.
Information technology software and support
2.43 The provision of IT software or support related to the provision
of financial product advice will not be conflicted remuneration if the
software or support relates to financial products issued or sold by the
benefit provider and complies with any other requirements detailed in the
regulations. [Schedule 1, item 24, Division 4, section 963C(d)]
2.44 Examples of IT software or support benefits that would relate to
financial products issued or sold by the benefit provider include the
provision of software to access a platform or access to a website to place
orders.
2.45 Although the exemption does not extend to IT software and
support benefits provided by licensees and authorised representatives,
33
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
such benefits would not generally be provided in circumstances where
they could reasonably be expected to influence advice. However, IT
software and support benefits provided by licensees will be prohibited if
they could reasonably be expected to influence advice, for example, where
the benefit is provided as a reward for product sales.
Benefits given by clients
2.46 Any non-monetary benefits provided by a retail client in relation
to the sale of a financial product or provision of financial advice are also
excluded from the definition of conflicted remuneration. [Schedule 1,
item 24, Division 4, paragraph 963C(e)]
Disclosure
2.47 Further regulations are also proposed (under the general
obligations of a licensee in existing paragraph 912A(1)(j) or existing
disclosure obligations of the Corporations Act) to set disclosure and
record keeping requirements for benefits of this type.
2.48 For exempt non-monetary benefits for both education and
training and IT software and support, it is proposed that:
· any benefit should continue to be disclosed in disclosure
documents, in circumstances where they are currently
required to be disclosed; and
· recipients should record receipt of these benefits.
2.49 For exempt infrequent or irregular benefits under $300:
· no disclosure is required in disclosure documents; but
· recipients must record receipt of these benefits.
2.50 The regulations will also require that, on request, the records
referred to in paragraphs 2.48 and 2.49 above must be made available to
the person who made the request.
Treatment of benefits from employers to employees
2.51 A monetary or non-monetary benefit given to a licensee or
representative by the employer of the licensee or representative is not
necessarily conflicted remuneration. If the payment of the benefit is
remuneration for work carried out (for example, an employee's salary),
then this will not be conflicted remuneration so long as it is not within the
definition in section 963A. While this allows the payment of salaries to
employee advisers, it means that any proportion of that employee's salary
34
Conflicted remuneration and other banned remuneration
that could reasonably be expected to influence advice is conflicted
remuneration. An important consideration in these circumstances would
be the extent to which any volume-based proportion of a salary package is
presumed to be conflicted remuneration by virtue of section 963L and
whether the recipient could prove that it could not reasonably be expected
to influence advice.
Example 2.4
A salaried financial planner receives a base salary of $80,000 for
providing financial product advice to retail clients, with the possibility
of a discretionary bonus of up 20 per cent if certain key performance
indicators are achieved. If a component of that bonus is dependent on
the adviser recommending or selling a particular number of financial
products, that component of the bonus could be considered to be
conflicted remuneration, and subject to the prohibitions under
section 963J. However, it would be open to the financial planner to
prove that, in the circumstances, the bonus could not reasonably be
expected to influence the advice.
2.52 The Bill provides an exception from the ban on conflicted
remuneration for arrangements where employees of an ADI (or of an
agent of an ADI) advise on and sell basic banking products. This entitles
an employee to receive sales incentives from their ADI employer, even
where it is volume based. However, if the employee provides financial
product advice on financial products other than basic banking products,
either in combination with or in addition to advice provided on basic
banking products, the receipt of a benefit will be considered conflicted
remuneration. This will encourage customer service specialists, who wish
to continue receiving volume or sales bonuses, to focus on providing
advice on basic banking products only. [Schedule 1, item 18, Division 4,
section 963D]
Example 2.5
A teller employed by an ADI provides advice on and recommends
particular banking products to the ADI's customers. The employee is
eligible for a performance bonus, in addition to her base salary, if
certain key performance indicators are achieved. If a component of the
bonus is dependent on the teller recommending or selling a particular
number of financial products other than basic banking products, this
component would be considered to be conflicted remuneration, and
subject to prohibitions under section 963J. The teller cannot receive a
sales bonus for recommending a basic banking product (such as a
savings account) to a customer if advice on that basic banking product
also included advice on a non-basic banking product (such as an
investment product).
35
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
2.53 Salaried planners or bank tellers can advise retail clients on
non-basic banking products, provided they possess the requisite
authorisation and competency. However, to the extent they provide
financial product advice on these products, they cannot be remunerated on
the basis of volume or sales targets in relation to those products.
Ban on conflicted remuneration
2.54 Neither a licensee, a licensee's authorised representative nor any
other representative may accept conflicted remuneration. [Schedule 1,
item 24, Division 4, sections 963E, 963G and 963H]
2.55 The obligation on an authorised representative not to accept
conflicted remuneration under subsection 963G(1) does not apply in the
situation where the authorised representative received the benefit after
reasonably relying on information from their licensee that the benefit was
not conflicted remuneration. For example, in the situation where a
licensee dealer group collected product commissions on the authorised
representative's behalf, and the licensee advised an authorised
representative that a particular forthcoming payments was in relation to
`grandfathered' or wholesale commissions, and this turned out not to be
true, the authorised representative will not be liable so long as its reliance
on that advice was reasonable. Because these matters will all be within
the knowledge of the authorised representative, the authorised
representative bears the onus of proving that the exception is made out.
[Schedule 1, item 24, Division 4, subsection 963G(2)]
2.56 A licensee must take reasonable steps to ensure that its
representatives do not accept conflicted remuneration. [Schedule 1, item 24,
Division 4, section 963F]
Treatment of benefits from employers to employees
2.57 An employer of a licensee, or of a representative of a licensee, is
under an obligation not to pay the employee conflicted remuneration,
rather than the employee being under an obligation not to accept
conflicted remuneration from the employer. This is appropriate because
in the majority of cases it is the employer, rather than the employee, that
sets the terms and conditions of an employment contract, as well as being
in control of remuneration payments. [Schedule 1, item 24, Division 4,
section 963J]
2.58 However, a representative (other than an authorised
representative) such as an employee is under an obligation not to accept
conflicted remuneration unless it is in circumstances in which an
employer is liable under section 963J. This means that while an employee
will not be under an obligation not to accept conflicted remuneration from
36
Conflicted remuneration and other banned remuneration
their employer, they will be under an obligation not to accept conflicted
remuneration from a third party. [Schedule 1, item 24, Division 4, section 963H]
Benefits from product issuers
2.59 A product issuer must not give conflicted remuneration to a
licensee or a licensee's representative. This ensures that, where conflicted
remuneration is paid by a product issuer or seller and accepted by a
financial services licensee, both parties will be liable to civil penalty.
[Schedule 1, item 18, Division 4, section 963K]
2.60 The test of whether a product issuer has paid conflicted
remuneration is an objective one, based on the perspective of the product
issuer. If the product issuer could not reasonably have known that
remuneration was conflicted, it is not expected that the product issuer will
be caught by this provision. However, this does not allow a product issuer
who is wilfully blind to the potentially conflicted nature of remuneration
to avoid the application of the ban.
Volume-based shelf-space fees
2.61 The Bill establishes a ban on the receipt by platform operators of
volume-based benefits to the extent that such incentives are merely a
means of product issuers or funds managers `purchasing' shelf space or
preferential positions on administration platforms. However, the Bill does
not purport to ban fund managers lowering their fees to platform operators
(in the form of scale-based discounts or rebates) where such discounts or
rebates represent reasonable value for scale. [Schedule 1, item 24, Division 5,
Subdivision A]
2.62 A platform operator is defined as a financial services licensee or
RSE licensee (as defined in the Superannuation Industry (Supervision)
Act 1993 (`SIS Act')) that offers to be the provider of a custodial
arrangement. `Custodial arrangement' is defined in the existing
section 1012IA of the Corporations Act; broadly, it is an arrangement
where the client may instruct the platform to acquire certain financial
products, and the products are then either held on trust for the client, or
the client retains some interest in the product. Under this definition, it is
taken to include arrangements where the client may direct the platform to
follow an investment strategy of the kind mentioned in the SIS Act.
[Schedule 1, item 24, Division 5, section 964]
2.63 A platform operator must not accept a volume-based shelf-space
fee. [Schedule 1, item 18, Division 5, subsection 964A(1)]
2.64 A benefit is presumed to be a volume-based shelf-space fee if
the benefit or its value is wholly or partly dependent on the number or
37
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
value of a funds manager's financial products to which the custodial
arrangement relates. This is intended to capture benefits provided in
return for a greater number or value of the funds manager's financial
products about which information is to be included on the platform.
[Schedule 1, item 24, Division 5, subsection 964A(2)]
2.65 However, a benefit is presumed not to be a volume-based
shelf-space fee if it is proved that all or part of the benefit is:
· a reasonable fee for a service provided to the funds manager
by the platform operator or another person; or
· a discount or rebate offered to the platform operator, so long
as the value of the benefit does not exceed the reasonable
value of scale efficiencies gained by the funds manager
because of the volume of funds under management.
[Schedule 1, item 24, Division 5, subsection 964A(3)]
2.66 In cases where the scale discount or rebate exceeds the
reasonable value of scale efficiencies, it is considered that the benefit is
intended to gain a placement on a platform or preferential treatment on a
platform (for example, a position on a `model portfolio' or `menu
selection').
2.67 Where it is alleged that a volume-based shelf-space fee has been
paid, and a platform operator in response wishes to rely on one or both of
the exclusions in subsection 964A(3), the platform operator has the onus
of proving that the payment is a fee for service or represents the
reasonable value of scale efficiencies. In determining whether a payment
represents the `reasonable' value of scale efficiencies regard should be
had to what might be reasonable in all the circumstances, including, for
example, the relative bargaining power between the particular funds
manager and the platform operator.
2.68 It is reasonable to expect that the platform operator will be
aware of the nature of any discount or rebate it receives, and will therefore
be aware of whether a payment is a genuine fee for service, or represents
genuine scale efficiencies. It is therefore appropriate that the platform
operator bear the onus of proving that the payment ought to be presumed
not to be a volume-based shelf-space fee.
Ban on asset-based fees on borrowed amounts
2.69 The Bill establishes a ban on asset-based fees on borrowed
amounts, where a licensee or licensee's representative provides financial
product advice to a retail client. [Schedule 1, item 24, Division 5, Subdivision B]
38
Conflicted remuneration and other banned remuneration
2.70 Similarly to proposed sections 961A and 963, where a licensee
is to provide advice as an authorised representative of another licensee,
the licensee that is to provide the advice is considered to do this in the
capacity of an authorised representative (not a licensee) and should be
treated accordingly. [Schedule 1, item 24, Division 5, section 964C]
2.71 The Bill provides that an `asset-based fee' is a fee for providing
financial product advice that is dependent upon the amount of funds to be
used to acquire financial products. If a fee is partly dependent on that
amount of funds, then it is an asset-based fee to that extent. [Schedule 1,
item 24, Division 5, section 964F]
2.72 Licensees or their authorised representatives must not charge
asset-based fees to retail clients on borrowed amounts to be used to
acquire financial products by or on behalf of the clients. [Schedule 1,
item 24, Division 5, sections 963D and 963E] A `borrowed amount' can mean an
amount borrowed in any form, whether secured or unsecured, including
the raising of funds through a credit or margin lending facility. [Schedule 1,
item 24, section 964G] A licensee contravenes the provision if its
representative (other than an authorised representative) charges an
asset-based fee on a borrowed amount. [Schedule 1, item 24, Division 5,
subsection 964D(2)]
2.73 If it is not reasonably apparent that the amounts used to acquire
financial products by or on behalf of the client are borrowed, then the
prohibition does not apply to the fee. This provides some protection to
advisers who have no reason to believe the funds being used by the client
are borrowed (in the situation, for example, where the client deliberately
conceals the fact that the funds are borrowed). [Schedule 1, item 24,
Division 5, subsections 964D(3) and 964E(2)] The test for whether something is
`reasonably apparent' is an objective one, based on whether it would be
apparent to a person with a reasonable level of expertise in the subject
matter of the advice, exercising care and assessing the client's information
objectively. It is a question of what would be apparent to a prudent
adviser. [Schedule 1, item 24, Division 5, section 964H]
2.74 Subdivision B of Division 5 provides that the ban on asset-based
fees on borrowed amounts, and the exception for when the borrowing is
not reasonably apparent, do not absolve licensees and authorised
representatives from the duty in Division 2 to act in the best interests of
the clients. To the extent that duty requires licensees and authorised
representatives to make reasonable inquiries to obtain complete and
accurate information from their clients, this obligation remains in place.
This ensures that advisers cannot deliberately or knowingly disregard
relevant information or not make reasonable inquiries, merely so that they
can charge an asset-based fee on the client's borrowed amounts.
[Schedule 1, item 24, subsections 964D(5) and 964E(4)]
39
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
2.75 The regulations may prescribe additional exceptions to the ban.
[Schedule 1, item 24, Division 5, subsections 964D(4) and 964E(3)]
2.76 To the extent that a retail client's funds are not borrowed,
licensees or authorised representatives can charge asset-based fees on that
non-borrowed component.
Penalties and action for loss or damage
2.77 The Bill sets out the provisions in Part 7.7A which are subject to
civil penalties (if breached). With respect to the civil penalty provisions
in Divisions 2, 4, 5 and 6 of Part 7.7A, the Bill establishes maximum civil
penalties of $200,000 for an individual or $1,000,000 for a body
corporate. [Schedule 1, items 28 and 30, sections 1317E and 1317G]
2.78 The Bill also amends existing section 1317DA of the
Corporations Act to include the civil penalty provisions for Part 7.7A
within the definition of a `financial services civil penalty provision'. This
means that compensation orders under section 1317HA of the
Corporations Act will be available for contraventions of the civil penalty
provisions in Divisions 4, 5 and 6. (Division 2 has its own arrangements;
see Chapter 1.) [Schedule 1, item 27, section 1317DA]
Anti-avoidance
2.79 The Corporations Amendment (Future of Financial Advice) Bill
2011, introduced into the House of Representatives on 13 October 2011,
includes a provision (new section 965) to prohibit schemes to avoid the
application of Part 7.7A. The purpose and application of this provision
are explained in the Explanatory Memorandum to that Bill.
2.80 The current Bill amends the new section 965, to change part of
the test for whether a scheme is an avoidance scheme from whether `the
sole or dominant purpose' of the scheme is avoidance, to whether
avoidance is the sole or a non-incidental purpose of the scheme. This is
intended to capture a broader range of schemes designed to avoid the
application of the FOFA reforms. [Schedule 1, item 25, section 965]
Application and transitional provisions
2.81 Item 33 of Schedule 1 to the Bill sets out the transitional and
application arrangements for the provisions of Part 7.7A established by
the Bill. Arrangements for the best interests obligations are discussed in
Chapter 1.
40
Conflicted remuneration and other banned remuneration
Conflicted remuneration
2.82 The obligations in Division 4 (conflicted remuneration)
generally apply from the date of commencement, 1 July 2012. However,
they do not apply to benefits given to a licensee or representative if the
benefit is given under an arrangement entered into before the day of
commencement and the benefit is not given by a platform operator.
[Schedule 1, item 33, subsections 1528(1)]
2.83 Division 4 will not apply to the extent that its operation would
result in an acquisition of property otherwise than on just terms.
[Schedule 1, item 33, section 1528(3)]
2.84 The regulations may prescribe circumstances in which the
conflicted remuneration obligations will or will not apply to benefits given
to a financial services licensee, or a representative of a financial services
licensee. [Schedule 1, item 33, subsections 1528(2)]
2.85 It is intended to provide for payments made by platform
operators under this provision. It is also intended that the regulations will
provide for conflicted remuneration with respect to both individual and
group risk insurance products within superannuation to be banned from
1 July 2013, to align with the start date of the MySuper reforms.
[Schedule 1, item 33, subsection 1528(2)]
2.86 The regulations will not apply to the extent that their operation
would result in an acquisition of property otherwise than on just terms.
[Schedule 1, item 33, section 1530]
Volume-based shelf-space fees
2.87 The ban on volume-based shelf-space fees in Subdivision A of
Division 5 of Part 7.7A applies from the day of commencement, but does
not apply to benefits given to a licensee under an arrangement entered into
before the day of commencement. The regulations may prescribe
circumstances in which the ban will apply to benefits given under an
arrangement entered into before the day of commencement. [Schedule 1,
item 33, section 1529] Regulations would not apply to the extent that their
operation would result in an acquisition of property otherwise than on just
terms. [Schedule 1, item 33, section 1530]
Asset-based fees on borrowed amounts
2.88 The ban on asset-based fees on borrowed amounts in
Subdivision B of Division 5 of Part 7.7A applies to fees charged from the
day of commencement, but only to the extent that the borrowed amounts
are to be used to acquire financial products on or after the day of
commencement. However, the ban would not apply to fees charged after
41
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
that date to the extent that the operation of the ban would result in an
acquisition of property otherwise than on just terms. [Schedule 1, item 33,
section 1531]
42
Chapter 3
Regulation impact statement
Background and problem identification
3.1 This regulation impact statement represents certain policies
announced by the Government in April 2010. Further related policy was
developed and announced by Government in April 2011.
3.2 The Corporations Act 2001 (the Corporations Act) regulates
financial products and services in Australia. One way in which an
investor acquires a financial product is as a result of following financial
product advice. There are relevant conduct rules around the giving of
financial product advice and rules to ensure participants behave fairly and
honestly. There are also disclosure requirements designed to overcome
information asymmetry between industry participants and investors where
disclosure assists investors to make informed decisions.
3.3 Currently, the Corporations Act requires that conflicts of interest
be managed and disclosed. The law requires that fees or remuneration
(including commissions and other payments) are disclosed clearly to retail
investors. It does not set limits on what can be charged or how it can be
charged. The Corporations Act also requires that advisers have a
reasonable basis for financial product personal advice (that is the advice
must be suitable). Under equitable principles, there are some duties owed
by persons providing advice to their clients arising out of the
adviser/client relationship. However, there is a lack of clarity around
when those duties apply and precisely what is required to comply with
them.
3.4 Under the Corporations Act, generally before the financial
service is provided, a retail client must be provided with a Financial
Services Guide (FSG) that contains information about remuneration,
including commissions or other benefits to be received by an adviser. If
personal advice is provided, the retail client also generally receives a
Statement of Advice (SOA) from an adviser which includes information
about the advice and remuneration and commissions that might
reasonably influence the adviser in providing advice. Before a product is
provided, a retail client must further receive a Product Disclosure
Statement which must also include information about the cost of the
product and information about commissions or other payments that may
impact on returns.
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Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
Retail investments
3.5 Retail investors hold a variety of financial products. In the main
this includes superannuation, life insurance, deposit products, shares, debt
securities (including debentures) and managed funds (other than
superannuation). The total value of household investment in these
investment products is around $350 billion or 5.5 per cent of total
household wealth.1
3.6 Retail investors can purchase products in different ways. This
includes products:
· distributed without advice, that is directly from a product
provider or third party broker or dealer;
· distributed with some advice, but not by a financial planner2
(that is, representative of the product provider who provides
some general or personal advice about the product); and
· distributed by a financial planner who provides personal
advice to retail clients. The planner may or may not be
associated with a product provider but is likely to receive
commissions from them. Financial planners also may use
platforms3 to invest in financial products on behalf of clients.
Fees
3.7 Investors pay fees when they acquire financial products. In
some circumstances, and generally for managed funds, investors tend to
pay the same total in product fees whether the product is distributed
through a financial planner or not.
1 Australian Bureau of Statistics, Cat No 5204, Australian System of National Accounts,
2007-08. Household investment in debt securities at 30 June 2008 was $11.9 billion or
0.2 per cent of total household assets. The ABS data do not provide information on specific
investments in shares and managed funds other than superannuation. However, the total
amount of wealth invested in shares and other equity, including investment in shares and
managed funds other than superannuation, at 30 June 2008, was $338.6 billion, or
5.4 per cent of total household assets. (ASIC's Submission to PJC, August 2009, 101).
2 There is no legislative definition of the term financial planner.
3 A platform is an administration facility that simplifies acquisition and management of a
portfolio of investments. Platforms allow retail investors to purchase a range of investments
through the one facility. In one sense platforms are like a department store where you can
choose from different brand names and products in the one place, rather than having to visit
a number of specialty stores.
44
Regulation impact statement
3.8 An investor purchasing a managed fund will generally make a
substantial initial investment in the fund, and may well make additional
contributions. Fees are then deducted from this investment, including
entry and contribution fees, administration/account fees, transaction fees
and fund management fees (investment and performance fees). Fees are
generally set by the product manufacturer and built into the product.
3.9 Each financial service provider receives a payment from the
product fees the investor pays. That is:
· the product provider pays its fund manager fees for managing
the investment;
· where there is a financial planner, the planner and dealer
group are also paid for advice/sale of the product;
· the product provider may pay a commission for the sale of
the product, generally to the dealer group. The dealer group
then passes on part of the commission to an individual
planner. Where there is an employee adviser, they may not
receive part of the commission but rather a salary. However
often the sale counts towards sales targets that may earn the
planner a bonus; and
· the dealer group or planner is paid an ongoing commission
(trail commission) and this is paid out of administration fees
from the retail investor's account.4
Financial Planning Industry
3.10 Financial advice comes from many sources including financial
planners, brokers and accountants.5
3.11 In the Australian market, there are 700-1,000 adviser dealer
groups operating more than 8,000 financial planning practices and
employing around 18,200 people. Industry revenue for the 2008-09
financial year is expected to be $4.36 billion, an estimated fall of
18.1 per cent compared with 2007-08. The average financial planner has
4 ASIC Submission to the PJC Inquiry, August 2009, 107-8.
5 There are some differences between the common usage of the term `financial planner' and
legal concept of `provider for financial product advice'. A broad range of people may
provide `financial product advice'. The data under `financial planning industry' relates to
the industry as the term is more commonly understood.
45
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
380 clients, of whom 40 per cent are advised regularly and on a
face-to-face basis.6
3.12 Approximately 85 per cent of advisers are associated with a
product provider. Of the remainder, the vast majority receive
commissions from product providers.7
Remuneration models
3.13 Financial planners receive a mix of salaries, `fee for services',
bonuses and commissions. The Financial Planning Association (FPA)
identified the most common remuneration types to be hourly rate/time
based charging; service based charging; asset based charging; commission
and subsidised advice.
3.14 Many planners tend to charge zero or minimal advice fees and
instead receive their remuneration from product providers. Product
providers recover these charges from the charges levied within products.
3.15 Trailing commissions (usually 0.6 per cent of account balances)
are the main remuneration method for financial planners, with seven in ten
planners citing them as a form of remuneration. Other forms of
remuneration include initial commission on new investment/contribution
(up to 4-5 per cent of contributions), volume bonuses (that is, additional
commission of up to 0.25 per cent of account balances), and fee for
service charged to the client (up to 1 per cent of account balance, or a flat
fee, perhaps related to the hours involved). These amounts would not all
be paid at the maximum level.
3.16 Trailing commissions are more common among aligned
independent and aligned planners8, while bank-based planners favour
up-front commissions.
3.17 Remuneration models vary across organisations and according
to the market segment to which a client belongs. Low to mid-wealth
6 ASIC submission to the PJC Inquiry on Financial Products and Services in Australia, 109,
per Rainmaker, Financial Planning. Rainmaker considers there are 749 advisory groups.
The above figure reflects alternative estimates.
7 Ibid, 110.
8 An aligned planner is a planner who works for a financial planning firm, which is owned by
a product manufacturer. That is, the licensee/dealer group and the planners within are
aligned to the product manufacturer (AMP Financial Planning is an example). An aligned
independent is an employee of a financial planning firm, which is owned by a product
manufacturer but the firm is independently branded (for example, Hillross (owned by
AMP)). The independence refers to the level of influence the product manufacturer has over
the planners within the firm regarding what they sell/advise on and who owns the clients.
46
Regulation impact statement
clients tend to pay initial and trail commissions, while `high net worth'
and `affluent' clients tend to pay a greater proportion of service fees as a
percentage of assets invested, or flat dollar adviser fees. This is most
likely because wealthy clients are more sophisticated about how much the
advice is costing, and more able to negotiate fees than less-wealthy
clients. Wealthy clients tend to receive sophisticated treatment and
periodic reviews from their advisers, while smaller customers tend to be
offered simple strategies, packaged products and one-off sales. Again,
this segmentation is likely based on both customers' needs and ability to
pay.
3.18 Revenue from fixed-rate and hourly-rate fee for service was
16 per cent of total planner revenue in 2008. Independent planners have a
higher proportion of fee for service arrangements than bank planners, with
around 13 per cent of independent planners deriving over half of their
revenue from pure fee for service in 2008, compared to 6 per cent of
aligned planners and 1 per cent of bank planners. Forty eight per cent of
bank planners did not derive any revenue from pure `fee for service' in
2008 (and 9 per cent of all practices).
3.19 Planners deriving most of their revenue from pure fee for service
spend almost half (47 per cent) of their time with clients planning for
financial and lifestyle goals, and put less of their client portfolios into
managed funds and more into direct equities. Planners deriving no
revenue from pure for fee service were more risk-oriented.9
3.20 Advisers derive revenue from:
· trail commissions (per cent of assets) (estimated at
35 per cent of adviser revenue);
· initial or up-front commission (per cent of initial investment)
(estimated at 26 per cent of adviser revenue);
· fee for service as a per cent of assets under management
(called an asset based fee) (estimated at 23 per cent of
adviser revenue); and
· fee for service as a fixed dollar amount or an hourly rate paid
up-front or out of the product (estimated at 16 per cent of
adviser revenue).10
9 Ibid, 110-11.
10 ASIC submission to the PJC Inquiry on Financial Products and Services in Australia,
48-49 per Investment Trends October 2008 Planner Business Model Report, 27.
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Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
Access to advice
3.21 Not all investors obtain financial advice. Available figures
indicated that between 22 per cent and 34 per cent of adult Australians
access financial advice. Use of a financial adviser increases with age.11
Conflicts of interest
3.22 Remuneration structures in the financial services industry must
be disclosed as they can create real and potential conflicts of interest that
may distort the quality of advice. While all remuneration structures may
create some form of conflict, there is some evidence that certain structures
are creating strong conflicts which are not being sufficiently addressed
through current regulation that requires conflicts to be managed and
disclosed.
3.23 Problems have been identified with commission-based
remuneration arrangements, sales and volume incentives and the use of
asset based fees. The issues are outlined below.
Commission based remuneration arrangements -- product provider
influence over adviser recommendations
3.24 Typically a commission is an arrangement between a product
provider and the adviser or the adviser's licensee and is built into a
financial product.
3.25 Upfront and ongoing (trail) commissions paid from product
providers to licensees are built into product charges (for example, entry
and administration fees). For ease of reference, commissions also refer to
other product provider payments, including those based on volume or
funds under management (other than soft-dollar benefits)12, as these are
payments that come from product providers and may also influence
adviser recommendations.
3.26 Where commissions are used, the income of a financial advice
business is linked to which products are recommended (for example,
industry superannuation funds do not pay commissions, whereas retail
superannuation funds do). Advisers earn income according to the type
and volume of products sold. There are many incentives to meet
volume-based or sales-driven targets.
11 Ibid, 114.
12 A soft-dollar benefit is a benefit received by a financial adviser (or its associates) other than
a basic cash or direct client fee. Examples include subsidised business equipment and
luxury overseas conferences.
48
Regulation impact statement
3.27 Commissions may encourage advisers to sell products rather
than give unbiased advice that is focused on serving the interest of the
clients. Financial advisers have potentially competing objectives of
maximising revenue from product sales and providing professional advice
that serves the client's interests.
3.28 There is some evidence that these conflicts affect the quality of
advice. The 2006 Shadow Shopping exercise of the Australian Securities
and Investments Commission (ASIC) found that advice that was clearly or
probably non-compliant was around six times more common where the
adviser had an actual conflict of interest over remuneration. The conflict
may lead to advice that is not compliant and not in the client's interests.
There is anecdotal evidence that high commissions motivated the
mis-selling of Westpoint products.
3.29 In its 2009 report on Financial Products and Services in
Australia13, the Parliamentary Joint Committee (PJC) noted that the
ineffectiveness of current disclosure of conflicts and conduct rules that
allow an adviser to favour their own interests over the interests of clients
is more likely to lead to sub-optimal investment strategies or excessive fee
arrangements than catastrophic outcomes for investors.
3.30 The issue of conflicted remuneration structures has been debated
for many years. It more broadly reflects the ongoing debate about the
sales focus of the financial advice industry and mismatch with consumer
expectations about receiving a professional unbiased advice service.
3.31 In its report, the PJC noted it received considerable evidence
suggesting that the most effective way to improve the quality of financial
advice for consumers is to remove conflicts altogether by banning
commissions and other conflicted remuneration practices. The PJC
recommended, among other things, that the Government consult and
support industry in developing the most appropriate mechanisms to cease
payments from product providers to financial advisers.14
3.32 The significance of this issue has been recognised both locally
and internationally. Locally, important industry associations, including
the Financial Planning Association (FPA) and Investment and Financial
Services Association (IFSA), have adopted policies to transition away
from commission-based payments. The United Kingdom's Financial
Services Authority (FSA) is introducing `Adviser Charging' which will
13 Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into
Financial Products and Services into Australia, November 2009.
14 Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into
Financial Products and Services into Australia, November 2009.
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Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
remove commission bias from advice on retail investment products. The
United States Treasury is proposing to give the Securities and Exchange
Commission (SEC) the power to examine and ban forms of compensation
that encourage intermediaries to put investors into products that are
profitable to them, but are not in the investors' best interest.
3.33 Although not conflict related, other issues arise with
commissions. After the investor has invested in the product, they cannot
control the commission payments to advisers unless they leave the product
or nominate another adviser (who receives the ongoing commission
payments). Also, ongoing commissions are often paid even if no ongoing
advice is being received (only around 40 per cent are clients are advised
regularly and on a face-to-face basis). There are also clear transparency
issues where investors may not know what they pay for advice or what
service they are entitled to in relation to the payment of ongoing
commissions.
Other volume based and sales incentives
3.34 A variety of payments throughout the financial services industry
are based on volume or sales targets. Some volume based payments are
noted above, as they are payments from product providers. However,
there are other volume based payments in the financial services value
chain that do not flow directly from a product provider, for example that
flow to and from platforms (in the form of shelf fees), as well as
incentives provided by licensees to its employees or authorised
representatives to meet sales or volume targets.
3.35 In relation to platforms15, there are ongoing payments from
platforms to licensees based on volume (relating to funds under
management), which also may create conflicts and distort advice. This
payment could be characterised as a commission in another guise. There
are also Fund Manager Payments, which are ongoing payments that are
volume based from the fund manager to the platform. These fees are
interrelated, where generally the fund manager pays the platform to sit on
the investment menu and the platform pays the licensee to be on the
approved product list and the licensee pays the planner for the
recommendation of the platform.
15 A platform is an administration facility that simplifies acquisition and management of a
portfolio of investments. Platforms allow retail investors to purchase a range of investments
through the one facility. In one sense platforms are like a department store where a customer
can choose from different brand names and products in the one place, rather than having to
visit a number of specialty stores.
50
Regulation impact statement
3.36 In relation to adviser employees, the very nature of volume
based payments and sales incentives encourages the sale of products,
rather than the giving of unbiased advice. The indirect conflicts through
employee remuneration operate in a similar fashion to conflicts in product
provider set remuneration. While it is noted that many employee
remuneration bonus arrangements are supplemented by other criteria, such
as quality and compliance, often sales targets in some shape or form are
the primary determinant of the bonus. Licensees may indicate that quality
advice or compliance requirements appropriately manage the conflicts
created by sales incentives, so that planners who fall short of required
compliance standards will not be eligible for a bonus. However, there are
concerns about the effectiveness of these controls in some circumstances
and sometimes there will be enormous pressure internally to allow the
planner to receive a bonus, notwithstanding shortfalls in terms of
compliance.
Asset based fees
3.37 An asset based fee is a fee agreed between a client and adviser.
The fee is calculated as a percentage of funds under management. The fee
changes with any changes to funds under management.
· Given the transition away from commission based
arrangements, there is an expectation that advisers will more
heavily rely on the use of asset based fees for remuneration.
3.38 Asset based fees can also create conflicts of interest that can
distort the quality of advice. It is important to note that the conflicts
related to commissions and asset based fees are different in origin but can
present the same type of issues.
3.39 Advisers who are remunerated by the quantity of funds under
management can also have conflicts of interest. They have more of an
interest in selling investment products to their clients and encouraging
their clients to borrow to invest, or use other strategies to maximise funds
under management (such as recommending that a client sell other assets,
such as real estate and/or property, to invest in products that will expand
available funds under management). The conflicts arise most notably
where leverage is recommended or where leverage is included in the
product.
Storm and asset based fees
3.40 The recent collapse of Storm Financial received close attention
by the PJC.
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Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
3.41 Storm's remuneration model involved the use of asset based fees
and commissions. For geared clients, Storm had a fee for service model
(plus trail commissions) equating to roughly 7.5 per cent on all new
money invested by clients. This covered the initial advice and ongoing
regular servicing of the portfolio. Any additional money invested by the
client also attracted this upfront fee for service. Also the product
manufacturers would pay Storm annual trail commissions of between
0.2 per cent and 0.385 per cent on the value of that client's investment at
the time (including the margin loan).
3.42 Under the Storm model, the fact that fees were generated based
on the amount of funds invested and the amount of funds under
management created an inevitable conflict of interest between the
adviser/licensee's interests in increasing revenue on the one hand and the
interests of the client in receiving appropriate advice. Asset based fees
create a conflict of interest that encourages advisers to recommend
aggressive gearing to increase the upfront fee generated when the
borrowed money is invested and to increase the balance of funds under
management and thereby the ongoing fees generated. It also acts as a
disincentive for advisers to build into the client's strategy an exit plan
whereby investors can realise gains as a result of market increases to
reduce overall debt, as this would reduce the fees earned by the adviser
and licensee.
3.43 In addition, in the case of Storm the overall financial viability of
the licensee relied heavily on these asset based fees, which meant that
when the global financial crisis occurred, and the value of the clients
funds dropped, and clients also stopped investing new monies, the income
of the licensee effectively disappeared. By relying on bull market inflows
for revenue, Storm was highly susceptible to collapse.
3.44 ASIC noted in its PJC submission that `Storm may be an
example of the potential impact on clients of failure to manage conflicts of
interest created by commissions and remuneration based on funds under
advice'.
3.45 There are also transparency concerns with the use of asset based
fees. The fee can mask the cost of advice, both up-front and in the case of
ongoing fees -- where the fee rises with normal asset appreciation. There
may or may not be a higher level of service when the fee rises due to
greater funds under management. This reflects the potential for ongoing
fees that do not match the service provided.
52
Regulation impact statement
Objectives of Government action
3.46 The objective of Government is to:
· minimise or eliminate the use of remuneration practices that
distort the quality of advice and adversely affect consumer
outcomes;
· encourage the provision of professional unbiased financial
advice;
· enable consumers to understand the fees they are paying for
advice and the services that they are paying for; and
· facilitate better market outcomes.
Options that may achieve objective(s)
Option A: Status Quo (including simplified fee disclosure)
3.47 This option would maintain the status quo. Current obligations
for licensees to manage and disclose conflicts of interest (including
remuneration and other payments) would continue. Various disclosure
documents would continue to be provided to investors, designed to assist
them to understand the potential impact of remuneration based and other
conflicts on the advice they receive from financial advisers.
3.48 The Government has already committed to shortening lengthy,
complex and unreadable financial services disclosure documentation.
Based on current government action to simplify disclosure of financial
products and services (which is currently underway), the option would
also involve simplified one or two page fee disclosure in the short PDS,
supplemented by additional detailed information made available via
incorporation by reference (IBR). The disclosure about advice fees is
achieved through summary information in the short PDS and more detail
provided in the Financial Services Guide (FSG) and the Statement of
Advice (SOA).
3.49 This option would see more effective disclosure of financial
advice services offered to investors. This includes simplified fee
disclosure such that consumers are able to understand the remuneration
costs, separate product and advice fees and that those costs are
comparable and clear.
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Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
Option B: Prospective legislative ban on conflicted remuneration
structures. Introduction of new adviser charging rules
3.50 This option would involve a direct ban on conflicted
remuneration structures for new contracts (that is, existing contracts are
grandfathered such that the ban does not apply to them) from 1 July 2012.
As a consequence of the ban on conflicted remuneration structures, the
option would also introduce new rules on adviser charging. This includes:
Removing product provider influence over adviser recommendations
3.51 Ban any form of commission from any financial services
business in relation to the distribution and provision of advice for retail
financial products (excluding risk insurance).
· It would allow adviser charges to be deducted from a client's
investments.
3.52 Product providers must distinguish the cost of the product from
advice.
Removing the influence of sales incentives and/or other volume based
payment
3.53 This would prevent payments throughout the financial services
industry that are based on volume or sales targets in relation to the
distribution and provision of advice for retail financial products
(excluding risk insurance).
Removing adviser incentives to sell and gear clients -- ban on the use of
asset based fee
3.54 This would prevent an adviser from charging an asset based fee
in relation to services provided to a retail client where the adviser
recommends their clients borrow to invest or leverage is included in the
product (an asset based fee is a fee calculated based on a percentage of
funds under management). For example, where a client is advised to
borrow funds to invest the adviser would be prohibited from charging an
asset-based fee based on both the original equity and the additional
leverage.
Introduction of adviser charging rules
3.55 This would require advisers to agree their fees directly with
clients and disclose the charging structure to clients in a clear manner,
including as far as practicable, total adviser charges payable. Ongoing
adviser charges could also only be levied if it relates to the provision of an
54
Regulation impact statement
ongoing service, which clients must renew annually, or if a payment plan
is agreed up-front for advice.
Option C: Industry led action to address conflicted remuneration
structures, with Government support
3.56 In Australia, there have been some recent moves to adopt fee for
service models instead of commission based payments. While views are
not unified across industry, the Financial Planning Association (FPA) and
the Investment and Financial Services Association (IFSA) have led action
in this regard. Some product providers and/or financial advice firms have,
or are in the process of, transitioning away from commission based
payments. This includes some of the larger adviser groups.
3.57 This option would involve government and industry developing
the most appropriate mechanism to address conflicted remuneration
structures. This option was supported by the PJC, although the PJC
recommendation involved the government consulting with and supporting
industry to develop an appropriate mechanism to cease payments from
product providers to financial advisers (that is, this would not cover, for
example, asset based fees or employee sales incentives from the licensee).
Option D: Introduce a statutory duty to prefer the client's interests over
the interests of the advisor (Client first rule)
3.58 Under this option, a new statutory duty would prohibit advisers,
in the event of a conflict, to prefer their own interests over those of the
client. This option would clarify for all parties that in no circumstances is
it permissible for advisers to put their own interests ahead of those of their
client. There would be no possibility of avoiding that duty through
disclosure or by obtaining consent of clients to breach it.
3.59 The proposed duty recognises that conflicts do exist in many
cases, but will require that advisers ensure that they do not prefer their
own interests over those of their clients, thereby compromising the quality
of advice. The duty would overlay the existing duties of disclosure and
giving appropriate advice. Breaches would be enforceable by clients and
the regulator in the same manner as the existing duties and would include
civil (including compensation claims) and criminal action, and action by
the regulator regarding the financial services licence.
Option E: Introduce a rule banning advisers who have a conflict of
interest from providing advice (No conflicts rule)
3.60 Under this option, advisers would be prohibited from providing
financial advice in the event that they had a conflict of interest that might
compromise the quality of the advice. There would be no possibility of
55
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
avoiding that rule through disclosure or obtaining the consent of clients to
breach it.
3.61 The proposed rule would prohibit all conflicts of interest. It
would overlay the existing duties of disclosure and giving appropriate
advice. Breaches would be enforceable by clients and the regulator in the
same manner as the existing duties and would include civil (including
compensation claims) and criminal action, and action by the regulator
regarding the financial services licence.
Option F: Introduce a fiduciary-like statutory duty to act in the best
interests of clients, subject to a `reasonable steps' qualification and to
place client's best interests ahead of their own
3.62 Under this option, advisers must act in the best interests of their
clients and must place the best interests of their clients ahead of their own
when providing personal advice. Advisers must already provide advice
that is appropriate. Overall, this is supplemented by a requirement that
advisers act in the client's best interest in giving personal advice.
3.63 The duty will include a `reasonable steps' qualification, so that
advisers must take `reasonable steps' to discharge the duty but are not
expected to base their recommendations on an assessment of every single
product available in the market. If an adviser cannot recommend a
product that is in the best interests of the client from their own `approved
product list' (APL) (a list of products that their licensee has authorised
them to sell), then the duty may require them to search beyond the APL or
recommend that the client should see another adviser. There would be no
possibility of avoiding that duty through disclosure or by obtaining
consent of clients to breach it.
3.64 Breaches would be enforceable by clients and the regulator in
the same manner as the existing duties and would include civil (including
compensation claims) and criminal action, and action by the regulator
regarding the financial services licence.
Impact analysis
Option A: Status Quo (including simplified fee disclosure)
3.65 This option would preserve the status quo. Conduct and
disclosure rules would continue to regulate conflicts of interest, which is
that conflicts of interest must be managed and disclosed.
3.66 This means that fees or remuneration (including commissions
and other payments) must be disclosed clearly to retail investors and there
would be no limits on what can be charged or how it can be charged. The
56
Regulation impact statement
requirement that advisers have a reasonable basis for financial product
personal advice (that is the advice must be suitable) would continue to
operate as is.
3.67 Current government work also means that this option would
involve the simplification of information provided to consumers on fees
and commissions in disclosure documents, such as Product Disclosure
Statements (PDSs) and Financial Services Guides (FSGs). It involves
developing `short form' disclosure documents in an attempt to summarise
and simplify complex fee information for consumers in a way that is
meaningful to them, with further detail available using Incorporation by
Reference (IBR) mechanisms.
3.68 The benefit of this option is that it facilitates choice of
remuneration which suits the client and particular adviser. Consumers
may also benefit from more understandable fee disclosure. Further
market forces may continue to drive a transition to a fee for service
environment for adviser remuneration to reflect broader community
concerns. The approach is also consistent with existing regulatory
measures which to some extent does minimise the compliance burden for
industry. There would be no substantive compliance burden on industry,
other than a broad impact that, in some circumstances, consumers may
continue to not seek financial advice based on the perception of conflicts
(noting that consumers may not seek advice for a variety of different
reasons). A NewsPoll/Industry Super Network survey in February 2010
indicated that most respondents would prefer a fee-for-service model.
79 per cent of those surveyed believed commissions and other
inducements compromised the quality of advice received.
3.69 While not quantifiable, there are costs to consumers in
maintaining the status quo. The costs relate to the continued conflicts of
interest and its potential adverse impact on the quality of advice. In
general, the level of trust that consumers place in their adviser, and the
strength of that conflict, often means they are unable to assess the impact
of the conflict on the advice received. Further, the inherent sales versus
advice conflict may continue to misalign the interests of the consumer and
adviser.
3.70 Further, from a consumer perspective, there are also serious
questions about whether complex fee arrangements, in particular the way
advice fees can be remunerated through the product provider via
commission structures and/or calculated as a percentage of funds under
management (FUM), can be communicated in a simple and meaningful
manner to consumers. The complexity in which advice fees can be
incurred pose a significant challenge to achieving `simplified fee
disclosure'.
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Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
3.71 A key objective of simplified fee disclosure is to clearly separate
product fees from advice fees. Advice fees, however, can be charged in
many different ways, including being deducted from the consumer's
account in such a way that the advice may appear to the consumer to be
`free'. Advice fees can also be paid as volume bonuses and soft dollar
benefits. Disclosure that includes information on advice fees under
current remuneration structures becomes, by its very nature, no longer
`simple'.
3.72 While it is possible that simplified disclosure may improve
consumer understanding and engagement, this measure alone may not be
sufficient to address the conflicts created by conflicted remuneration
structures. The conflicts created are strong and consumers may continue
to have difficulty understanding the impact of the remuneration on advice.
Benefits Costs
Consumers Consumers can choose the method by There is some evidence that conflicted
which they pay for advice. remuneration structures may lead to advice
that is not legally compliant or otherwise
Some consumers may benefit from comprises the client's interest. This can have
simpler disclosure to enable them to a wide range of impacts for the investor
understand the fees they are paying. ranging from possible catastrophic
consequences (noting these are more
atypical) to sub-optimal investment outcomes
(for example even a small difference in a
fund's fees and costs can have a significant
impact on long term investment returns).
Even with simpler disclosure of remuneration,
this may not alone be sufficient to address
the conflicts created by conflicted
remuneration structures.
Simplified disclosure is unlikely to improve
the quality of advice; as it will not remove
conflicted structures.
No changes to current arrangements would
permit continued potential for misalignment of
the interests of consumers in receiving
professional unbiased advice and the
interests of the adviser.
Consumers may also continue to pay for
advice services they do not receive.
Industry Industry can choose the remuneration In relation to simplified disclosure, there
methods which suits them and their would be some minimal compliance impact
clients. on product providers, platform providers,
licensees and advisers. This would involve
one-off compliance costs in adapting new
disclosure requirements (for example,
structuring and amendments to existing
documents). However given a reasonable
transitional period, these costs would be
relatively minor (and part of normal business
58
Regulation impact statement
costs) given that disclosure documents must
be renewed after a certain period.
Potential for `first mover disadvantage' -- that
is those who have adopted fee for service
arrangements may face some competitive
disadvantage (it is a highly competitive
market for experienced advisers and advisers
may move to ensure they can continue to
receive commissions).
Government The existence of conflicts may continue to
adversely the quality of advice and consumer
outcomes.
Option B: Prospective legislative ban on conflicted remuneration
structures. Introduction of new adviser charging rules
3.73 This option would involve a direct ban on conflicted
remuneration structures, generally in relation to the distribution and
provision of advice for retail financial products (excluding risk insurance).
3.74 Retail investors will benefit from this option because it will
reduce the incidence of investors being directed to products as a result of
incentives offered to advisers, rather than because investment in the
products is in the investors' interests. This may reduce instances of
sub-optimal advice, may help to prevent and address the rarer instance of
major failures affected by high commissions and result in an overall
improvement in advice quality, particularly product recommendations.
Further the changes clearly align the interests of the adviser and client,
and may build trust in an industry where some consumers may not seek
advice because of the perceived conflicts within the industry.
3.75 There have been suggestions that retail investors will no longer
be able to afford advice if commission are removed. Some investors may
consider that they can no longer obtain `free' (that is, commission based)
advice, notwithstanding that investors indirectly pay for the advice (for
example through product charges) and in some instances these payments
may cost them more over the long term. This may be a difficult
perception change for these clients and may impact on demand for full
advice. However retail investors will not be restricted to having to pay a
large fee up-front. The ban on commissions and asset-based fees (where
leverage is used) will still allow investors to be able to pay for advice
using flexible payment mechanisms, such as adviser charges being
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Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
deducted from a client's investments over time16 or through a payment
plan.
· The available research, undertaken by Rice Warner Actuaries
(Rice Warner) on behalf of Industry Super Network (ISN),
suggests that clients receiving full advice are likely to pay the
same or less in fees after the change. More so, most clients
will see the value of the advice provided, even when the cost
is transparent. The research also suggests that clients will
assess that they often need simple advice and demand for this
need will be met.
3.76 The ban on asset based fees only applies to recommendations
that include leverage and where leverage is built into the product. There
is some potential for consumer detriment in that it does not address a
potential issue where advisers can use other strategies to increase funds
under management. However under proposed adviser charging rules,
there will be requirements for advisers to agree the fee with the client, as
well as the adviser making dollar disclosure and only charging an ongoing
fee if it relates to ongoing service. This addresses concerns about
transparency and clients paying more than the value of the service.
3.77 The ban does not initially apply to risk insurance. Insurance has
different features than general investment products. Unlike investments,
there are no investment funds from which clients can often draw from to
pay for financial advice. Therefore there are concerns about the
affordability of advice in a fee for service environment and the potential
for under-insurance should be explored in this context. In addition, more
work needs to be done at a product level to facilitate a move away from
commissions to fees for risk products. Further consultation with
stakeholders on these issues will be undertaken before a decision is made
about the ban and its application to risk insurance.
3.78 There are costs to the industry to implement this option, and the
option will also have broader longer-term implications.
3.79 The option is likely to drive structural reform in the industry. It
has implications for the way in which products are distributed and
businesses are structured. It is a new model for the industry where fees
paid for a product must be transparently distinct from the fees paid for
advice. This will alter the financial services industry over the long term.
However, the grandfathering of existing contracts means that changes to
the industry will be more gradual and will occur over time. The
16 This mechanism allows product providers to remit adviser payments but as an
administrative facility only.
60
Regulation impact statement
grandfathering of existing contracts means that existing fee arrangements
(prior to the commencement of the ban) can continue. For example, this
means where a person is already invested in a product (prior to the ban)
and the adviser is remunerated by commissions; the product provider can
continue to pay the adviser the ongoing trail commission and the adviser
can continue to receive it.
3.80 There is an expectation that some persons will exit the industry,
as with any major reform. The number of persons who may exit the
industry is unknown. It is further expected that there will be consolidation
of the industry, with larger institutionally owned dealer groups (licensees)
acquiring a number of smaller dealer groups to grow their adviser
numbers and achieve economies of scale. While this means there will be
fewer participants in the market, it does not necessarily represent a
reduction in competition and will drive overall efficiency improvements
of financial advisory groups.
· The available research from Rice Warner notes that many
full service advisers rely on substantial trail commissions and
platform rebates to sustain their businesses and, after the
regulatory change, advisers will be compelled to demonstrate
the value of their services to retain and attract clients. The
research notes that as advice is a growth industry, and
coupled with overall efficiency improvements, there is still
significant scope for financial planners to maintain and
develop viable businesses (even if product provider payments
are banned for new business).
3.81 These changes may impact on the demand and supply of advice.
· The available research from Rice Warner suggests that
demand will be broadly stable and even though adviser
numbers will reduce over time, more efficient delivery
models for simple advice and efficiency improvements
means that demand will be met.
3.82 It is expected that adviser remuneration, as well as the number
of advisers, will reduce over the long term.
· The available research from Rice Warner suggests that
adviser remuneration will still increase in real terms,
although by significantly less than under the current
regulatory environment. The reduction in overall adviser
remuneration will be $2.5 billion (in 2009 dollars) in 2024
representing 0.23 per cent of GDP. The report also suggests
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Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
that adviser numbers will reduce17 and the characteristics of
advisers will change.
3.83 There will be a reasonable change management process for
participants adopting the proposals. There will be one-off costs to
implement the ban on payments and adviser charging, some additional
ongoing compliance costs and costs involved with getting across new
regulatory requirements.
· Product providers will need to implement `factory gate
pricing' (a UK term for separating the cost of the product
from the cost of advice). For investment type products, there
are current products in the market which separate product
and advice costs, and in those circumstances the system
changes required should be less than where the provider has
no products of this kind. The extent to which product
providers already have these systems is not known. Product
providers will also need to put procedures and mechanisms in
place so they can comply with the ban and associated
requirements, such as remitting adviser service fees from the
client's investment.
· The immediate impact for financial planning practices will be
to set up alternative cash-flow mechanisms. Currently the
value of a financial advice business is calculated on a
valuation which is based on the income stream from trail
commissions times a multiplier (generally between 1.9 and
2.9). The client book becomes the businesses' primary asset.
The valuation on this basis is also used by lenders in
providing finance to the business secured against the income
stream coming from the trail commissions, so there may be a
need for advisers to re-negotiate loan arrangements with their
financiers based on some other valuation of the business (for
example, good will). It should be noted that grandfathering
of existing contracts will mean that remuneration that comes
from existing arrangements will largely be unaffected.
· Advisers and its licensees will need to devise and introduce
an adviser charging structure and make relevant disclosures
(noting there are some current disclosure requirements).
They will need to cost their services, articulate what and how
they provide their services and demonstrate a clear value
proposition to their clients.
17 Rice Warner research estimates there are around 15,400 advisers which will remain broadly
stable over the next five years and decline to around 8,600 in 2024.
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Regulation impact statement
· Advisers will need to make substantial changes to its
disclosure documentation. There would also be changes
required to policy documents and employment contracts and
so forth. However, the transitional period would likely allow
for documentation to be updated according to normal
roll-over schedules, which would reduce the impact by
spreading it out and making it a part of normal business
practice.
· Financial planning practices will have to renegotiate fees
with their clients and set up new payment mechanisms.
Advisers will also need to change systems and procedures to
adopt the new charging structure and are expected to spend
more time with clients explaining the fee structure, to
demonstrate the value of advice.
· There may be cost saving with regard to the systems and staff
that are currently needed to manage commission payments.
This can be a complicated and time-consuming process
involving calculating commissions and doing manual
`clawbacks', for example, where the clients exercise a
cooling off period and the commissions need to be repaid to
the product provider. These systems and staff add extra cost,
and would no longer be required, so there is likely to be a
cost saving to business in this regard.
· Advisers who will be most impacted will be the businesses
that rely substantially on ongoing trail commissions and do
not maintain an existing ongoing client relationship. There is
no available data on the number of businesses who might fall
into this category.
· Advisers will also incur ongoing annual costs in that they
must have clients opt-in each year to continue to provide
ongoing service.
· Advisers and licensees may need to re-negotiate their
fee-sharing arrangements and may need to adjust other
elements of the commercial relationship, such as key
performance indicators.
· The overall costs depend on the extent to which participants
are already structured to adopt this model, for which there is
no available data. Some businesses have made these at least
some of the changes. The costs to industry have not been
quantified, and were not considered in detail in the PJC
Inquiry.
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Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
Benefits Costs
Consumers Consumers will benefit from improved Consumers may continue under the
quality of advice that is not distorted by apprehension that commission based
conflicted remuneration structures. advice is `free' advice and they may
perceive an increase in the cost of
Consumers will benefit from an alignment advice. This may impact of some
of adviser interests through remuneration consumers' willingness to seek advice.
practices that support the clients' interests
in receiving professional unbiased advice.
The removal of conflicted remuneration There may be some compliance costs
structures may enhance trust in the passed on to consumers.
industry and encourage some consumers
to seek advice.
Consumers will benefit from adviser
charging that is clear and directly related
to the services provided.
Industry The removal of conflicted remuneration The ban on conflicted remuneration
structures may improve the level of structures will change the way in which
generalised trust in the industry and products are distributed and businesses
encourage some consumers to seek are structured.
advice.
It is a new model for the industry where
It is an opportunity for industry to develop fees paid for a product must be
more efficient adviser delivery models. transparently distinct from the fees paid
for advice. This will alter the financial
No first mover disadvantage. services industry over the long term.
However the grandfathering of existing
contracts means that changes to the
industry will be more gradual.
There will be one-off costs to industry
(product providers, platforms, licences
and advisers) to implement the ban.
There will be some ongoing costs to
industry, as a result of new rules (such as
opt-in annual renewal notices).
Some businesses are expected to exit
the industry.
Government Consumers will benefit from better quality
of advice and outcomes.
Option C: Industry led action to address conflicted remuneration
structures, with Government support
3.84 Option C would build upon existing industry measures to
transition away from commission based payments. The Government
would work with industry to develop the most appropriate mechanism to
cease these payments.
3.85 To date, not all of industry support a transition away from
commission based payments. Further the moves by some parts of industry
64
Regulation impact statement
to transition away from commissions are limited in some way. For
example, the policies only apply to certain products or to certain types of
payments.
3.86 The benefit of this option, is that in some instances, it will
benefit consumers by reducing the incidence of investors being directed to
products as a result of incentives offered to advisers, rather than because
investment in the products is in the investors' interests. This may result in
an overall improvement in advice quality, particularly product
recommendations.
3.87 However the key limitation of this option is that those benefits
will only ensue where the initiatives apply. As the initiatives will not
apply to all products and payments that create conflicts, the costs to
consumers will continue in those circumstances. Further if certain
payments continue (as per current industry initiatives) there is a real risk
that removed benefits will flow through those mechanisms and in fact
there will no substantive change to current arrangements.
Benefits Costs
Consumers Consumers will benefit from improved To the extent that the initiatives apply,
quality of advice that is not distorted by consumers may continue under the
conflicted remuneration structures, but only apprehension that commission based
to the extent that the initiatives apply. advice is `free' advice and they may
perceive an increase in the cost of
The removal of some conflicted advice. This may impact of some
remuneration structures may enhance trust consumers' willingness to seek advice.
in the industry and encourage some
consumers to seek advice. To the extent that the initiatives apply,
there may be some compliance costs
To the extent that the initiatives apply, passed on to consumers.
consumers will benefit from adviser
charging that is clear and directly related to Where the initiatives do not apply,
the services provided. consumer detriment will continue (as
described under costs of maintaining the
status quo).
Industry To the extent that the initiatives apply, the To some extent, the initiatives will
removal of conflicted remuneration change the way in which products are
structures may improve the level of distributed and businesses are
generalised trust in the industry and structured.
encourage some consumers to seek
advice. There will be one-off costs to industry
(product providers, platforms, licences
It is an opportunity for industry to develop and advisers) to implement the relevant
more efficient adviser delivery models. initiative.
The implications and costs relate solely
to the scope of initiatives which have
been developed by industry associations
or companies.
Government To the extent that the initiatives apply, The measures are not comprehensive
consumers will benefit from better quality of and this allows certain consumer
advice and outcomes. detriment to continue.
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Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
Option D: Introduce a fiduciary-like statutory duty to prefer the client's
interests over the interests of the advisor (Client first rule)
3.88 Option D will not necessarily ban any particular form of
remuneration. The proposed duty is a more generic standard that will
address issues that might arise from all types of conflicts -- for example,
ownership-based conflicts.
3.89 It would be able to operate in connection with future provision
of advice connected to an existing arrangement with a client. In contrast,
the proposal to ban particular remuneration structures can only operate
prospectively, due to constitutional restrictions concerning acquisition of
property.
3.90 The rule would benefit consumers by reducing the incidence of
advice being compromised through conflicts, resulting in sub-optimal
outcomes for consumers of financial advice.
3.91 A further possible result of the proposal for the new duty to
place the client's interests first is that it would serve to strengthen, from
the perspective of potential enforcement, the existing duties of
intermediaries to ensure the advice has a reasonable basis and is
appropriate for the client's need. When that test is paired together a
statutory duty to place the interests of the client first when there is a
conflict, there is a clearer message in the statute about unacceptable
conduct which would be of benefit to the regulator in its enforcement
efforts.
3.92 For persons conducting the business of financial advice, despite
the existing of equitable principles that have similar elements, there would
be some transitional costs associated with ensuring that their business
structure and practice does not violate the rule. On some occasions on an
ongoing basis, the rule would require advisors to, for example, change
recommendations to a product that offers less benefits to the advisor in
order to ensure the client's interest is preferred over their own.
Benefits Costs
Consumers Consumers will benefit from improved There may be some compliance costs
quality of advice that is not distorted by passed on to consumers.
conflicted remuneration structures.
Consumers will benefit from an alignment
of adviser interests through remuneration
practices that support the clients' interests
in receiving professional unbiased advice.
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Regulation impact statement
Industry Clarification of the duty may offer some Transitional costs for some financial
savings in the longer terms as the conduct advice providers in ensuring that
that is permitted and not permitted is business structures and practices do not
certain. violate the client first rule.
Lesser ongoing costs resulting from the
need to prefer the client's interest over
their own.
A degree of complication and uncertainty
due to the limitation of the duty to
circumstances where the client and the
adviser's interests are in conflict.
Government Supplementation of existing rules will
clarify required behaviours and assist
regulators to enforce requirements against
advisors engaging in practices detrimental
to consumers.
Option E: Introduce a rule banning advisers who have a conflict of
interest from providing advice (No conflicts rule)
3.93 Option E would effectively prohibit many forms of
remuneration currently used. Commission payments would violate the
rule. There may also be significant impact on the structure of vertically
integrated business (where a product provider owns a financial advice
business).
3.94 The benefit of the rule for consumers would be that all advice
would be free of any `skewing' as a result of a conflict. However, a no
conflict rule would require large scale restructuring of a large proportion
of the financial advice industry. Many market participants are likely to
leave the industry, and those that are left would need to operate on a fee
for service basis. This would result in some serious risks that access and
affordability of advice for most consumers would be detrimentally
affected.
3.95 For industry, the majority of participants in the financial advice
industry may not be able do business as usual without violating the
no-conflict rule and/or that carve outs would be required (for example the
position of conflict an employee adviser of the Commonwealth Bank may
find themselves in). There would need to be a major shift to a fee for
service model and the costs of doing so is likely to result in a significant
number of market exits.
3.96 For Government, there are likely to be some costs involved with
supporting industry participants (including employees) of advice
businesses unwilling or unable to make the transition to a no-conflict
environment.
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Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
Benefits Costs
Consumers Consumers will benefit from improved Cost of advice would increase
quality of advice that is not distorted by significantly and availability of advice
conflicted remuneration structures or other would decrease significantly.
conflicts.
Consumers will benefit from an alignment
of adviser interests through remuneration
practices that support the clients' interests
in receiving professional unbiased advice.
Industry Clarification of the duty may offer some Significant transitional costs for some
savings in the longer terms as the conduct financial advice providers -- which in
that is permitted and not permitted is some cases would be high enough to
certain. provoke market exit.
Ongoing costs resulting from the need to
withhold services in cases where conflict
exists.
Government Possible need for government support of
exiting advisors.
Option F: Introduce a fiduciary-like statutory duty to act in the best
interests of clients, subject to a `reasonable steps' qualification and to
place client's best interests ahead of their own (best interest's
formulation)
3.97 Option F may preclude advisers from receiving commission
payments in many circumstances but not in all cases. For example, there
may be cases where it could be argued that the advisers' interests
coincided with those of the client and the commission could be payable in
those circumstances.
3.98 The benefit of the rule for consumers is that it encompasses the
benefits of the client first rule (option D), including that it reduces the
incidence of advice being compromised through conflicts, resulting in
sub-optimal outcomes for consumers of financial advice. More generally,
consumers will also benefit from advice that is in their best interests, as
advice may be compromised by remuneration and other conflicts. The
option strengthens the existing duties of intermediaries to ensure the
advice has a reasonable basis and is appropriate for the client's need.
3.99 For persons conducting the business of financial advice, despite
the existence of equitable principles that have similar elements, there
would be transitional costs associated with ensuring that their business
structure and practice does not violate the rule. The costs include a review
of and/or changes to processes supporting the giving of advice, including
product selection, the scope of the approved product lists and training of
68
Regulation impact statement
advisers. It is expected to increase the requirements for research and due
diligence before products are approved for sale, as they will need to be in
the client's best interest.
· The quantum of these changes, and costs involved, depend
on the extent to which businesses are structured to implement
the best interest's formulation, which is unknown.
3.100 While Option D requires that in the event of a conflict, an
adviser must not prefer their own interests over those of the client, it does
not require advisers to act in the client's best interest generally. However
Option F has the effect that an adviser must act in the client's best interest.
For example, if an adviser cannot recommend a product that is in the best
interests of the client from their own `approved product list' (APL) (a list
of products that their licensee has authorised them to sell), then the duty
may require them to search beyond the APL or recommend that the client
should see another adviser.
· Given this, there would likely be some rationalisation of
investment products, including the development of simpler
investment products for `approved product lists' (for
example, investment products based on standard age/asset
mixes).
3.101 The option does not propose an impractical standard on industry.
The duty will include a `reasonable steps' qualification, so that advisers
must take `reasonable steps' to discharge the duty but are not expected to
base their recommendations on an assessment of every single product
available in the market.
3.102 Industry already complies with a best interest test in relation to
obligations placed on responsible entities of managed investment
schemes. This means that there is already some understanding and
application of these principles within the Corporations Law.
The option will provide greater scope to the regulator to address consumer
detriment arising from sub-optimal product recommendations.
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Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
Benefits Costs
Consumers Consumers will benefit from advice that is There may be compliance costs passed
in their best interests, including more to consumers. Particularly in the short
appropriate product recommendations. tern, the cost of advice may increase.
Consumers will benefit from advice that is
not distorted by conflicts.
Potential for development of simpler
investment products for retail clients
Industry Clarification of the duty may offer some Transitional costs for some financial
savings in the longer terms as the conduct advice providers, including a review and
that is permitted and not permitted is or changes to procedures relating to the
certain. giving of personal advice to retail clients.
This includes costs for research and due
It is broadly consistent with other diligence requirements, scope of
obligations in the Corporations Act. approved product lists and training
Reasonable care qualification clarifies the requirements for advisers.
scope of the duty, in that it does not
impose an impractical standard on
advisers to base their recommendations
on an assessment of every single product
in the market.
Government Consumers will benefit from better quality
of advice and consumer outcomes.
The regulator is given greater scope to
address consumer detriment.
Consultation
3.103 The PJC undertook an extensive public consultation process in
developing its recommendations. During the inquiry, the PJC received
and considered evidence from a broad range of sources, including
investors, banks, industry bodies, advisers, product providers, consumer
groups, law firms and regulatory bodies. In addition, the PJC conducted
public hearings on the issues raised by the PJC.
3.104 Following the PJC inquiry, no further consultation was
undertaken by Treasury.
3.105 There will be further consultation with stakeholders on whether
the ban on conflicted remuneration structures should apply to risk
insurance (including group insurance).
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Regulation impact statement
Views on conflicted remuneration structures
3.106 In its report, the PJC noted it received considerable evidence
suggesting that the most effective way to improve the quality of financial
advice for consumers is to remove conflicts altogether by banning
commissions and other conflicted remuneration practices. The PJC
recommended, among other things, that the Government consult and
support industry in developing the most appropriate mechanisms to cease
payments from product providers to financial advisers.
3.107 ASIC recommended, that in addition to banning commissions
and other incentives, asset-based fees also be banned, due to the
equivalent conflicts. Many other submitters indicated they favoured fee
for advice models: ANZ supports fee-for-service arrangements for the
provision of holistic advice, the Accounting Professional and Ethical
Standards Board consider advisers should adopt fee-for-service models,
The Institute of Actuaries of Australia think that commissions should not
be payable for advice, and the Institute of Chartered Accountants in
Australia consider that advisers should be remunerated based on `genuine
fee for service arrangements (that is, an asset based fee is not a genuine
fee for service), with an industry led solution. The Australian Investors
Association (AIA) supports an outright ban on commissions and asset
based fees. CHOICE supports a ban on 'remuneration incentives that are
inconsistent with fiduciary duties an adviser owes a client'. CHOICE
further suggests that ASIC should be given the power to outlaw particular
conflicts of interest where it is satisfied that disclosure and management
will not prevent inappropriate or biased advice. The Industry Super
Network (ISN) recommends a ban on commissions and other forms of
conflicted remuneration structures.
3.108 MLC favour a transition to fee for service models, which
includes the use of asset based fees but suggest an outright ban on
commissions is not appropriate.
3.109 The FPA gave evidence to the PJC that a client directed fee for
service model was the most important measure and that asset based fees
should be allowed under this model. The FPA stated that asset based fees
support the affordability of advice.
3.110 Some do not support a transition away from commission based
payments. The Stockbrokers Association of Australia (formerly the
Securities and Derivates Industry Association) think disclosure deals with
conflicts created by commissions. The Association of Financial Advisers
(AFA) and Millenium3 think that consumers and business should be able
to choose the remuneration structure that suits them and that the removal
of commissions will affect the affordability of comprehensive financial
advice. The Commonwealth Bank of Australia (CBA) note that
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Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
comprehensive advice is expensive and existing subsidies through
commissions make it affordable. Further that any regulation should be
industry based. APT Strategy argue that banning commissions would
ultimately have negative impacts on consumers through increased advice
costs. In its evidence to the PJC, the Investment and Financial Services
Association (IFSA) noted that removing existing fee structures would
increase the cost to consumers.
3.111 The Australian Compliance Institute acknowledge the
remuneration based conflicts but consider that alternatives other than fee
for service may be required, given concerns about affordability and access
to advice.
3.112 Some other submissions from adviser groups also did not
support an outright ban on commissions, some arguing that clients should
be able to choose remuneration methods and others argued the method of
payment for advisers is not important in addressing poor
quality/conflicted advice. There were a few submissions that suggest that
many planners would go out of business as a result of the changes.
3.113 The submissions did not address the direct implementation costs
to industry.
Fiduciary duty
3.114 A number of witnesses appearing before the committee
supported the imposition of an explicit fiduciary duty on financial
advisers, requiring them to give priority to their clients' interests ahead of
their own. ASIC's submission to the PJC inquiry supported a fiduciary
like duty.
3.115 Professional Investment Services did not oppose the
introduction of a statutory fiduciary duty, indicating that such a duty
already exists. The Trustee Corporations Association of Australia argued
that advisers should always place their clients' interests first. The
Australasian Compliance Institute (ACI) supported a fiduciary duty being
imposed on individual advisers.
3.116 ANZ's submission to the PJC noted that the obligation of
financial planners [those who provide holistic advice] to put the client's
interests first should be legislatively enshrined in order to formally
establish that financial advisers owe fiduciary duties to their clients.
3.117 Many submissions raise the possibility of introducing a fiduciary
duty and indicate their general support for this option. The submitters
below provided detail on how they saw the formulation of the duty.
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Regulation impact statement
3.118 ISN proposes that all advisers be required to act in their client's
best interest, and this obligation would replace the need for advice to have
a reasonable basis. The obligation would require the planner to give
clients their undivided loyalty, which means the financial planner must
strive to avoid any actual or perceived conflict of interest. Where a
conflict is unavoidable, a fiduciary must obtain `informed consent' of the
client which they say goes beyond the type of disclosure typically
provided in financial services. ISN say this duty does not lead to an
obligation to predict the best or highest performing products but state that
this requirement would require licensees to include a variety of product
types on its approved product list and would preclude volume based
payments.
3.119 Choice proposes to establish a legal fiduciary duty on advisers,
either similar to options being considered in the US, or like that of the UK
where advisers are required to act in the best interests of clients, rather
current requirements to provide a `reasonable basis' for advice. Choice
also considers that the fiduciary duty would facilitate the removal of
commissions from the industry.
3.120 The FPA acknowledge and willingly accept the fiduciary
obligation and propose that a fiduciary relationship based on an obligation
to put the `Client's interest first'. Placing `Client's interests first' is
consistent with the fiduciary duty of loyalty and trust, which suggests that
a planner who undertakes to act on the client's behalf must not misuse the
position to their own or a third party's possible advantage. The FPA has
several concerns with the application of a `best interests' style
requirement for financial planners, one being that it would result in a
requirement for advisers to provide the best possible advice.
3.121 AMP supports the recommendation that financial planners act in
the best interests of their clients, however AMP considers that under the
general law, financial advisers already have a fiduciary obligation to their
clients in many aspects of their relationship. It is argued that section
945A of the Corporations Act (requirement to have a reasonable basis for
advice) contains a stricter application than a fiduciary duty as it imposes
an objective standard that an adviser must meet in preparing and giving
advice. AMP believes this extends beyond a fiduciary duty which would
require planners to act honestly, for a proper purpose, and to obtain
consent to any collateral benefits. AMP thinks it is important that the
duties applying to advisers are consistent with other professions.
3.122 The Association of Financial Advisers (AFA) told the
committee that the category 'financial adviser' should be legislatively
defined before a fiduciary duty could be imposed by legislation.
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Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
Conclusion and recommended option
3.123 Option A does not sufficiently address the objectives of
Government action, notwithstanding that there may be some benefits to
consumers from simplified fee disclosure, which is consistent with other
current (or planned) regulation and would offer a much relatively lower
compliance burden than the other options.
3.124 Further, Option C does not sufficiently address the objectives of
Government action, as industry moves to transition away from
commission based payments are limited in scope (both in terms of the
types of payments covered and which products they apply to). This limits
the effectiveness of industry led action.
3.125 While Option D is attractive, it is not preferred because it would
introduce a degree of complication and uncertainty due to the limitation of
the duty to circumstances where the client and the adviser's interests are
in conflict. Further, the duty would not, however, be strong enough to
require the adviser (or authorised representative) to ensure that products
recommended from their `approved product list' were not only
appropriate but also in the best interests of the client.
3.126 Option E is also not preferred, because notwithstanding its
benefits in addressing Government objectives, the costs and potential
industry impact are too prohibitive.
3.127 The preferred option is a combination of options B (legislative
ban on conflicted remuneration structures) and F (best interest's
formulation). The options impose a ban on conflicted remuneration
structures and also introduce a fiduciary-like best interests formulation
(which supports the ban on conflicted remuneration structures). The best
interests formulation recognises that many conflicts exist but places
additional obligations on advisers which reflect the possible detriment to
consumers arising from these conflicts and imposes a general requirement
for advisers to act in the best interests of their clients when giving
personal advice. The best interest's formulation also encompasses the
benefits of Option D.
3.128 A combination of Options B and F was found, on balance of the
potential costs, benefits and risks considered for each option, to yield the
greatest net benefit to the community. The analysis of impacts however,
was limited because there was insufficient quantitative evidence about the
costs and benefits associated with each option. The impact analysis and
recommendations is largely based on a high level assessment of the
potential qualitative impacts. The recommended options are however
expected to have a very significant impact in this market.
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Regulation impact statement
Implementation and review
3.129 Treasury and ASIC will work closely with industry to devise an
implementation strategy. There will be an appropriate implementation
period. The ban on conflicted remuneration structures may be progressed
in phases.
3.130 Further public consultation on any draft legislation
implementing the recommendations is also envisaged prior to introduction
of the Bill into Parliament.
3.131 ASIC will need to closely monitor and enforce the ban, in
particular to monitor for developments that may see these payments be
progressed through alternative mechanisms. The Government will also
continue to monitor the application of the regime to ensure that it is
operating effectively.
75
76
Index
Schedule 1: Amendments
Bill reference Paragraph number
Item24, Division 4, section 963A 2.31
Item 6 1.56, 1.60, 1.82
Items 7 and 8 1.82
Item 9 1.83
Item 18, Division 4, section 963D 2.52
Item 18, Division 4, section 963K 2.59
Item 18, Division 5, subsection 964A(1) 2.63
Item 23, Division 2, subsection 961(6) 1.18
Item 23, Division 2, section 961A 1.19
Item 23, Division 2, Subdivision B 1.20
Item 23, Division 2, subsection 961B(1) 1.21
Item 23, Division 2, subsection 961B(2) 1.23
Item 23, Division 2, subsection 961B(2) 1.25
Item 23,Division 2, paragraph 961B(2)(a) 1.31
Item 23, Division 2, paragraph 961B(2)(b)(i) 1.32
Item 23, Division 2, paragraph 961B(2)(b)(ii) 1.35
Item 23, Division 2, paragraph 961B(2)(c) 1.36
Item 23, Division 2, section 961C 1.37
Item 23, Division 2, section 961H 1.38
Item 23, Division 2, paragraph 961B(2)(d) 1.39
Item 23, Division 2, paragraph 961B(2)(e) 1.40
Item 23, Division 2, section 961D 1.41
Item 23, Division 2, paragraph 961B(2)(f) 1.42
Item 23, Division 2, paragraph 961B(2)(g) 1.43
Item 23, Division 2, section 961E 1.44
Item 23, Division 2, subsection 961B(3) 1.48
Item 23, Division 2, section 961F 1.49
Item 23, Division 2, subsection 961B(3) 1.50
77
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
Item 23, Division 2, subsection 961B(4) 1.52
Item 23, Division 2, subsection 961B(5) 1.54
Item 23, Division 2 1.1
Item 23,Division 2, section 961G 1.56, 1.58
Item 23, Division 2, section 961G 1.59
Item 23, Division 2, section 961H 1.60, 1.61
Item 23, Division 2, subsection 961H(5) 1.62
Item 23, Division 2, section 961J 1.63, 1.65
Item 23, Division 2, section 961J 1.64
Item 23, Division 2, subsections 961J(2) and (3) 1.69
Item 23, Division 2, section 961L 1.71, 1.79
Item 23, Division 2, Subdivision F 1.75
Item 23, Division 2, section 961K 1.77
Item 23, Division 2, section 961Q 1.78
Item 23, Division 2, subsection 961Q(2) 1.78
Item 23, Division 2, section 961M 1.80
Item 23, Division 2, subsection 961(1) 1.12
Item 23, Division 2, subsection 961(1) 1.13
Item 23, Division 2, subsection 961(2) 1.14
Item 23, Division 2, subsection 961(4) 1.14
Item 23, Division 2, subsection 961(3) 1.16
Item 23,Division 2, subsection 961(5) 1.17
Item 24, Division 4, section 963L 2.17
Item 24, Division 4, section 963A 2.21
Item 24, Division 4, section 963B 2.23
Item 24, Division 4, paragraph 963B(1)(a) 2.24
Item 24, Division 4, paragraph 963B(1)(b) 2.25
Item 24, Division 4, paragraph 963B(1)(c) 2.26
Item 24, Division 4, paragraph 963B(1)(d) 2.27
Item 24, Division 4, paragraph 963B(1)(e) 2.28
Item 24, Divisions 4 and 5 2.1
Item 24, Division 4, section 963C 2.34
Item 24, Division 4, section 963C(a) 2.35
Item 24, Division 4, section 963C(b) 2.36
Item 24, Division 4, section 963C(c) 2.37
Item 24, Division 4, paragraph 963C(c) 2.40
Item 24, Division 4, section 963C(d) 2.43
78
Index
Item 24, Division 4, paragraph 963C(e) 2.46
Item 24, Division 4, section 963 2.11
Item 24, Division 4, sections 963E, 963G and 963H 2.54
Item 24, Division 4, subsection 963G(2) 2.55
Item 24, Division 4, section 963F 2.56
Item 24, Division 4, section 963J 2.57
Item 24, Division 4, section 963H 2.58
Item 24, Division 4 2.13
Item 24, Division 5, Subdivision A 2.61
Item 24, Division 5, section 964 2.62
Item 24, section 963A 2.14
Item 24, Division 5, subsection 964A(2) 2.64
Item 24, Division 5, subsection 964A(3) 2.65
Item 24, Division 5, Subdivision B 2.69
Item 24, Division 5, section 964C 2.70
Item 24, Division 5, section 964F 2.71
Item 24, Division 5, sections 963D and 963E 2.72
Item 24, section 964G 2.72
Item 24, Division 5, subsection 964D(2) 2.72
Item 24, Division 5, subsections 964D(3) and 964E(2) 2.73
Item 24, Division 5, section 964H 2.73
Item 24, subsections 964D(5) and 964E(4) 2.74
Item 24, Division 5, subsections 964D(4) and 964E(3) 2.75
Item 25, section 965 2.80
Item 27, section 1317DA 2.78
Items 28 and 30, sections 1317E and 1317G 2.77
Item 33, section 1527 1.81
Item 33, subsections 1528(1) 2.82
Item 33, section 1528(3) 2.83
Item 33, subsections 1528(2) 2.84
Item 33, subsection 1528(2) 2.85
Item 33, section 1530 2.86, 2.87
Item 33, section 1529 2.87
Item 33, section 1531 2.88
79
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