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Senate

Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon J. B. Hockey MP)
This Memorandum takes account of amendments made by the House of Representatives to the bill as introduced and recommendations made by the Senate Economics Legislation Committee report of 16 June 2014.

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation Definition
ADI Authorised Deposit-taking institution
ASIC Australian Securities and Investments Commission
Corporations Act Corporations Act 2001
Corporations Regulations Corporations Regulations 2001
Dissenting Report Dissenting Report by Coalition members of the Parliamentary Joint Committee on Corporations and Financial Services inquiry into the 2012 FOFA Bills
FOFA Part 7.7A of the Corporations Act 2001, as introduced by the Corporations Amendment (Future of Financial Advice) Act 2012 and the Corporations Amendment (Further Future of Financial Advice Measures) Act 2012, also known as the Future of Financial Advice
2012 FOFA Bills Corporations Amendment (Future of Financial Advice) Bill 2012 and the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2012
ICCPR International Covenant on Civil and Political Rights
Licence Australian Financial Services Licence
Licensee holder of an Australian Financial Services Licence
Representative representative of an Australian financial services licensee
RIS regulation impact statement
SIS Act Superannuation Industry (Supervision) Act 1993
SOA Statement of Advice
Bill Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014

General outline and financial impact

Outline

The Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014 (Bill) implements the Government's election commitment to reduce compliance costs imposed on the financial services industry by amending Part 7.7A of the Corporations Act 2001 (Corporations Act). Part 7.7A is also referred to as the Future of Financial Advice (FOFA).

FOFA was announced by the former Government in April 2010, and introduced to Parliament in 2011. FOFA was the former 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), which was established to inquire into, and report on, issues associated with financial product and services provider collapses that occurred in the wake of the Global Financial Crisis.

The underlying objective of FOFA was to improve the quality of financial advice whilst building trust and confidence in the financial advice industry.

The FOFA amendments commenced, on an optional basis, from 1 July 2012, and became compulsory from 1 July 2013.

The Government agrees with the policy intent of FOFA, but considers that the legislation has-in parts-placed an unnecessarily heavy compliance burden on the financial services industry. When the Corporations Amendment (Future of Financial Advice) Bill 2012 and the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2012 (2012 FOFA Bills) were introduced into Parliament, they were referred to the Parliamentary Joint Committee on Corporations and Financial Services (the Committee).

The Committee delivered its report on the 2012 FOFA Bills in February 2012; the report included a Dissenting Report by Coalition members of the Parliamentary Joint Committee (the Dissenting Report). The Dissenting Report put forward 16 recommendations for changes to FOFA, reflecting the Coalition's concerns that the 2012 FOFA Bills were too complex, costly to implement and created unnecessary red tape.

In July 2013, the Coalition released its Policy to Boost Productivity and Reduce Regulation, in which it committed to reduce compliance costs for small business, financial advisers and consumers who access financial advice, by implementing the recommendations from the Dissenting Report.

The amendments in this Bill reduce compliance burdens whilst maintaining consumer protections.

On 20 December 2013, the Assistant Treasurer, Senator the Hon Arthur Sinodinos AO, announced amendments to FOFA. The amendments implement the Government's election commitment to reduce compliance costs for the financial services industry.

On 19 March 2014, the Bill was introduced into Parliament as part of the Government's Autumn Repeal Day; the Bill was referred to the Senate Economics Legislation Committee (the Senate Committee) on 20 March 2014. In line with the referral, the Acting Assistant Treasurer, Senator the Hon Mathias Cormann, announced on 24 March 2014 that the accompanying FOFA amendments would be put on hold while the Committee considered the Bill and to enable the Government to consult further in good faith with all relevant stakeholders.

Since March, the Government has undertaken additional targeted consultation with: the Association of Financial Advisers; the Australian Bankers' Association; CHOICE; the Council of the Ageing; the Financial Planning Association of Australia; the Financial Services Council and a number of its members; Industry Super Australia; and National Seniors Australia.

Based on these consultations a number of refinements to better target certain FOFA provisions have been made.

The Senate Committee released its report on the Bill on 16 June 2014. Overall, the Senate Committee found that the proposed amendments achieve a proper balance between providing adequate consumer protection and sound professional and affordable financial advice. The Senate Committee recommended that the Bill be passed after the Government give consideration to two recommendations.

The Government agrees with these recommendations and has responded by introducing Parliamentary amendments to the Bill. Changes have also been made to the explanatory memorandum to address the Committee's recommendations. These changes are reflected in this document.

On 15 July 2014, the Government announced a number of changes to the Statement of Advice requirements to incorporate additional improvements agreed with the Palmer United Party and the Australian Motoring Enthusiasts Party.

The Bill includes the following key amendments to FOFA:

·
removing the need for clients to renew their ongoing fee arrangement with their adviser every two years (also known as the 'opt-in' requirement);
·
making the requirement for advisers to provide a fee disclosure statement only applicable to clients who entered into their arrangement after 1 July 2013;
·
removing paragraph 961B(2)(g), the 'catch-all' provision, from the list of steps an advice provider may take in order to satisfy the best interests obligation;
·
better facilitating the provision of scaled advice; and
·
providing a targeted provision that permits benefits on general advice in certain circumstances; payments commonly known as commissions are not permitted.

Further, the Bill includes amendments to the Statement of Advice requirements that:

·
provide for additional disclosure and information in the Statement of Advice in relation to existing rights of the client and obligations of the provider of advice;
·
ensure that any instructions for further or varied advice from the client are: documented in writing; signed by the client; and acknowledged by the providing entity, or an individual acting on behalf of the providing entity; and
·
require that the Statement of Advice be signed by both the provider of the advice and the client.

Time sensitive amendments were reflected in the Corporations Regulations to the extent allowed under the relevant regulation-making powers. These amendments include: the removal of the opt-in requirement; changes to fee disclosure statements; removal of the catch-all provision; the facilitation of the provision of scaled advice; and changes to conflicted remuneration. These amendments will subsequently be repealed once the Bill receives the Royal Assent.

Consultation: The Government has undertaken extensive consultation on the amendments to FOFA.

Consultation on an exposure draft Bill and Regulation was conducted for three weeks in February 2014. Various consultation meetings were also held. A total of 57 written submissions were received.

Further targeted consultation was also undertaken whilst the Committee was conducting its inquiries into the Bill.

These consultations have informed the final position of this Bill.

Date of effect: The amendments commence upon the day after this Bill receives the Royal Assent.

Proposal announced: The amendments to FOFA were announced on 20 December 2013 by the Assistant Treasurer, Senator the Hon Arthur Sinodinos AO.

Refinements to FOFA were announced on 20 June 2014 by the Acting Assistant Treasurer, Senator the Hon Mathias Cormann.

The amendments to Statements of Advice were announced on 15 July 2014.

Financial impact: This Bill has no significant financial impact on Commonwealth expenditure or revenue.

Compliance cost impact: The amendments have no compliance cost impact; they are deregulatory in nature.

Regulation impact statement

A details-stage regulation impact statement (RIS) for the amendments to FOFA has been prepared and can be found in Chapter 6.

Information gathered through the consultation process has been used to inform the details-stage RIS.

Chapter 1 Best interests obligation

Outline of chapter

1.1 Schedule 1 to the Bill amends Part 7.7A of the Corporations Act 2001 (Corporations Act) to: remove the 'catch-all' provision from the list of steps an advice provider may take in order to satisfy the best interests duty; better facilitate the provision of scaled advice; make consequential changes to the modified best interests duty; and a minor change to the definition of a basic banking product.

Context of amendments

1.2 The Government has committed to provide certainty and reduce compliance costs for small business, and financial advisers, whilst maintaining the quality of advice for consumers who access financial advice. See Outline above for further information.

Removal of the 'catch-all' provision

1.3 Currently, the law-in subsection 961B(1) of the Corporations Act-requires advice providers to act in their client's best interests when providing personal advice. Subsection 961B(2) lists a number of steps that a provider may take in order to show they have satisfied the best interests duty. There are seven steps, the last of which is paragraph (g), also known as the 'catch-all' provision. Paragraph (g) states that a provider must prove that they have 'taken any other step [in addition to the six preceding ones] that ... would reasonably be regarded as being in the best interest of the client.'

1.4 The Government has committed to removing the catch-all provision to remove legal uncertainty on how to satisfy the best interests duty.

Facilitating scaled advice

1.5 Scaled advice is personal advice where the scope of the advice has been limited or scaled. There is currently uncertainty over the amount of work that is required for providers to satisfy their best interests duty when providing scaled advice. There is also uncertainty over the ability for providers and clients to agree on the scope of scaled advice.

1.6 The Government has committed to amending the legislation to better facilitate the provision of scaled advice to reduce uncertainty and enable cost-effective scaled advice to be provided to consumers.

Modified best interests obligation

1.7 The current best interests duty in the FOFA provisions provides a modified best interests duty for certain advice providers who provide advice on basic banking products or general insurance products.

1.8 Consequential changes to the modified best interests obligation are required given the Government's commitment to include consumer credit insurance products in section 963D of the Corporations Act.

The client priority obligation

1.9 Under the current law, the client priority obligation in section 961J does not need to be satisfied if the advice sought by the client relates solely to a basic banking product or a general insurance product.

1.10 To ensure consistency with the amendments to the modified best interests duty that flow on from the inclusion of consumer credit insurance in the basic banking provision, consequential changes to the client priority obligation are required.

Definition of basic banking products

1.11 Under the current law, section 961F defines a 'basic banking product' as, amongst other things, a non-cash payment facility linked to a basic deposit product.

1.12 The Bill removes the requirement that non-cash payment facilities must be related to a basic deposit product so as to include products that are functionally equivalent to those already listed in the definition, or products that may not always be related to a basic banking product.

Summary of new law

1.13 The Bill amends the best interests duty in section 961B by:

·
removing paragraph (g) (the catch-all provision) from the best interests duty;
·
better facilitating scaled advice by explicitly allowing clients and providers to agree the scope of advice to be provided and indicating the best interest duty applies to this agreed scope; and
·
consequential changes to the modified best interests duty.

1.14 The Bill also amends the appropriate advice requirement in section 961G to clarify that it operates as a separate provision; makes consequential amendments to the client priority obligation; and a minor change to the definition of a basic banking product.

Comparison of key features of new law and current law

New law Current law
The requirement to act in the best interests of the client remains, but the last step in subsection 961B(2) is no longer required.

One of the ways a provider could show they have satisfied the best interests duty is to follow the steps outlined in subsection 961B(2). The last step requires a provider to have 'taken any other step [in addition to the six preceding ones] that ... would reasonably be regarded as being in the best interests of the client.'
Clients and providers can explicitly agree on the scope of any scaled advice.

Providers need only investigate the objectives, financial situation and needs of their client that are relevant to the scaled advice to be provided.

However, the advice provided would still need to be in the best interests of the client, appropriate to the client, and fulfil all the obligations of Division 2 of Part 7.7A.

There is uncertainty on whether clients and providers can agree on the scope of the advice to be provided.

Some providers are concerned that they are required to undertake a fulsome investigation into the client's objectives, financial situation and needs before any scaled advice can be provided.

An agent or employee of an Australian Authorised Deposit-taking institution (ADI) need not satisfy certain steps in the best interests duty in relation to advice provided on a basic banking product or general insurance product if they provide personal advice on a basic banking product, a general insurance product, a consumer credit insurance product, or a combination of these products.

However, the full best interests duty applies to the advice about consumer credit insurance products in this situation.

An agent or employee of an Australian Authorised Deposit-taking institution (ADI) need not satisfy certain steps in the best interests duty if they provide personal advice on a basic banking or general insurance product.
Advice provided to a client must be appropriate having regard to the best interests duty. Advice provided to a client must be appropriate had the provider satisfied the best interests duty.

An agent or employee of an ADI will not be required to satisfy the client priority obligation in relation to advice that relates to a basic banking product, a general insurance product, or a combination of these products, if the subject matter of the advice sought by the client relates to a basic banking product, a general insurance product, a consumer credit insurance product, or a combination of any of these products.

Further, all providers will not be subject to the client priority obligation in relation to advice on a general insurance product to the extent that the subject matter of the advice sought by the client relates to a general insurance product.

An agent or employee of an ADI is not required to satisfy the client priority obligation if the subject matter of the advice sought by the client relates only to a basic banking product.

Further, all providers are not required to satisfy the obligation if the subject matter of the advice sought by the client relates only to a general insurance product.

The definition of a basic banking product will be amended so a non-cash payment facility will no longer be required to be related to a basic deposit product. The definition of a basic banking product includes, amongst other things, a facility for making non-cash payments that is related to a basic deposit product.

Detailed explanation of new law

Remove the 'catch-all' provision

1.15 The Bill addresses concerns that there is significant legal uncertainty over how financial providers can satisfy their duties to their clients.

1.16 Currently, subsection 961B(1) of the Corporations Act establishes a best interest duty. It states that a provider 'must act in the best interests of the client' when providing personal advice to a retail client.

1.17 Subsection 961B(2) currently provides seven steps that a provider may take to satisfy the best interests duty. Paragraph 961B(2)(g) is the last of the seven steps. It states that a provider must be able to prove that they have 'taken any other step [in addition to the six preceding ones] that, at the time the advice is provided, would reasonably be regarded as being in the best interest of the client, given the client's relevant circumstances.' Paragraph 961B(2)(g) is known as the 'catch-all' provision.

1.18 The Bill removes paragraph 961B(2)(g), and makes a related consequential amendment to section 961E by removing it; section 961E specifies what would reasonably be regarded as being in the best interests of the client. As the phrase 'reasonably be regarded as being in the best interests of the client' is only contained in paragraph 961B(2)(g), which is being removed, section 961E is not required. [Schedule 1, items 9, 10 and 14, section 961E and subsections 961B(2)(f) and 961B(2)(g)]

1.19 The removal of paragraph 961B(2)(g) removes the legal uncertainty over how advice providers can satisfy their best interests duty whilst maintaining consumer protections. Even without paragraph 961B(2)(g), subsection 961B(2) still sets a high standard for providers to show they have acted in the best interests of their client.

Interaction with other best interest obligations

1.20 It should be noted that the best interest duty established by subsection 961B(1) remains-unaltered-in the legislation. Further, it should be noted that the best interest duty from section 961B works in conjunction with related obligations in Division 2 of Part 7.7A; namely:

·
section 961G, which requires the advice to be appropriate;
·
section 961H, which requires an adviser to provide a warning if there is any incomplete or inaccurate information;
·
section 961J, which requires a provider to prioritise their client's interests ahead of their own; and
·
section 961L, which requires licensees to ensure that their representatives are complying with these sections.

1.21 These obligations will continue to remain in the law.

Facilitating scaled advice

1.22 The Bill amends the best interests obligation to better facilitate the provision of scaled advice: the Bill clarifies that an advice provider and a client may agree on the scope of advice to be provided. The Bill provides that the best interests duty, and the other obligations of Division 2 of Part 7.7A of the Act, applies to the scope or subject matter of the advice agreed upon between the client and the provider.

1.23 The Bill also clarifies the appropriateness of advice requirement.

1.24 As mentioned previously, the best interest duty applies to personal advice provided to retail clients. Personal advice is advice that considers the financial objectives, situation, and needs of a person (as defined in subsection 766B(3) of the Corporations Act). All personal advice is 'scaled' or 'limited in scope' to some extent: advice is either less or more comprehensive in scope along a continuous spectrum.

1.25 Whilst scaled advice is not specifically defined in the Corporations Act, it is usually referred to in the industry as a targeted form of personal advice. For example, scaled advice may cover a specific area of a client's needs such as insurance or superannuation, and can be contrasted to holistic advice that usually considers all of the client's financial needs.

1.26 The limited scope of scaled advice usually makes it much cheaper than more fulsome personal advice. This may be due to the fact that a provider does not need to consider as many of the client's circumstances, needs and objectives to provide the advice.

1.27 As holistic personal advice can often be expensive, scaled advice is an affordable avenue for many consumers seeking personal advice.

1.28 The Bill addresses uncertainty over whether a client and adviser can agree on the scope of the advice to be provided by inserting a specific provision indicating that such an agreement can occur. [Schedule 1, item 13, subsection 961B(4A)]

1.29 It is quite common for a client-who may not have had any prior contact with a provider-to initially seek advice on a broad range of services. However, due to the breadth of scope, such advice may not be affordable for the client. In other instances, a client may not be sure of the advice they really want or need. Nonetheless, even if the client knows the advice they want or need, the client may not be able to afford the advice; thus, the scope may need to be limited in some form to reduce the cost of the advice.

1.30 Where the scope is limited in some form, a provider and their client will usually have a series of conversations to explore and understand the advice the client wants; these conversations help to better define possible subjects of the advice.

1.31 Once the provider and client have explored and better understood what the client wants, agreement between the provider and the client on the subject of the advice usually occurs. The new provision explicitly indicates that this agreement can take place. [Schedule 1, item 13, subsection 961B(4A)]

1.32 The new provision also clarifies that the obligations of Division 2 of Part 7.7A of the Act apply to the advice ultimately sought. As such, the advice that is provided to the client-even though limited in scope-must still be in the best interests of the client, be appropriate for the client, have prioritised the client's needs, and a warning must be given if the advice is based on incomplete or inaccurate information. An adviser should be mindful of the obligations of Division 2 of Part 7.7A when engaging in conversations to arrive at the scope of the advice to be sought.

1.33 It is important to note that this new provision does not alter the operation of section 947D; section 947D requires an advice provider to disclose certain information about the costs and benefits of switching between one financial product and another financial product. As such, providers must still be mindful of their section 947D obligations when providing scaled advice.

1.34 In agreeing the subject of the advice, there needs to be a 'meeting of the minds' between both the provider and the client. The provider should clearly explain to the client the consequences of not receiving advice on other subjects.

1.35 For example, a retail client, who does not want to spend too much money on financial advice, seeks advice on financial matters. After having a conversation about the client's financial objectives, circumstances and needs, the client and provider agree that advice on superannuation, debt consolidation, and life insurance are topics that are particularly relevant to the client at this time.

1.36 The client, being only able to afford to receive advice on one of these topics, and having been informed-and having considered-the benefits and drawbacks of receiving advice on only one of these topics, can agree with the provider to receive advice on a particular topic. For the purposes of this example, assume the client decides to receive advice on debt consolidation; the new law clarifies that the client and provider can agree that advice on debt consolidation will be provided.

1.37 There is currently uncertainty over the advice that the best interest duty applies to; in particular, there is uncertainty over how the best interest duty-and related obligations-applies to scaled advice. Some industry stakeholders have questioned whether the duty applies to the advice as initially sought by the client (in the scenario above, the advice as initially sought would be advice on the broad topic of financial matters), or whether the duty applies to the advice as ultimately sought.

1.38 The Bill inserts an example of a client and provider agreeing the subject matter of advice. The example clarifies that the best interests obligations apply to the advice ultimately sought (in the scenario above: the advice ultimately sought is the advice on debt consolidation). [Schedule 1, item 13, subsection 961B(4A)(example)]

1.39 There is also currently uncertainty over the extent of the investigations that are required to be undertaken when providing scaled advice.

1.40 A number of industry participants consider that the current paragraph 961B(2)(a), which is the first of the steps in the best interests duty-and which requires the provider to identify the objectives, financial situations and needs of the client that were disclosed to the provider by the client through instructions-requires the provider to perform a 'full fact-find' with the client before any other steps are to be taken.

1.41 A full fact-find is generally associated with holistic advice, and requires a provider to consider-in great detail-the client's financial objectives, circumstances and needs. Given the time taken by a provider in considering these details, advice provided when a full fact-find is undertaken is usually quite expensive.

1.42 A full fact-find was never the intention behind paragraph 961B(2)(a); rather, paragraph 961B(2)(a) requires consideration of the objectives, circumstances and needs relevant to the client and the advice that is sought. The relevant objectives, circumstances and needs usually only become apparent after talking to the client to understand the advice they are after.

1.43 The Bill removes doubt about the necessity of a full fact-find by repealing paragraph 961B(2)(a) and inserting a new paragraph that requires the provider to identify the objectives, financial situation and needs of the client that are disclosed to the provider by the client. [Schedule 1, items 7 and 8, paragraphs 961B(2)(a) and (ba)]

1.44 Notwithstanding the fact that the steps in subsection 961B(2) do not need to be followed in the order as written, the position of the new paragraph-after paragraph 961B(2)(b)-should help alleviate concerns that an up-front full fact-find is required to be performed ahead of any other steps.

1.45 The new paragraph requires the provider to assess the facts that have been presented by the client, and to perform a comparison between the facts disclosed and the facts that would be relevant to the advice sought as required by subparagraph 961B(2)(b)(ii); subparagraph 961B(2)(b)(ii) requires the provider to identify the objectives, financial situation and needs of the client that would reasonably be considered as relevant to advice sought on that subject matter (the client's relevant circumstances).

1.46 The Bill further clarifies that the investigations a provider needs to conduct when providing advice-regardless of the scope-are those that are reasonably considered as relevant to the subject matter of the advice sought. [Schedule 1, item 11, subsections 961B(2)(note)]

Operation with the appropriate advice requirement

1.47 The best interests duty operates in conjunction with the appropriate advice requirement set out in section 961G; but, both operate as separate obligations. Currently, section 961G requires advice provided to be appropriate had the best interests duty been satisfied.

1.48 To ensure the appropriateness requirement operates as a separate obligation, the Bill amends section 961G to provide that advisers must only provide advice to the client if it would be reasonable to conclude that the advice is appropriate to the client 'having regard to' section 961B. [Schedule 1, item 15, subsection section 961G]

1.49 By specifying that a provider must have regard to section 961B, the best interests duty forms a central, although not absolute, basis for determining the appropriateness of the advice. In some instances, consideration of the best interests duty may be sufficient; in other instances, other factors may also need to be considered.

1.50 Consumers who seek financial advice expect that their adviser will act in their best interests and that, as a result, the advice provided will leave them in a better position. In addition, consumers expect that any advice provided will be tailored to their relevant circumstances. Accordingly, when determining the appropriateness of advice, an adviser must consider whether the advice provided could reasonably be expected to leave the client in a better position given their relevant circumstances.

1.51 To be clear, the appropriate advice requirement is not an outcomes test: it does not require that the client must be in a better position after the advice is provided; rather, it requires an adviser to consider whether a client would reasonably be expected to be in a better position.

1.52 Whilst the changes to the best interests duty explicitly allow a client and adviser to agree the scope of the advice, it does not allow a client and adviser to agree that the advice is appropriate for the client: this is a judgement call for the adviser. As such, agreeing on the scope of advice does not mean that inappropriate advice can be given; the appropriateness of the advice will need to be assessed by reference to the information obtained from the client and the client's relevant circumstances.

1.53 In certain circumstances, it may not be appropriate for the adviser to provide advice on the agreed topic, and so it may be necessary to warn the client or advise that certain action will not be appropriate; in other instances, a warning may not be necessary. This is ultimately an 'on balance' decision that will depend on the facts at hand and will require the adviser to exercise their professional judgement using their skills and experience.

1.54 Where the adviser, in having regard to section 961B, concludes that it is not appropriate to provide advice on a subject matter that has been agreed upon, the adviser should not provide that advice to the client.

Modified best interests obligation

1.55 The Bill makes consequential changes to the modified best interests duty as a result of the inclusion of consumer credit insurance products in section 963D of the Corporations Act.

1.56 Currently under subsection 961B(3), an agent or employee of an ADI is not required to satisfy the steps of the best interests duty (in paragraphs 961B(2)(d) to (g)) when the subject matter of the advice sought by the client is solely in relation to a basic banking product. Subsection 961B(4) further provides that a provider need not satisfy those steps when the subject matter of the advice sought by the client is solely in relation to a general insurance product.

1.57 The Corporations Regulations also provide that an agent or employee of an ADI need not satisfy the steps in paragraphs 961B(2)(d) to (g) when the only personal advice provided is in relation to a basic banking product and a general insurance product.

1.58 The Regulations also provide that the steps in paragraphs 961B(2)(d) to (g) do not need to be followed by any provider if the subject matter of the advice relates to a general insurance product.

1.59 The new law provides that an agent or employee of an ADI need not satisfy the steps in paragraphs 961B(2)(d) to (f) of the best interests duty in relation to personal advice on a basic banking or general insurance product where the subject matter sought by the client relates to a basic banking product, a general insurance product, a consumer credit insurance product, or a combination of these products. [Schedule 1, item 12, subsection 961B(3)]

1.60 To the extent that the subject matter of the advice sought by the client is a general insurance product, the provider satisfies the best interests duty if the provider takes the steps outlined in paragraphs (2)(b), (ba) and (c). [Schedule 1, item 12, subsection 961B(4)]

1.61 It is important to note that this amendment does not extend the modified best interests duty (under the current law, the need to satisfy the steps in paragraphs 961B(2)(a) to (c) but not paragraphs 961B(2)(d) to (g) when personal advice is provided) to the provision of consumer credit insurance; rather, it allows the modified best interests duty to apply to a basic banking product and/or general insurance product where the subject matter of the advice sought also relates to consumer credit insurance.

1.62 As such, the provision of advice on consumer credit insurance still requires all the steps in subsection 961B(2) (the best interests duty) to be satisfied.

The client priority obligation

1.63 The Bill amends the client priority obligation to ensure consistency with the amendments to the modified best interests duty that flow on from the inclusion of consumer credit insurance in the basic banking provision.

1.64 Section 961J places an obligation on the provider to give priority to the client's interests when the provider knows or reasonably ought to know that there is a conflict between the client's interests and the provider's interests, or the interests of one of the other parties listed in subsection 961J(1).

1.65 Under the current law, an agent or employee of an ADI is not required to satisfy the client priority obligation if the subject matter of the advice sought by the client relates only to a basic banking product. Further, all providers do not need to satisfy the obligation if the subject matter of the advice sought by the client relates only to a general insurance product.

1.66 The Bill makes consequential amendments to the circumstances in which a provider is not required to satisfy the provision.

1.67 An agent or employee of an ADI will not be required to satisfy the client priority obligation in relation to advice that relates to a basic banking product, a general insurance product, or a combination of these products, if the subject matter of the advice sought by the client relates only to a basic banking product, a general insurance product, a consumer credit insurance product, or a combination of any of these products. The client priority rule will continue to apply to advice provided in relation to a consumer credit insurance product. [Schedule 1, item 16, subsection 961J(2)]

1.68 Further, all providers will not be required to satisfy the client priority obligation in relation to advice on a general insurance product to the extent that the subject matter of the advice sought by the client relates to a general insurance product. The client priority obligation will continue to apply in providing advice on matters not relating to a general insurance product. [Schedule 1, item 16, subsection 961J(3)]

Basic banking products

1.69 Section 961F of the Act defines a 'basic banking product'. This definition captures a range of products, including first home saver accounts, basic deposit products, non-cash payment facilities linked to a basic deposit product, and traveller's cheques.

1.70 This definition was established in late 2011 when the FOFA legislation was first introduced into Parliament. Since this time, the banking industry has developed, and consumers have demanded, alternative products that are functionally equivalent or may not always be related to a basic banking product. For example:

·
pre-paid travel cards instead of traveller's cheques; and
·
pre-paid debit cards instead of a debit card that is linked to a bank account.

1.71 The Bill removes the requirement that non-cash payment facilities must be related to a basic deposit product so as to include products that are functionally equivalent to those already listed in the definition, or products that may not always be related to a basic banking product. [Schedule 1, item 14A, paragraph 961F(b)]

Application and transitional provisions

1.72 The amendments to the best interests obligation apply in relation to the provision of personal advice to a retail client on or after the commencement day. The amendments commence the day after the Royal Assent. [Schedule 1, item 43, sections 1531A and 1531B]

1.73 The current requirements continue to apply until the new law is in place or new regulations are made.

Chapter 2 Ongoing fee arrangements

Outline of chapter

2.1 Schedule 1 to the Bill amends Part 7.7A of the Corporations Act 2001 (Corporations Act) to:

·
remove the renewal notice obligation for fee recipients;
·
make the requirement for providers to provide a fee disclosure statement only applicable to clients who entered into their arrangement after 1 July 2013; and
·
extend the time period within which fee disclosure statements must be provided to a client.

Context of amendments

2.2 The Government has committed to provide certainty and reduce compliance costs for small business and financial advisers, whilst maintaining the quality of advice for consumers who access financial advice. See Outline for further information.

Removal of the 'opt-in' requirement

2.3 The current law provides that licensees or representatives ('fee recipients') who have an ongoing fee arrangement with a retail client whose ongoing fee arrangement commenced after 1 July 2013 must obtain their client's agreement at least every two years to continue the ongoing fee arrangement, for new clients. If, after receiving the renewal notice, the client decides not to renew or fails to respond to the fee recipient's renewal notice, the ongoing fee arrangement terminates.

2.4 The Government has committed to remove the requirement for fee recipients to obtain their client's approval at least every two years in order to continue an ongoing fee arrangement (known as the 'opt-in' requirement) on the basis that the current law imposes unnecessary costs.

Changes to fee disclosure statements

2.5 The current law provides that licensees and representatives must give all retail clients who have an ongoing fee arrangement a fee disclosure statement which shows the fees paid by the client, the services the client received, and the services the client was entitled to receive, in the previous 12 months.

2.6 The Government has committed to making the annual fee disclosure statements prospective only. In other words, a fee disclosure statement only needs to be sent to clients charged an ongoing fee during a period of 12 months or more where the ongoing arrangement was entered into after 1 July 2013. It is not required for arrangements entered into prior to 1 July 2013.

2.7 The current law requires a fee disclosure statement to be provided to a retail client within 30 days of the anniversary of the day the ongoing arrangement was entered into (the client's anniversary date). The statement must also relate to the period of 12 months that ends on the day no more than 30 days before when the statement must be given.

2.8 The Government has committed to: extend the time period in which a fee disclosure statement is required to be sent to a client to 60 days after the client's anniversary date; and amend the statement period, so that it applies to the period of 12 months that ends on the day no more than 60 days before when the statement must be given.

2.9 This is on the basis that retrospectively applying the annual fee disclosure statement imposes large costs on industry, with minimal benefit, and that the previous 30 day time period for providing a fee disclosure statement was too short.

Clarification of intra-fund advice

2.10 The current law does not define intra-fund advice. The Government has committed to clarifying this term in the FOFA legislation.

Summary of new law

2.11 The Bill provides that, where an ongoing financial advice relationship exists between a licensee or representative (the 'fee recipient') and a retail client which involves the charging of an ongoing advice fee (however described), the adviser is no longer required to:

·
provide a renewal notice for fee recipients; and
·
provide a fee disclosure statement to clients who entered into their ongoing fee arrangement before 1 July 2013.

2.12 Fee recipients still need to provide an annual fee disclosure statement to all other clients (that is, post-1 July 2013 clients)

2.13 The Bill extends the time period in which a fee disclosure statement is required to be sent to a client to 60 days after the client's anniversary date. The statement must relate to the period of 12 months that ends on the day no more than 60 days before when the statement must be given.

2.14 The Bill defines the term 'intra-fund advice'.

Comparison of key features of new law and current law

New law Current law
No requirement to obtain a client's agreement to charge an ongoing fee.

Any ongoing fee arrangement continues to exist unless the arrangement is terminated by either the client or the licensee or representative.

Licensees and representatives who have an ongoing fee arrangement with a retail client must obtain their client's agreement at least every two years to continue the ongoing fee arrangement, for new retail clients who enter into an ongoing fee arrangement from 1 July 2013.
Licensees and representatives who have an ongoing fee arrangement with a client must give retail clients who entered into the arrangement after 1 July 2013 a fee disclosure statement which shows the fees paid by the client, the services the client received, and the services the client was entitled to receive, in the previous 12 months. Licensees and representatives who have an ongoing fee arrangement with a client must give all retail clients a fee disclosure statement which shows the fees paid by the client, the services the client received, and the services the client was entitled to receive, in the previous 12 months.
Fee disclosure statements must be provided within 60 days of the client's anniversary date.

The statement must relate to the period of 12 months that ends on the day no more than 60 days before when the statement must be given.

Fee disclosure statements must be provided within 30 days of the client's anniversary date.

The statement must relate to the period of 12 months that ends on the day no more than 30 days before when the statement must be given.

The term 'intra-fund advice' is defined by way of a note which links the term and the relevant subject rules under section 99F of the SIS Act. The term 'intra-fund advice' is not expressly defined.

Detailed explanation of new law

Removal of the renewal notice 'opt-in' requirement

2.15 Under the current law, where an ongoing financial advice relationship exists between a licensee or representative (the 'fee recipient') and a retail client which involves the charging of an ongoing advice fee, the fee recipient is required to obtain their client's agreement at least every two years to continue the ongoing fee arrangement by way of a renewal notice, for clients who entered into an ongoing fee arrangement from 1 July 2013.

2.16 An ongoing fee arrangement exists where a retail client is given personal advice and charged an ongoing fee during a period of more than 12 months.

2.17 The renewal notice is required to contain information indicating that the client may renew the ongoing fee arrangement, as well as information setting out what will happen if the client elects not to renew the arrangement, or if they do not respond to the renewal notice, in particular, that the arrangement (including the provision of advice and the ongoing fee) will terminate.

2.18 The renewal notice must to be sent to the client within 30 days of the end of the two-year period. The client then has 30 days to agree to renew the arrangement.

2.19 If, after receiving the renewal notice, the client decides not to renew or fails to respond to the fee recipient's renewal notice, the ongoing fee arrangement terminates. This means that the fee recipient is not obligated to provide ongoing financial advice to the client, and the client is not obligated to continue paying the ongoing fee.

2.20 The current law provides that licensees or representatives may not be subject to the renewal notice obligation if they are bound by an ASIC approved code of conduct that obviates the need for the opt-in requirement.

2.21 The new law removes the obligation for a fee recipient to provide a renewal notice to a client. [Schedule 1, items 3-5 and 17, 18, 19, 20, 21, Subdivision B of Division 3 of Part 7.7A (heading), sections 960, 962CA, 962K, 962L, 962M and 962N and subsections 962F(1), (2) and (3)]

2.22 Therefore, under the new law, an 'opt-out' system applies where any ongoing fee arrangement continues to exist unless the arrangement is terminated by either the client or the fee recipient.

Changes to fee disclosure statements

3.23 Under the current law, where an ongoing financial advice relationship exists between a licensee or representative (the 'fee recipient') and a retail client which involves the charging of an ongoing advice fee (a fee for a period longer than 12 months), the fee recipient is required to give all retail clients a fee disclosure statement which shows the fees paid by the client, the services the client received, and the services the client was entitled to receive, in the previous 12 months.

2.24 The fee disclosure statement must be provided: before the end of a period of 30 days beginning on the 12 month anniversary of the day the arrangement was entered into; or, if a fee disclosure statement has been given to the client since the arrangement was entered into, before the end of a period of 30 days beginning on the 12 month anniversary of the day immediately after final day of the year for which disclosure was provided in the last fee disclosure statement.

2.25 The statement must relate to the period of 12 months that ends on the day no more than 30 days before when the statement must be given.

2.26 The new law removes the requirement to provide a yearly fee disclosure statement to clients who entered into their ongoing arrangement prior to 1 July 2013, restricting the requirement for licensees to provide a fee disclosure statement to clients who entered into their ongoing arrangement after 1 July 2013. [Schedule 1, items 22, 39 and 40, Subdivision C of Division 3 of Part 7.7A, table item 22 of subsection 1317E(1) and subparagraph 1317G(1E)(b)(v)]

2.27 The new law also extends the time in which a fee disclosure statement must be provided to the client: the fee disclosure statement will need to be sent within 60 days of the client's anniversary date. The statement must also relate to the period of 12 months that ends on the day no more than 60 days before when the statement must be given. [Schedule 1, items 20A and 20B, subsection 962G(1) and subparagraph 962H(1)(b)(i)]

2.28 The obligations for providing a fee disclosure statement to post-1 July 2013 clients-set out in Subdivision B of the Corporations Act-remain unchanged.

2.29 The result is that the obligation to provide a fee disclosure statement applies to fee recipients in situations where they:

·
provide personal advice to a retail client; and
·
the client is charged an ongoing fee during a period of 12 months or more; and
·
the arrangement was entered into after 1 July 2013.

2.30 Judgment needs to be used to consider what constitutes a new ongoing arrangement. As discussed below, a significant alteration of the arrangement between the fee recipient and the client might constitute a new arrangement; a small alteration in the terms might not.

2.31 Generally speaking, alterations in the terms such as a simple alteration of an existing fee, an alteration in the duration of the arrangement, or where the fee recipient merged or was taken over by another company but the existing arrangement did not otherwise change, would not constitute a new ongoing fee arrangement.

Example 2.1: Changes to an existing ongoing arrangement


YPT Financial Planners have recently been taken over by ABC Incorporated.

Previous YPT clients have had their pre-takeover ongoing fee arrangements continued under the new company, and the particulars of the arrangements have not changed.

This would not constitute new ongoing fee arrangements for YPT clients.

Example 2.2: Changes to an existing ongoing arrangement


Ellen, a financial adviser, works for Sky Limited Financial. Her clients have ongoing fee arrangements with Sky Limited. When Ellen moves on from Sky Limited, she passes her clients to another Sky Limited employee, Phil.

As Ellen's clients have ongoing arrangements with Sky Limited, Ellen leaving Sky Limited would not constitute a new ongoing fee arrangement.

If Phil then negotiates with a particular client to alter the terms of their arrangement, depending on the changes, this may constitute a new ongoing fee arrangement.

2.32 However, if the fee recipient substantially alters the terms of an agreement with a client-for example, through the changing of the advice from insurance only to a much broader ambit, or a change in the structure of the fees paid-it might be considered that a new ongoing arrangement has been entered into.

2.33 Provisions in Part 7.7A of the Corporations Act which support the fee disclosure statements to post-July 2013 customers (such as those outlining what information must be included in the fee disclosure statement, and what happens when the fee recipient does not comply with the requirement to provide a fee disclosure statement within the specified time) remain unchanged.

Clarification of intra-fund advice

2.34 Under the current law, the term intra-fund advice is not expressly defined.

2.35 The Bill inserts a note into section 963B to clarify that the term intra-fund advice refers to a type of financial product advice provided to a member of a regulated superannuation fund by a trustee of the fund, or by persons under an arrangement with the trustee of the fund.

2.36 The note links the commonly used term with the rules under section 99F of the Superannuation Industry (Supervision) Act 1993, which deal with the subject area.

2.37 In particular, the note clarifies that intra-fund advice is not advice of the kind the cost of which is prohibited from being collectively levied under section 99F of the SIS Act. [Schedule 1, item 29, section 963B (note)]

2.38 The ban on conflicted remuneration is intended to capture benefits intended to influence the advice or product choice recommendation provided to retail clients.

2.39 Where remuneration structures relating to the provision of intra-fund advice are unlikely to materially influence the intra-fund advice provided to members, for example the levying of administration or management fees by trustees or fee for service type payments to third party advice providers, it is not intended that these arrangements would be captured by the ban on conflicted remuneration.

Application and transitional provisions

Removal of 'opt-in' requirement

2.40 The removal of the 'opt-in' requirement applies in relation to ongoing fee arrangements with renewal notice days (the renewal notice day being either the second anniversary of the day on which the arrangement was entered into or, if the arrangement had previously been renewed, the second anniversary of the last day on which the arrangement was renewed) that occur on or after the day after the Royal Assent. [Schedule 1, item 43, sections 1531A and 1531C]

2.41 The current renewal notice obligations compulsorily apply to clients who entered into an ongoing fee arrangement after 1 July 2013. Fee renewal notices become due within 30 days of 1 July 2015. As such, no renewal notice days occur prior to the removal of the opt-in provision.

2.42 However, FOFA was optional from 1 July 2012. For those fee recipients who chose to comply with FOFA early, the renewal notice obligations apply to clients who entered into an ongoing fee arrangement after the fee recipient's opt-in date. As such, fee renewal notices could become due earlier than 1 July 2015 for these fee recipients.

2.43 The removal of the opt-in provisions apply from the earlier of the day after the regulations are registered, or the time outlined above.

Limitation of fee disclosure statement

2.44 The removal of the requirement to provide a fee disclosure statement to clients who entered into their ongoing fee arrangement before 1 July 2013 applies in relation to an ongoing fee arrangement for those disclosure days for the arrangement that occur on or after the day after the Royal Assent. [Schedule 1, item 43, sections 1531A and 1531D]

2.45 The current requirement to provide clients with a fee disclosure statement continue to apply until the new law is in place or new regulations are made.

2.46 Further, the extension of the time in which a fee disclosure statement must be provided to a client would apply in relation to an ongoing fee arrangement for those disclosure days for the arrangement that occur on or after the day after the Royal Assent.

Chapter 3 Conflicted remuneration and other banned remuneration

Outline of chapter

3.1 Schedule 1 to the Bill amends Part 7.7A of the Corporations Act 2001 (Corporations Act) to amend the current conflicted remuneration provisions.

Context of amendments

3.2 The Government has committed to provide certainty and reduce compliance costs for small business and financial advisers, whilst maintaining the quality of advice for consumers who access financial advice. See Outline for further information.

General advice provision

3.3 Under the current law, remuneration (both monetary and non-monetary) received in relation to both personal advice (financial product advice that takes into account the client's objectives, financial situation and needs) and general advice (financial product advice that does not take into account the client's objectives, financial situation and needs) is captured by the ban on conflicted remuneration.

3.4 The Government considers that the current application of the ban on conflicted remuneration imposes unnecessary burdens on industry by capturing individuals not directly involved in providing advice to clients. However, it is important to note that it was never the Government's intention to allow the payment of commissions on general advice.

3.5 To this end, the Government intends to introduce a targeted 'general advice provision' that specifies that monetary benefits paid in relation to general advice are not conflicted remuneration as long as certain conditions are met. Importantly, the provision clarifies that payments commonly known as commissions are not permitted.

3.6 The provision is targeted and is comprised of five limbs; all five limbs must be satisfied for the benefit to not be considered conflicted remuneration.

Execution-only provision

3.7 Under the current law, the 'execution-only provision' provides that benefits paid for execution-only services (such as the issue or sale of a financial product) are not conflicted remuneration. However, the provision does not apply in instances where a person within the licensee group (of the person receiving the benefit) has provided advice to the client on the product, or class of product, in the previous 12 months.

3.8 The Government has committed to broaden the provision to reduce unnecessary administrative complexity and ensure that legitimate execution-only services can be provided.

Education and training provision

3.9 Under the current law, the 'education and training provision' specifies that benefits in relation to education and training relating to the provision of financial product advice are not conflicted remuneration.

3.10 In order to facilitate industry attempts to up-skill, the Government has committed to broaden the provision to include training that relates to conducting a financial services business.

Basic banking provision

3.11 Under the current law, a 'basic banking provision' is provided that deems benefits in relation to basic banking products as not conflicted remuneration. To access the provision, the benefit must: be received by an agent or employee of an ADI; relate to a basic banking or general insurance product; and the agent or employee of an ADI-at the time of providing advice on the basic banking product-must not provide financial product advice on any other financial product except for general insurance.

3.12 The Government has committed to broaden the existing basic banking provision to include all simple, 'Tier 2' products-Tier 2 products are generally considered simple in nature, and include basic banking products, general insurance products, and consumer credit insurance products.

Ban on volume-based shelf-space fees

3.13 Under the current law, a platform operator is prohibited from receiving 'volume-based shelf-space fees' from a fund's manager where the fee is for 'purchasing' shelf space or to receive preferential treatment by the platform operator.

3.14 In order to clarify the scope of the ban and provide certainty to industry, the Government has committed to amend the ban on volume-based shelf-space fees to clearly identify the payments the ban intends to capture.

Client-pays provision

3.15 Under the current law, the 'client-pays provision' provides that certain benefits paid by a client to a licensee or representative are not conflicted remuneration.

3.16 The Government has committed to clarify that the provision also applies in circumstances where a benefit is paid by another party as long as the payment is made out of the client's funds, and the benefit is given at the direction of the client and with the client's clear consent.

'Mixed' benefits

3.17 The current provisions of the Corporations Act do not explicitly permit 'mixing' of benefits in relation to products or circumstances that are deemed to not be conflicted remuneration. The Corporations Regulations has addressed this problem; however, these changes have not been reflected in the Corporations Act.

3.18 The Government has committed to amend the Corporations Act to reflect the changes in the Corporations Regulation.

Regulation-making powers

3.19 Under the current law, regulation-making powers exist that permit certain benefits to be excluded from the definition of conflicted remuneration in prescribed circumstances. However, there are no regulation-making powers to clarify the operation of these provisions; neither are there regulation-making powers that could specify that, notwithstanding these provisions, a benefit is conflicted remuneration.

3.20 Given the complexity of payment arrangements within the financial advice industry, there is a possibility that future remuneration structures may be developed that are inadvertently captured by the ban on conflicted remuneration. Regulation-making powers that clarify the operation of the existing provisions provide a way to address any future unintended consequences.

3.21 Similarly, if a future remuneration structure is developed that, prima facie, is not captured by the ban on conflicted remuneration-but is clearly contrary to the spirit or intent of the ban-regulation-making powers that proscribe such payments provide a way to address this problem.

Summary of new law

3.22 The Bill amends the Corporations Act to broaden and clarify provisions that deem benefits to not be conflicted remuneration. Specifically, the amendments:

·
provide a targeted general advice provision that deems benefits on general advice to not be conflicted remuneration provided certain conditions are met;
·
broaden the execution-only provision so that it applies where no advice on that product, or the class of products of which the product is one, has been provided to the client by the individual performing the execution service in the previous 12 months;
·
expand the execution and training provision to include training relevant to a financial services business;
·
broaden the basic banking provision so that it can be accessed when advice on other simple ('Tier 2') financial products is provided at the same time as advice on a basic banking product and/or a general insurance product;
·
clearly define volume-based shelf-space fees and the payments the ban on volume-based shelf-space fees intends to capture;
·
clarify the operation of the client-pays provision;
·
clarify that 'mixing' benefits that are deemed not conflicted remuneration does not make the benefits conflicted remuneration; and
·
introduce regulation-making powers to address future remuneration structures that may be inadvertently captured by-or try to inappropriately avoid-the ban on conflicted remuneration.

Comparison of key features of new law and current law

New law Current law
The ban on conflicted remuneration on personal advice remains, but a limited general advice provision is provided.

The general advice provision does not permit payments commonly known as commissions.

Benefits on general advice are permitted if:

(a) the benefit is given to an employee, or persons in 'employee like' situations, in relation to general advice given to a retail client; and

(b) the employee provides the advice under the name, trade mark, or business name, of the licensee; and

(c) the benefit is not a payment that is commonly known as a commission; and

(d) the employee has not given personal advice (other than in relation to a basic banking product, general insurance product, consumer credit insurance product, or a combination of those products) to the retail client in the last 12 months before the benefit is given; and

(e) the financial product in relation to which the general advice is given is a product issued or sold by the licensee.

The ban on conflicted remuneration applies to both personal and general advice.

The ban currently applies to benefits given to a licensee or a representative that could reasonably be expected to influence the financial product advice provided or the financial products recommended to a retail client.

The execution-only provision now applies if a monetary benefit is given in relation to the issue or sale of a financial product, and the licensee or representative receiving the benefit has not provided financial product advice to the client in relation to the product-or class of products of which the product is one-in the previous 12 months. The execution-only provision deems a monetary benefit to not be conflicted remuneration if it is given in relation to the issue or sale of a financial product, and the licensee or representative has not provided financial product advice to the client in relation to the product-or products of that class-in the previous 12 months.
The education and training provision now applies if it is relevant to the operation of a financial services business, which includes the provision of financial product advice. The education and training provision deems a non-monetary benefit to not be conflicted remuneration if it relates to education and training that is relevant to the provision of financial product advice.
The basic banking product provision now enables a benefit to be given to an agent or employee of an ADI that also relates to a consumer credit insurance product. Further, the agent or employee may also provide personal advice on a consumer credit insurance product at the same time as providing advice on the basic banking product.

The basic banking provision deems benefits in relation to basic banking products to not be conflicted remuneration.

To utilise the provision, the benefit must: be received by an agent or employee of an ADI; relate to a basic banking product or a general insurance product; and the agent or employee of an ADI, at the time of providing advice on the basic banking product, must not provide financial product advice on any other financial product except for general insurance.

A clear definition of a volume-based shelf-space fee is provided.

Payments that are not considered volume-based shelf-space fees are also clarified.

Volume-based shelf-space fees paid by a fund's manager to a platform operator are banned.

However, the term volume-based shelf-space fee is broadly defined and has unintentionally captured many legitimate payment types

The existing client-pays provision is clarified to indicate that it also applies in circumstances where a benefit is paid by another party as long as the payment is made out of the client's funds, and the benefit is given at the direction of the client and with the client's clear consent. The client-pays provision deems certain benefits as not conflicted remuneration if they are paid by a client to a licensee or representative
The Corporations Act now explicitly permits 'mixed benefits', so a benefit may now be paid in relation to multiple products or circumstances that are deemed to not be conflicted remuneration and will still not be conflicted. The Corporations Act does not explicitly permit 'mixing' of benefits in relation to products or circumstances that are deemed not conflicted remuneration. As such, a payment in relation to multiple products or circumstances that are not conflicted remuneration may be considered conflicted remuneration.

The Corporations Regulations has addressed this problem; however, these changes have not been reflected in the Corporations Act.

Regulation-making powers are provided to clarify the operation of the conflicted remuneration provisions, including to deem some payments conflicted remuneration. No regulation-making powers exist to clarify the operation of the exemptions from conflicted remuneration.

Detailed explanation of new law

General advice provision

3.23 The Bill provides a targeted 'general advice provision' that deems monetary benefits that relate to general advice to not be conflicted remuneration in certain circumstances. The provision does not allow the payment of commissions on general advice.

3.24 This provision addresses concerns that the current law has unintentionally captured parties that do not provide personal advice. However, it is important to note that it was never the Government's intention to allow the payment of commissions on general advice. To this end, the general advice provision is targeted, and is comprised of five limbs; all five limbs must be satisfied for the benefit to not be considered conflicted remuneration. Importantly, there is a specific limb that clarifies-beyond a doubt-that payments known as commissions cannot be paid. [Schedule 1, item 29, subsections 963B(6) and (9)]

3.25 Currently, section 963A of the Corporations Act defines 'conflicted remuneration' as a benefit given to a licensee or representative that could reasonably be expected to influence the choice of financial product recommended or the financial product advice provided to a client. 'Financial product advice' is defined in section 766B of the Corporations Act to include both personal and general advice.

3.26 The five limbs to the general advice provision are:

1) The 'employee' limb (paragraph (a))

3.27 This limb ensures that only employees or persons in 'employee-like' situations are eligible to utilise the provision. The limb identifies three employee scenarios that are permitted:

·
an employee of the licensee, or a related body corporate of the licensee;
·
an employee of an authorised representative of the licensee; or
·
an individual who has been sub-authorised under section 961B of the Corporations Act by an authorised representative of the licensee to give general advice on behalf of the licensee of the kind given.
[Schedule 1, item 29, paragraph 963B(6)(a)]

2) The 'name of the licensee' limb (paragraph (b))

3.28 This limb restricts the employee limb by requiring the employee to provide general advice under the name of the licensee, a trade mark of the licensee, or a business name of the licensee. The term trade mark of a licensee means a trade mark of which the licensee is the registered owner under the Trade Marks Act 1995, and the business name of a licensee means a business name that is registered to the licensee under the Business Names Registration Act 2011. [Schedule 1, item 29, paragraph 963B(6)(b)]

3.29 Both the employee and name of the licensee limbs ensure that it is clear that the general advice is provided by an employee working for the licensee under the licensee's name, trade mark or business name.

3) The 'no commissions' limb (paragraph (c))

3.30 This limb clearly indicates that the general advice provision does not permit payments commonly known as commissions. This limb indicates that two types of payment are not permitted:

·
a recurring payment made because the person has given the general advice, and
·
a payment made solely because a financial product of a class in relation to which the general advice was given has been issued or sold to the client.
[Schedule 1, item 29, paragraph 963B(6)(c)]

3.31 The two payments are-respectively-broadly consistent with what are commonly referred to as a trail commission and an upfront commission.

3.32 It is important to note that neither the no commissions limb, nor the general advice provision, prevents the payment of a salary or a performance benefit (such as a performance bonus paid subject to a balanced scorecard).

3.33 The reference to 'solely' means that 'per product' payments-such as a benefit of $1 for each product issued-or-sold as a result of general advice given-are not permitted. However, if an employee were required to meet a reasonable performance target-such as selling 1,000 products-as well as a customer satisfaction target for the incentive payment to be paid, the payment would not be made solely because of the general advice: the performance and customer satisfaction targets would also have been satisfied; consequently, such a payment would be permitted.

3.34 It should be noted that a payment structured in a manner that, prima facie, is not solely because of the general advice may-still-not be permitted. For example, if the payment were in relation to a performance target that would not be seen as reasonable, the payment may be seen to have been made solely because of the general advice and thus would not be permitted.

3.35 The reference to 'financial products of a class' prevents benefits on general advice given on a class of products where that general advice results in a product of that class being issued or sold to the client. As such, regardless of whether general advice were provided on an entire class of financial product, three financial products of the same class, or a single financial product, as long as the payment is made solely because a financial product of a class in relation to which the general advice was given is issued or sold to the client, the payment is not permitted.

4) The 'no personal advice' limb (paragraph (d))

3.36 This limb restricts the advice that can be provided in the preceding 12 months. The limb specifies that, during the 12 months immediately before the benefit was given, the employee must not have given financial product advice to a retail client other than:

·
general advice;
·
personal advice in relation to basic banking products, general insurance products, and consumer credit insurance products; or
·
a combination of the advice mentioned above.

[Schedule 1, item 29, paragraph 963B(6)(d)]

3.37 The general advice provision operates seamlessly with the existing provision that allows benefits to be paid in relation to basic banking products, general insurance products, and consumer credit insurance products (the 'basic banking provision').

3.38 The no personal advice limb precludes persons who provide personal advice across classes of financial products-commonly referred to as financial planners or financial advisers-from utilising the general advice provision.

5) The 'allowable products' limb (paragraph (e))

3.39 This limb ensures that the general advice provided by an employee is in relation to a financial product issued or sold by the licensee. To utilise the general advice provision, the financial product in relation to which the general advice is given must either be:

·
a product issued or sold by the licensee or a related body corporate of the licensee; or
·
a product issued or sold by another entity under the name of the licensee, a trade mark of the licensee or a business name of the licensee.

[Schedule 1, item 29, paragraph 963B(6)(e)]

3.40 The general advice provision applies to benefits given on or after the day after the Royal Assent that are not otherwise grandfathered.

Execution-only provision

3.41 The Bill amends the existing 'execution-only provision' in paragraph 963B(1)(c) to provide a closer nexus between the party receiving the benefit and any advice that might have been provided in relation to the benefit.

3.42 The current law deems benefits given in relation to the issue or sale of a financial product as not conflicted remuneration as long as the licensee or representative has not provided financial product advice to the client in relation to the product-or products of that class-in the previous 12 months.

3.43 Under the Bill, the execution-only provision will apply if a monetary benefit is given in relation to the issue or sale of a financial product and the licensee or representative receiving the benefit has not provided financial product advice to the client in relation to the product that is to be issued or sold-or advice on a class of financial products, of which the product is one-in the previous 12 months. [Schedule 1, items 27 and 29, subsections 963B(4) and (5) and paragraph 963B(1)(c)]

Training provision

3.44 The Bill broadens the existing 'education and training provision' in paragraph 963C(c) to include education and training that relates to the carrying on of a financial services business.

3.45 The current law deems a non-monetary benefit that is in relation to genuine education or training relating to the provision of financial product advice to retail clients as not conflicted remuneration provided the benefit complies with regulations made for the purposes of the provision.

3.46 The Bill provides that a licensee or representative may receive a benefit of education or training that relates to the carrying on of a financial services business (for example, training in relation to client administrative services). The term 'carrying on of a financial services business' includes the provision of financial product advice. [Schedule 1, item 33, subparagraph 963C(c)(ii)]

Basic banking provision

3.47 The Bill broadens the existing 'basic banking provision' to include all simple, 'Tier 2' products.

3.48 ASIC, in its training guidelines, makes a distinction between 'Tier 1' and 'Tier 2' products: Tier 2 products are generally considered simple in nature and therefore require less onerous training when providing advice than Tier 1 products. Tier 2 products include basic banking products, general insurance products, and consumer credit insurance products. Tier 1 products include all other financial products not listed in Tier 2 (for example, managed investment schemes and superannuation).

3.49 Section 963D currently deems benefits that relate to a basic banking product as not conflicted remuneration as long as the agent or employee of an ADI-at the time of providing advice on the basic banking product-does not provide financial product advice on any other financial product. Regulation 7.7A.12H of the Corporations Regulations allows access to the provision where the benefit also relates to a general insurance product and the agent or employee does not provide financial product advice on any other financial product except a general insurance product.

3.50 The Bill enables the benefit that is given to also relate to a consumer credit insurance product. Further, the Bill allows the agent or employee to provide personal advice on a consumer credit insurance product at the same time as providing advice on a basic banking and/or general insurance product. [Schedule 1, item 35, subsections 963D(1) and 963D(2)]

3.51 A definition of 'consumer credit insurance' is inserted into section 960, and is defined as having the same meaning as in the Insurance Contracts Act 1984. [Schedule 1, item 1, section 960]

Employees

3.52 In accordance with ASIC's Regulatory Guide 175: Licensing: Financial product advisers - Conduct and disclosure, references to an agent or employee, or otherwise acting by arrangement with an Australian ADI under the name of an Australian ADI includes: contractors; employees of employment agencies who may be temporarily working for the Australian ADI/employer; employees of a body corporate related to the Australian ADI/employer; and employees of another company who work exclusively for the Australian ADI/employer.

Ban on volume-based shelf-space fees

3.53 The Bill clarifies the definition of 'volume-based shelf-space fee' and the payments the ban on volume-based shelf-space fees intends to capture.

3.54 Currently, section 964 of the Corporations Act provides that a platform operator must not accept volume-based shelf-space fees. However, the term volume-based shelf-space fee is not clearly defined. Consequently, concerns have been raised that the current provisions capture legitimate payments between fund managers and platform operators.

3.55 The Bill amends section 964A to clearly define a volume-based shelf-space fee. The Bill also clarifies the types of payments that are not considered volume-based shelf-space fees; platform operators are still required to not accept benefits that are volume-based shelf-space fees. [Schedule 1, items 6 and 38, section 960 and section 964A]

3.56 Concerns have also been expressed that the current definition of 'funds manager'-which is used in the definition of volume-based shelf-space fee-is too broad, and captures many entities who are not actually funds mangers.

3.57 The Bill amends subsection 964(2) to provide a clear definition of a fund's manager that better describes the entities the ban on volume-based shelf-space fees intends to capture. [Schedule 1, items 36 and 37, subsections 964(1) and (2)]

Client-pays provision

3.58 The Bill provides clarity on the operation of the 'client-pays provision'.

3.59 Under the current law, paragraph 963B(1)(d) provides that benefits given by a retail client to a licensee or representative in relation to the issue or sale of a financial product or financial product advice are not conflicted remuneration.

3.60 In addition, section 52 of the Corporations Act provides that: 'a reference to doing an act or thing includes a reference to causing or authorising the act or thing to be done'. As Paragraph 963B(1)(d) deems a benefit to not be conflicted remuneration if it is 'given' to a licensee or representative, applying section 52 would mean that in giving a benefit to a licensee or representative, a retail client is also causing or authorising the benefit to be given.

3.61 The Bill inserts a note at the end of section 963A to clarify that section 52 also operates in relation to the conflicted remuneration provisions of sections 963A, 963B, 963C and 963D. [Schedule 1, item 23, section 963A (note)]

3.62 The note clarifies that a benefit may be given either directly by a client or given by another party at the direction of the client; as long as the benefit is given using the client's own monies, or funds the client is beneficially entitled to, the client-pays provision applies.

3.63 Concerns have been raised over whether the client-pays provision can be used to permit payments made from a superannuation fund member's balance. The Bill clarifies that such payments can occur.

3.64 The Bill inserts a note at the end of subsection 963B(1) that specifically indicates that the client-pays provision operates with respect to advice paid from a superannuation fund member's fund balance. This principle also applies to other investments of the client, such as a platform or a managed investment scheme. [Schedule 1, item 28, note in subsection 963B(1)]

3.65 The trustee of the superannuation fund must still consider whether payments out of the client's superannuation fund is appropriate given the trustee's other obligations, such as the sole purpose test under section 62 of the SIS Act.

3.66 It is important to note that, where the benefit is given by another party, it must be given with the client's clear consent. A client would not be considered to have given clear consent if the consent was not clearly and expressly sought; for example, where consent has been sought as part of a broad range of terms and conditions agreed by the client in aggregate, clear consent would not have been provided. Rather, a client's consent could be expressly sought in a separate and distinct section of the terms and conditions agreed by the client.

3.67 Benefits given by another party at a client's direction are not given by the client if the benefits are borne out of the other party's funds.

'Mixed' benefits

3.68 The Bill allows a benefit to relate to more than one of the conflicted remuneration provisions.

3.69 Under the current law, the provisions relating to general insurance, life risk insurance and basic banking products under Division 4 of Part 7.7A of the Corporations Act provide that the benefit must 'solely' relate to one of these products. This means that a benefit cannot be given if it relates to one or more provisions in Division 4-that is, a 'mixed' benefit in relation to more than one provision cannot be provided. This outcome was unintentional, and was rectified through the Corporations Regulations. However, the change to the Corporations Regulations have not been reflected in the Corporations Act.

3.70 The Bill permits mixed benefits by providing that a benefit is not conflicted remuneration 'to the extent' that it relates to one or more of the products or circumstances described in sections 963B, 963C and 963D. This allows a benefit to relate to one or more provision, and also allows for circumstances that fall outside the definition of conflicted remuneration. [Schedule 1, items 24, 25, 26, 31, and 32, section 963C, subsection 963B(1), paragraphs 963B(1)(a), 963B(1)(b) and 963C(a)]

3.71 The Bill also confirms that the mere payment of two non-conflicted remuneration benefits does not, in and of itself, make the combined payment conflicted. The Bill inserts an example at the end of subsection 963B(1) that illustrates this point. [Schedule 1, item 28, subsection 963B(1) (example)]

Regulation-making powers

3.72 Under the current law, sections 963B, 963C and 963D contain a regulation-making power that allows certain benefits to be deemed not conflicted remuneration in certain circumstances. However, the regulation-making power does not extend to clarifying the operation of existing provisions; neither are there regulation-making powers that could specify that, notwithstanding these provisions, a benefit is conflicted remuneration.

3.73 The Bill introduces regulation-making powers under sections 963B, 963C and 963D. The regulation-making powers allow a regulation to be created to prescribe:

·
circumstances in which all or part of a benefit is not considered to be conflicted remuneration;
·
the extent to which, or a method for working out the extent to which, a benefit is not considered conflicted remuneration; and
·
circumstances in which all or part of a benefit is to be treated as conflicted remuneration.

[Schedule 1, items 29, 34 and 35, subsections 963B(7) and (8), 963C(2) and (3) and 963D(3) and (4)]

3.74 Given the complexity of payment arrangements within the financial advice industry, there is a possibility that future remuneration structures may be developed that are inadvertently captured by the ban on conflicted remuneration. Regulation-making powers that clarify the operation of the existing exemptions provide a way to address any future unintended consequences.

3.75 Similarly, if a future remuneration structure is developed that, prima facie, is not captured by the ban on conflicted remuneration-but is clearly contrary to the spirit or intent of the ban-regulation-making powers that proscribe such payments provide a way to address this problem.

Application and transitional provisions

3.76 These provisions commence the day after receiving Royal Assent.

Ban on conflicted remuneration

3.77 The amendments made in relation to the ban on conflicted remuneration apply to a benefit if:

·
the benefit is one to which Division 4 of Part 7.7A applies under section 1528, that is, the benefit is not grandfathered; and
·
the benefit is given on or after the commencement day.

[Schedule 1, item 43, sections 1531A and 1531E]

3.78 Certain benefits given under an arrangement entered into prior to the application day of the ban on conflicted remuneration, as defined in subsection 1528(4), are not be subject to the ban as a result of subsection 1528(1) and regulations made for subsection 1528(2). These benefits are not affected by this Bill.

3.79 Benefits given under an arrangement entered into after the application day of the ban on conflicted remuneration and certain benefits given under arrangements entered into prior to the application day are subject to the ban. Under the current law, such a benefit could not be given or received if it is conflicted remuneration. The Bill serves to permit certain benefits that are subject to the current law. As such, the amendments are not likely to give rise to the risk of acquisition of property (within the meaning of paragraph 51(xxxi) of the Australian Constitution). In any case, subsection 1528(3) provides that Division 4 of Part 7.7A of the Corporations Act will not apply to the extent it would result in an acquisition of property from a person otherwise than on just terms (within the meaning of paragraph 51(xxxi) of the Australian Constitution).

3.80 The current requirements continue to apply until the Bill receives the Royal Assent or new regulations are made.

Ban on volume-based shelf-space fees

3.81 The amendments made in relation to the ban on volume-based shelf-space fees apply to a benefit if:

·
the benefit is one to which Subdivision A of Division 5 of Part 7.7A applies under section 1529, that is, the benefit is not grandfathered; and
·
the benefit is given on or after the commencement day.

[Schedule 1, item 43, sections 1531A and 1531F]

3.82 Under subsection 1529(1), the ban on volume-based shelf-space fees applies where the benefit is given under an arrangement entered into prior to the application day, as defined in subsection 1529(3).

3.83 The current requirements continue to apply until the Bill receives the Royal Assent or new regulations are made.

Consequential amendments

3.84 The new law also contains a range of consequential amendments to address matters such as headings, notes and definitions. [Schedule 1, items 2, 30, 41 and 42]

Chapter 4 Statements of Advice

Outline of Chapter

4.1 Schedule 1 to the Bill amends Part 7.7A of the Corporations Act 2001 (Corporations Act) to amend the Statement of Advice (SOA) provisions.

Context of Amendments

4.2 The current law requires a providing entity to give a SOA when personal advice is given to a retail client (except in certain circumstances).

4.3 Subdivision D of Division 3 provides requirements in relation to the content of the SOA.

4.4 The Government has committed to implementing additional improvements to the SOA requirements to increase transparency in the services that clients are receiving, ensuring they are aware of their rights and their adviser's obligations.

Summary of new law

4.5 The Bill makes three key amendments to the SOA requirements:

·
requiring that the SOA be signed by the providing entity, or an individual acting on behalf of the providing entity, and acknowledged by the client;
·
providing clarity that the client may seek further or varied advice, and requiring that, if further or varied advice is sought, the client's instructions for further or varied advice must be confirmed in writing, signed by the client and acknowledged by the adviser; and
·
amending the content requirements of the SOA.

Comparison of key features of new law and current law

New law Current law
The SOA must be signed by the providing entity, or an individual acting on behalf of the providing entity, and acknowledged by the client. No requirement on either the providing entity or the client to sign the SOA.

Clarity that the client may seek further or varied advice.

The client's instructions for further or varied advice must be confirmed in writing, signed by the client, and acknowledged by the adviser.

Clients can currently seek further or varied advice at any stage.

There is no specific requirement that this request for further or varied advice be in writing, signed by the client and acknowledged by the adviser.

Additional content must be provided in the SOA, on top of the current law requirements. Specific requirements about what must be included in the SOA.

Detailed explanation of the new law

Signing and acknowledgement of the SOA

4.6 The new law provides that:

·
the SOA must be signed by the providing entity, or an individual acting on behalf of the providing entity; and
·
the client must acknowledge receipt of the SOA by signing the SOA as soon as practicable after receiving the SOA.

[Schedule 1, item 1A, subsections 946A(2A) and (2B)]

4.7 The client does not commit an offence if he or she does not provide acknowledgement of the SOA. Further, the providing entity does not fail to give the SOA to the client in accordance with Subdivision D of Division 3 of Part 7.7 merely because the client does not acknowledge the SOA. [Schedule 1, item 1A, subsection 946A(2C)]

4.8 The significance of the client's signature on the SOA is to acknowledge receipt of the SOA. In signing the SOA, the client is not agreeing or accepting the SOA, and the client is not signing that they wish the advice in the SOA to be executed.

4.9 Whilst the individual that can sign the SOA on behalf of the providing entity is a matter to be determined by the providing entity, in most instances the individual signing would be the advice provider.

4.10 A signature can include a written signature or an electronic signature (as defined by section 10 of the Electronic Transactions Act 1999).

Seeking further or varied advice

4.11 The new law provides that, to avoid doubt, a retail client who is given the SOA may seek further or varied advice from the providing entity; such further or varied advice may be required if, for example, the client's relevant circumstances change. [Schedule 1, item 1A, subsection 946A(2D)]

4.12 If further or varied advice is sought, the providing entity must ensure that instructions from the client are: documented in writing; signed by the client; and acknowledged by the providing entity, or an individual acting on behalf of the providing entity. [Schedule 1, item 1A, subsections 946A(2E) and (2G)]

4.13 The instructions for further or varied advice can be documented in writing and signed by the client either before or after the advice is given. This allows for flexibility in time-critical situations. For example, if the stock market crashes and a client seeks time-critical further advice that they subsequently want actioned immediately, the instructions for further or varied advice can be documented in writing and signed by the client after the advice has been given.

4.14 The providing entity does not commit an offence if the client does not sign a written copy of the instructions for that further or varied advice. Also, the fact that the client does not sign a written copy of the instructions for that further or varied advice is not evidence that the instructions have not been given. As such, the providing entity is able to proceed with providing further or varied advice-particularly time-critical advice-even if the client has not yet signed. [Schedule 1, item 1A, subsection 946A(2F)]

4.15 To clarify: the changes outlined in this chapter will not alter any other existing requirements around the provision of personal advice, including the situations in which a Statement of Advice-or Record of Advice-is required.

Content requirements of the SOA

4.16 The new law requires that advisers include the following statements and information in the SOA to ensure clients are aware of their existing rights and their adviser's obligations under the Corporations Act:

·
the provider of the advice is required to provide the advice in accordance with the best interests duty (section 961B);
·
the provider of the advice genuinely believes that the advice given is in the best interests of the client, given the client's relevant circumstances; the term 'relevant circumstances' is given meaning by section 961B of the Act;
·
the provider of the advice is required in circumstances specified under section 961J to give priority to the client's interests when giving the advice;
·
information on fees that have been, or may be, charged to the client in relation to the advice;

-
This includes fees by the providing entity; a related body corporate of the providing entity; a director or employee of the providing entity or a related body corporate; an associate of any of the above; or any other person in relation to whom the regulations require the information to be provided.

·
if the client enters into an ongoing fee arrangement with the providing entity to which Division 3 of Part 7.7A applies, that the providing entity must give the client a fee disclosure statement each year in relation to the ongoing fee arrangement;
·
if the providing entity recommends that the client acquire a financial product, a statement advising the client that they may have the right to return the product under Division 5 of part 7.9 within a cooling-off period; and
·
that the client may seek further or varied advice from the providing entity at any time.

[Schedule 1, items 1B, 1C, 1D, 1E, 1F, 1G, 1H and 1J, paragraphs 947B(2)(ca), (cb), (cc), (cd), (ce), (fa), (fb) and (h), 947C(2)(da), (db), (dc), (dd), (de), (ga), (gb) and (i), and notes at the end of subsections 947B(2) and 947C(2)]

4.17 Fees to be included in the SOA are those in relation to providing the advice; product fees are not intended to be included in the SOA.

Application and transitional provisions

4.18 To the extent that they relate to instructions for further or varied advice, the amendments apply in relation to instructions given on or after the later of the commencement day of the Bill and 1 January 2015.

4.19 All other amendments to the SOA provisions apply in relation to Statements of Advice given on or after the later of the commencement day of the Bill and 1 January 2015. [Schedule 1, item 43, section 1531AA]

Chapter 5 Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Corporations Amendment (Streamlining of Future of Advice) Bill 2014

5.1 This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

5.2 This Bill fulfils an election commitment made by the Government to reduce the regulatory overreach of the Future of Financial Advice (FOFA) legislation.

5.3 The original FOFA legislation, which was passed by Parliament in June 2012, was introduced to increase trust and confidence in the financial services industry and increase access to financial advice for retail investors. FOFA made a number of changes to financial advice laws, including removing conflicted remuneration structures, and introducing measures to improve the quality of advice and enhance retail investor protections. The legislation applied voluntarily from 1 July 2012, and was mandatory from 1 July 2013.

5.4 The Government believes that the FOFA legislation went too far and imposed unnecessary red tape and costs on industry, which has pushed up the price of financial advice for consumers and is contrary to the initial goals of FOFA. The Government considers that the legislation has also had a number of unintended consequences that have led to uncertainty in the industry. This Bill fulfils the Government's election commitment to unwind the regulatory overreach created by the FOFA legislation and provide certainty to the financial services industry.

Human rights implications

5.5 The impact of this Bill on the following human rights has been considered:

·
the right to privacy and reputation;
·
the right to freedom of opinion and expression; and
·
the right to work and rights in work.

Right to privacy and reputation

5.6 Article 17 of the International Covenant on Civil and Political Rights (ICCPR) provides that no one shall be subjected to arbitrary or unlawful interference with their privacy. The right to privacy may be engaged if the Bill involves the collection, security, use, disclosure or publication of personal information.

5.7 This Bill removes the need for financial advisers to mail out an annual fee disclosure statement to clients who entered into their ongoing fee arrangement prior to 1 July 2013. A fee disclosure statement is document that will typically contain the client's name, address, account number and account details; at least some of which is personal to the client.

5.8 This Bill also removes the need for financial advisers to obtain client agreement to continue an ongoing fee arrangement every two years. To obtain client agreement, an adviser would typically be required to mail out a form for the client to complete. This form would also contain some personal details of the client.

5.9 This Bill could therefore engage the right to privacy as it deals with the disclosure of personal information. However, the Bill does not limit the right to privacy in any way. The information that would be contained in these documents will still be available to the client either through other documents they receive or upon request.

5.10 In addition, the risk of this information being intercepted in the mail is eliminated by this amendment. To the extent that this increases the security of personal information, this may advance the right to privacy for the affected clients. However, on balance, the Bill does not engage the right to privacy and reputation.

The right to freedom of opinion and expression

5.11 The right to freedom of opinion and expression is contained in articles 19 and 20 of the ICCPR. The right to freedom of opinion and expression may be engaged if the Bill deals with aspects of employment or workplace relations.

5.12 As described above, this Bill removes the need for advisers to send fee disclosure statements to pre-1 July 2013 clients. These statements contain information about the client and their account. As a result, the right to freedom of opinion and expression could be engaged because it regulates the clients' access to this information. The information that is being regulated, however, is still available to the client through other means so the right to freedom of opinion and expression is not limited.

5.13 This Bill extends the time for fee disclosure statements from 30 to 60 days after the client's anniversary date. These statements contain information about fees charged to the client and the services they received in the previous 12 months. As a result, the right to freedom of opinion and expression is engaged because it regulates the clients' access to this information. The information that is being regulated, however, is still available to the client, albeit 30 days later.

5.14 The changes to the Statement of Advice requirements contained in this Bill increase access to information for consumers by providing additional disclosure on a consumer's rights and an advice provider's obligations.

5.15 On balance, the right to freedom of opinion and expression is not engaged.

The right to work and rights in work

5.16 The right to work and rights in work is contained in articles 6(1), 7 and 8(1)(a) of the International Covenant on Economic, Social and Cultural Rights. The right to work and rights in work may be engaged if the Bill deals with aspects of employment or workplace relations.

5.17 This Bill increases the number of avenues through which certain employees in the financial services industry can earn benefits. As this relates to remuneration, which is an aspect of employment, it may engage certain rights in work. That said, it certainly does not limit the rights of employees; rights in work are advanced to the extent that certain employees can earn a living through additional income streams. However, on balance, the right to work and rights in work are not engaged.

Conclusion

5.18 This Bill is compatible with human rights as it does not raise any human rights issues.

Chapter 6 Regulation impact statement[1]

Introduction to FOFA

What is FOFA?

6.1 Summarily, the Future of Financial Advice (FOFA) legislation-part 7.7A of the Corporations Act 2001 (the Act)-imposes the following standards on providers of financial advice:

·
a best interests obligation that requires advisers to act and provide advice that is in the best interests of their client;
·
an obligation to disclose ongoing fees and charges paid by their client; and
·
a requirement to not accept payments that may influence the advice provided to the client.

6.2 Each of these requirements is discussed in greater detail later in this Regulation Impact Statement (RIS).

6.3 FOFA represents the former Government's response to the recommendations of the 'Ripoll Inquiry', a Parliamentary Joint Committee on Corporations and Financial Services (PJC) inquiry into financial products and services in Australia. The Ripoll Inquiry was set up in 2009 to inquire into, and report on, issues associated with financial products and services provider collapses that occurred in the wake of the Global Financial Crisis (GFC).

6.4 The dual underlying objectives of FOFA are to:

·
improve the quality of financial advice;
·
increase trust and confidence in the financial advice industry.

Why is FOFA changing?

6.5 The current Government agrees with the policy intent of FOFA, but considers that the legislation has, in parts, placed an unnecessarily heavy compliance burden on the financial services industry.

6.6 When the FOFA legislation was first introduced to Parliament in late 2011, Parliament referred the then Bills-FOFA was introduced in two tranches[2]-to the PJC; a report on the PJC's inquiry was released in early 2012.

6.7 Alongside the main PJC report was a Dissenting Report by the Coalition members of the PJC (the Dissenting Report). The Dissenting Report contained a number of recommendations to reduce the regulatory burden the 2012 FOFA Bills were predicted to impose on the financial services industry.

Timeline of FOFA

Graphic 1: FOFA history

Graphic 1: FOFA history

Graphic 2: FOFA amendments

Graphic 2: FOFA amendments

Overview of the financial services industry

6.8 The financial services industry is an important part of the Australian economy; it currently employs over 400,000 people and is the largest industry in Australia when measured by gross value added (a measure of the economic worth of the goods and services produced)[3]. Continued industry growth is expected to be largely driven by Australia's ageing population and the increasing pool of superannuation funds.

Graphic 3: Structure of financial services industry

Graphic 3: Structure of financial services industry

6.9 Product manufacturers, or fund managers, are responsible for creating and managing financial products. Australia's managed funds industry is one of the largest in the world, and the majority of these funds are attributable to the advanced superannuation system, which encourages employees to save for retirement throughout their working life. The pool of superannuation funds in Australia is roughly the same size as Australia's economy[4].

6.10 Platforms act as intermediaries between product manufacturers and dealer groups. A product manufacturer will typically place their financial products on a platform to make their products accessible to dealer groups. A dealer group is made up of multiple representatives who are authorised by a licensee to provide financial advice under that licensee's financial services licence. In Australia, there are more than 750 dealer groups[5] who compare and assess financial products on platforms and select a range of products (commonly referred to as an 'approved product list') for their aligned advisers to offer to their clients. Dealer groups also offer a range of other services, including back-end support and administrative functions.

6.11 Industry estimates indicate that there are around 18,000 financial advisers in Australia[6], who collectively manage over $500 billion of funds under advice and generate over $4 billion revenue per annum[7]. Between 20 and 40 per cent of Australian adults use or have used a financial adviser[8].

6.12 The financial advice industry is stratified into three distinct segments: large, medium and small firms. There are five large firms, all of which directly employ over 1,000 financial advisers. These large firms are also financial product manufacturers and offer platform services. Medium sized firms employ between 60 and 1,000 advisers, and small firms employ less than 60 advisers. Many, but not all, of the small and medium sized firms are aligned with one of the larger firms, often using the platform(s) of a large firm to access and manage financial products for their clients.

6.13 The industry is relatively competitive, with around half the market accounted for by the top five firms, and the remaining half occupied by small and medium firms[9]. Whilst there are some impediments for consumers switching financial products and advisers, the competitive nature and the need for advisers to act in the best interests of their clients ensures that clients have the ability to switch products and advisers.

Increase in Institutional Ownership

6.14 The introduction of FOFA, along with the impact of the GFC, appears to have had a sizable impact on the industry. The FOFA amendments led many dealer groups to review their remuneration models and business entity structures in light of the shift to fee for service and the ban on conflicted remuneration. The outcome has been that, since 2008, there have been a number of major dealer group purchases, with more than a quarter of advisers changing their home licence since 2008.

6.15 Many of these groups merged with, or were purchased, by wealth management groups, with institutional ownership of the financial advice market now controlling the majority of the market. Five advice conglomerates now control more than half of the advice market.

6.16 Industry consolidation is being driven by the economies of scale achieved by having a large number of advisers within the same group. This includes the opportunity to distribute financial products through a greater number of aligned advisers. ASIC has expressed concerns about the number of the largest dealer groups being owned by product issuers, which may give rise to perceived or actual conflicts of interest[10]. In addition, smaller groups which have found it difficult to adapt to FOFA have proven to be easy and desirable targets for larger groups[11]. The barriers to entry in the industry relate mainly to holding and complying with licensing requirements, which have increased since FOFA, and achieving a sufficient scale to be competitive[12].

Impact of FOFA

6.17 While the industry was growing rapidly before the GFC, the economic downturn in 2008 and the FOFA amendments have led to a decline in financial adviser numbers. More recently, dealer group numbers appear to have increased and funds under advice have remained relatively stable, especially compared with the decline following the GFC. It is likely that the concentration within the industry and FOFA amendments encouraged advisers to either move to other licensees or to establish themselves under their own licence.

6.18 As revenue has remained relatively steady but compliance and servicing costs increased because of the FOFA amendments, there has been a decline in the industry's performance. AMP, for example, estimated the reduction in embedded value in financial year 2013 because of FOFA at $176 million in respect of anticipated margin impact and the remaining cost of implementing FOFA at $4 million in financial year 2014[13]. The Commonwealth Bank also increased its spend on risk and compliance projects by 24 per cent in 2013 compared with 2012 which was, in part, to satisfy FOFA amendments[14].

6.19 The fall in adviser numbers also implies that the industry has been underperforming population growth. This raises concerns as the industry tries to service more people, particularly amongst the baby boomers heading into retirement. The decline in adviser numbers is also likely to be a reason behind the merger and acquisition activity in the industry, as groups develop alternative pathways for expanding. Industry employment is predicted to remain flat as uncertainty leads to career changes and a pause in recruitment[15].

Driving Efficiencies

6.20 The relative stagnation in the advice industry and the costs associated with FOFA has encouraged advisers and dealer groups to gain efficiencies through software and other tools. Industries servicing the advice industry, including platforms and software providers, have been under increasing pressure to provide these efficiencies.

Platforms

6.21 Platforms are administrative systems used by advisers for their clients. The big four banks plus AMP and Macquarie control most of the market. To capture and retain market share, platforms have been focusing on technological advances such as share trading capability.

6.22 Adviser groups often use a number of platforms to serve different needs, but with consolidation in both the platform and advice industries by leading players, there is an increasing push from these players for their own, or aligned, advisers to use their own 'white label' platforms rather than external platforms[16].

Research providers

6.23 As a condition of their licence, advisers are required to demonstrate why they recommended particular products to their clients. This research often informs the formulation of Approved Product Lists (APLs). Sometimes a second subsidiary list is created from the APL, a Recommended Product List (RPL), which lists the products recommended for advisers to use at that point in time. Almost all licensees outsource this research to external research providers, often to more than one provider[17]. ASIC has noted that advisers should perform due diligence on potential external research providers, so that they understand the research provider's business model and can take that into account when providing advice to clients[18]. Under FOFA, where an advice provider considers it reasonable to recommend a financial product they must conduct a reasonable investigation into products relevant to the subject matter of the advice and assess the information gathered in the investigation[19].

6.24 There are only around a dozen research providers in Australia. The market is very concentrated, with the top five research providers controlling almost 90 per cent of the market. Fund managers now try to strategically target advisers through the research providers they have contracted. Research providers are therefore important gate-keepers, deciding which products meet the standards required by advisers[20].

6.25 A 2011 ASIC review of the top 20 advice licensees found that despite the median number of products on approved product lists being around 400, there remained a tendency to concentrate product recommendations into a few key products[21]. This is relevant to any regulation of the remuneration models used by dealer groups.

Remunerations Models

6.26 Aspects of FOFA, including the ban on conflicted remuneration, the introduction of scaled advice and the best interests duty, have led to a widespread shift to fee for service payments. This shift has been noticed by ASIC, and it was an anticipated consequence of FOFA[22]. Some groups, most notably MLC/NAB Wealth and AMP[23], have been moving to a fee for service model for several years, but the trend has become more pronounced since FOFA.

6.27 This shift is evident in two ASIC surveys of licensees conducted in 2011 and 2013. A 2011 ASIC review of the top 20 advice licensees found that the majority remunerated their advisers based on the volume of financial products sold, which included ongoing commissions, up-front commissions and volume rebates[24]. In regards to total licensee remuneration, 90 per cent was paid by product providers (including asset-based fees), and only 10 per cent were paid directly by clients[25].

6.28 Significant product concentration was also evident in the fees received by advisers. Ongoing commissions from the top three products recommended by all 20 licensees represented 37 per cent of all ongoing fees. Further, 43 per cent of all up-front commissions were received from the top three recommended products[26].

6.29 In contrast, in a 2013 ASIC review of the top 21 to 50 licensees, 11 received less than 5 per cent of their remuneration directly from clients, two received over 90 per cent of their remuneration directly from clients. On average, approximately 36 per cent of revenue was received directly from clients[27].

6.30 The impact of the proposed reforms on remuneration models within the industry is uncertain at this stage. There has been only limited public comment from the industry on their future plans, although AMP has ruled out reintroducing commission payments on its investment and superannuation products[28].

6.31 The impact of FOFA on the cost of financial advice is not yet evident. It is possible that groups absorbed compliance costs - instead of passing these costs onto consumers - to retain clients and maintain market share. A handful of licensees have been FOFA-compliant for longer than was mandated, giving them the opportunity to transition and spread their compliance costs over a longer time frame.

6.32 In general, ASIC has found that the fees charged for advice can vary significantly across advice providers[29]. In 2010, licensees reported an estimate of the cost of providing comprehensive financial advice to a client in the range of $2,500 to $3,500[30]. IBISWorld also reports fees of around $2,500 to receive holistic advice from an adviser[31].

6.33 Importantly, ASIC found that a significant gap exists between what consumers are prepared to pay for financial advice and how much it costs industry to provide advice. This is the case even though high net worth clients often cross-subsidise lower value clients[32]. This gap existed prior to the FOFA amendments and would only have been exacerbated by the compliance costs imposed by FOFA, although this is hard to quantify at this stage.

6.34 The FOFA amendments were expected to increase the provision of scaled advice, that is advice limited to a particular product or range of products. The number of advisers providing scaled advice was expected to rise from 2 to 2.5 percent in 2013-14 to between 10 and 15 per cent in 2018-19, as scaled advice is often cheaper to provide than holistic advice under a shift to a fee for service model[33]. The proposed explicit provision of scaled advice will further facilitate this growth trend.

Significance of the problem to be addressed

The Ripoll Inquiry

6.35 To understand the significance of the problem to be addressed, it is important to understand the history and context of FOFA. As noted in the introduction, and shown in Graphic 1: FOFA history, the current FOFA legislation was a response by the former Government to the findings of the Ripoll Inquiry.

6.36 The Ripoll Inquiry was set up in 2009 to inquire into, and report on, issues associated with financial products and services provider collapses, such as Storm Financial, Opes Prime, with particular reference to the role of financial advisers; the general regulatory environment for financial products and services; the role played by commission arrangements relating to product sales and advice, including: the potential for conflicts of interest, the need for appropriate disclosure, and remuneration models for financial advisers; and the appropriateness of information and advice provided to consumers considering investing in products and services, and how the interests of consumers can best be served.

6.37 The Ripoll Inquiry released its report in November 2009 and made 11 recommendations for reform. The report commented: 'It is the view of the committee that, if implemented, these changes will act in synergy to provide better outcomes and protections for consumers of financial products and services'[34].

FOFA

6.38 Most of the recommendations from the Ripoll Inquiry were adopted by the former Government and formed the basis of FOFA. In some areas, FOFA went further than the Ripoll Inquiry recommendations and imposed additional requirements not canvassed. Table 6.1 summarises select recommendations from the Ripoll Inquiry that subsequently became part of FOFA, as well as additional measures introduced as part of the original FOFA legislation.

Table 6.1: Select Ripoll Inquiry recommendations and FOFA

Ripoll Inquiry recommendation FOFA response Concerns with FOFA
Recommendation 1: That the Corporations Act be amended to explicitly include a fiduciary duty for financial advisers operating under an AFSL, requiring them to place their clients' interests ahead of their own. Introduce a statutory best interests duty-Division 2, Part 7.7A-which requires an advice provider to:

·
act in the best interests of the client;
·
provide advice that is appropriate to the client;
·
warn the client if the advice is based on incomplete or inaccurate information; and
·
if there is a conflict between the client's interests and those of the advice provider, give priority to the client's interests.

·
The current provision is unclear and labour-intensive due to its open-ended nature.
·
It has also created significant legal uncertainty as to how advisers can actually satisfy the best interests duty.

Recommendation 4: That the government consult with and support industry in developing the most appropriate mechanism by which to cease payments from product manufacturers to financial advisers. Introduce a ban on conflicted remuneration-Division 4, Part 7.7A-which bans benefits, whether monetary or non-monetary, given to advisers in relation to advice that could reasonably be expected to influence either the choice of financial product recommended or the financial product advice given.

Some exemptions from this ban were introduced, including for basic banking products.

·
The current ban captures activities that were not the objective of FOFA.
·
The financial advice industry is required to maintain complex systems when providing general advice to ensure compliance with the existing conflicted remuneration provisions.

Not included in recommendations Introduce an opt-in requirement-Division 3, Part 7.7A-which requires an adviser to seek, every two years, their client's consent to continue an ongoing fee arrangement.

·
The opt-in notices do not arguably offer substantial benefits to consumers; particularly as consumers already have the ability to opt-out of their arrangements.
·
This requirement has imposed significant implementation and ongoing costs on advisers.

Not included in recommendations Introduce a fee disclosure statement-Division 3, Part 7.7A-which requires an adviser to provide, every year, a statement that shows the fees paid by the client, the services the client received and the services the client was entitled to receive during the preceding 12 months.

·
Providing fee disclosure statements to pre-1 July 2013 clients has proven to be difficult and expensive.
·
Many of these clients are on old legacy systems, predating the FOFA changes; as such, significant manual work is required to prepare statements for these clients.

Dissenting Report

6.39 Upon introduction to Parliament, the 2012 FOFA Bills were referred to the PJC for inquiry and report. Alongside the PJC's report into the 2012 FOFA Bills was the Coalition's Dissenting Report. The Dissenting Report affirmed the Coalition's commitment to the recommendations of the Ripoll Inquiry, but criticised the former Government's proposed legislation. The Dissent Report comments:


...in pursuing regulatory change the Parliament must focus on making things better not just more complex and more costly for everyone. The Parliament must avoid regulatory overreach where increased red tape increases costs for both business and consumers for little or no additional consumer protection benefit[35].

...

...the Ripoll Inquiry reported back in November 2009 and made a number of well-considered and reasonable reform recommendations[36].

...

...Instead of implementing the very sensible and widely supported recommendations made by the Ripoll Inquiry, the government allowed its Future of Financial Advice reform package to be hijacked by vested interests creating more than two years of unnecessary regulatory uncertainty and upheaval in our financial services industry.

The government's decision making processes around FOFA over the past two years leave much to be desired. There were constant and at time completely unexpected changes to the proposed regulatory arrangements under FOFA right up until the introduction of the current legislation. Invariably this was done without proper appreciation or assessment of the costs involved, of any unintended consequences or other implications flowing from the proposed changes to the changes.

Important financial advice reforms recommended by the Ripoll inquiry have been delayed by more than two years so the government can press ahead with a number of additional contentious changes.

It is the view of Coalition Committee members that the FOFA package of legislation in its current form is:

·
Unnecessarily complex and in large parts unclear;
·
Expected to cause increased unemployment;
·
Legislating to enshrine an unlevel playing field amongst advice providers, inappropriately favouring a government friendly business model; and
·
Likely to cost about $700 million to implement and a further $350 million per annum[37] to comply with, according to conservative industry estimates.


Based on the evidence provided to the Committee, Coalition Committee members conclude that this will lead to increased costs and reduced choice for Australians seeking financial advice[38].

6.40 The Dissenting Report went further to indicate that FOFA would have a widespread, detrimental effect on the financial advice industry. The Dissenting Report continues:


The Committee received evidence from many industry participants about the very serious detrimental effects the introduction of this legislation in its current form would have on the industry and on consumers. Detrimental effects include high additional costs imposed on industry participants with resulting increased costs of advice for consumers, reduced employment levels in the financial services sector leading to reduced availability and access to affordable high quality advice, as well as a further concentration of advice providers which would lead to an undesirable reduction in competition and choice for consumers[39].

...

Stakeholders argue that FOFA, if passed in its current form, would cause an undesirable restructuring of the financial advice industry, with increased concentration of players in the market and less competition[40].

...

Coalition Committee members consider that the disproportionate increase in costs to the industry and consumers, the reduction in the number of financial advisers in Australia, the associated additional job losses and the further concentration of financial advice services providers will have detrimental impacts on the cost, availability and accessibility of financial advice across Australia[41].

6.41 The Dissenting Report made 16 recommendations that would address the Coalition Committee members' concerns with FOFA.

FOFA today

6.42 There is evidence[42] to suggest that some of the concerns raised in the Dissenting Report have eventuated. There has been some evidence-depending on reporting sources-of a decline in adviser numbers in recent years. There has also been evidence of increasing industry concentration-particularly through the consolidation of smaller dealer groups with large institutional advisers; it is reasonable to conclude that such a concentration may result in less competition and choice available to consumers.

6.43 During consultations undertaken on the proposed package of amendments to FOFA, as well as on the draft legislation and regulations, a number of industry stakeholders have indicated that they have incurred, and will continue to incur, significant ongoing costs to satisfy the compliance requirements imposed by FOFA. However, it is currently unclear whether this has translated into higher costs for consumers. Similarly, it is unclear whether FOFA has resulted in reduced availability and accessibility of financial advice. Given the short time since FOFA became mandatory, and given the continuing adjustments that are taking place in the industry, these outcomes may not be known for some time.

Looking forward

6.44 The changes the Government intends to make to FOFA should be considered against the backdrop of an ageing population, declining workforce participation and the need for increased fiscal discipline.

6.45 The Australia to 2050: future challenges report shows that the proportion of Australia's population aged 65 and over is projected to almost double over the next 40 years[43]. The increased value of individuals' superannuation and other private assets represent a significant business opportunity for advisers. Superannuation and retirement products currently comprise the majority of the wealth management market, so growth in this area will have a significant positive impact on the industry.

6.46 While there will be an increase in the number of retirees to advise, the number of advisers in industry in recent years has stagnated or declined slightly. Some industry stakeholders have attributed this to increased costs and uncertainty arising from FOFA. Reducing the compliance burden on the industry will free up more resources, and should facilitate job creation and innovation, which will support productivity and result in more efficient processes.

6.47 Higher spending on public health care, pensions and other social services caused by population ageing will also result in higher fiscal pressures on the government. One guiding principle for achieving fiscal sustainability is that government should 'do for people what they cannot do, or cannot do efficiently, for themselves, but no more'[44]. Financially self-reliant individuals will reduce the pressures on government spending, and encouraging Australians to take responsibility for their own financial decisions will become increasingly important. The proposed changes to FOFA will foster an environment where affordable financial advice is more accessible, which will encourage wealth creation.

6.48 In summary, the changes to FOFA are an important first step in reducing the regulatory burden on the financial advice industry, and should help in providing the flexibility to take advantage of future opportunities.

Objectives of Government action

6.49 In its pre-election Policy to Boost Productivity and Reduce Regulation, the Coalition committed to amend FOFA to: 'reduce compliance costs for small business financial advisers and consumers who access financial advice'[45]. In particular, it indicated that it would: 'implement all 16 recommendations made as part of the Parliamentary Joint Committee inquiry into FOFA'[46].

6.50 Since the election, the Assistant Treasurer has, in a number of speeches, re-affirmed the Government's commitment to: 'reducing the regulatory overreach of FOFA'[47].

6.51 The objective of Government action is threefold:

·
Remove the unnecessary burdens imposed on the financial advice industry from FOFA measures that went beyond the recommendations of the Ripoll Inquiry;
·
Properly implement the finding of the Ripoll Inquiry so as to reduce regulatory overreach whilst maintaining the important consumer protection measures introduced by FOFA; and
·
Address other technical and consequential concerns raised by industry.

6.52 A summary of the key proposed changes is presented in Table 6.2. These are detailed further in the 'impact of changes' section later in this document.

Table 6.2: Summary of changes to FOFA

FOFA component Concern Change
Best interests duty The best interests duty, as currently drafted, has created significant uncertainty amongst advisers. Many industry stakeholders have argued that this uncertainty is ongoing and needs to be addressed by regulatory change.

These stakeholders argue that the open-ended nature of the duty leaves advisers uncertain on how to satisfy their duty. They also expressed concern that advisers are vulnerable to legal action because adviser's obligations under the duty is not well defined nor well understood.

Government action will remove the open-ended nature of the best interests duty.

Whilst the Ripoll Inquiry recommended imposing a fiduciary duty on advisers, it did not recommend it to be an open-ended obligation.

Scaled advice Scaled advice (a form of targeted advice that is limited in scope, and is typically much cheaper than full, holistic advice), was supposed to have been accommodated by the best interests duty.

However, many advisers have indicated that they are not confident that they can legally provide this form of advice. This uncertainty has resulted in advisers spending more time and money on activities than otherwise necessary, such as understanding their legal obligations and documenting compliance with the best interests duty.

Government action will facilitate the provision of scaled advice, whilst ensuring advice remains appropriate to the client.

This action will properly implement the policy intent of the Ripoll Inquiry.

Fee disclosure statements Fee disclosure statements are currently required to be provided to all clients, including those in ongoing fee arrangements prior to the introduction of FOFA on 1 July 2013, and were designed to increase the engagement of clients and improve transparency in the industry.

According to industry stakeholders, providing fee disclosure statements to pre-1 July 2013 clients is difficult and expensive: many of these clients are on old legacy systems, predating the FOFA changes; as such, significant manual work is required to prepare statements for these clients.

By contrast, as post-1 July 2013 clients are on newer, FOFA compliant systems, it is-comparatively speaking-much cheaper and efficient to produce fee disclosure statements for these clients.

In the exposure draft of the original FOFA legislation, fee disclosure statements were only intended for post-1 July 2013 clients.

Government action will remove the requirement for fee disclosure statements to pre-1 July 2013 clients, but keep the requirement for post-1 July 2013 clients.

The requirement to provide fee disclosure statements was not a recommendation from the Ripoll Inquiry.

Opt-in provisions The opt-in requirement was introduced to increase client engagement. However, many industry stakeholders have argued that the opt-in notices do not offer substantial benefits to consumers; particularly as consumers already have the ability to opt-out of their arrangements.

Many stakeholders have also indicated that, whilst the opt-in provisions are trying to institute a behavioural shift in the way clients interact with advisers, the changes required are too great for the financial advice industry to bear alone; rather, any changes in consumer engagement should be part of a broader strategy.

Government action will remove the opt-in requirement. Opt-in was not a recommendation from the Ripoll Inquiry.

Options that may achieve the objectives

6.53 This regulation impact statement (RIS) assesses the impacts of the Government's proposed amendments based on its election commitment; it does not explore any other options (in accordance with the Office of Best Practice Regulation's (OBPR) guidelines).

6.54 Whilst the Government's election commitment was to implement the 16 recommendations of the Dissenting Report, a number of the recommendations are no longer applicable as changes have already been made to FOFA that achieve the objectives sought, or the recommendations are no longer relevant due to the passage of time.

6.55 As such, this RIS considers the impact of a package of amendments to FOFA, including all of the (still relevant) Dissenting Report recommendations, as well as some additional amendments to address industry concerns.

Impact analysis

Overview of impact on industry and consumers

6.56 The proposed amendments to FOFA seek to navigate the fine line between ensuring that unnecessary and burdensome regulations that drive up the cost of business are removed, whilst ensuring that the consumer protections of FOFA are maintained.

6.57 The proposed amendments to FOFA are deregulatory and will reduce the compliance burden on the financial advice industry. Feedback from consultations and submissions on the draft amendments varied, and ranged from a complete rejection that any changes need to be made to FOFA, through to wholesale support.

6.58 Many industry stakeholders indicated that the proposed amendments will result in a more practical framework for financial planners and their clients. These stakeholders have argued that the changes will: provide clarity to industry, more closely align FOFA with the intentions of the Ripoll Inquiry, and deliver significant cost savings that will ultimately benefit consumers.

6.59 Consumer groups-and some industry stakeholders-are far less enthused. Most of the submissions have argued that the proposed package of amendments go too far in winding back the consumer protections introduced by FOFA. In particular, some stakeholders expressed concern that a number of proposed amendments, including the changes to the best interests duty, the removal of opt-in provisions, and exempting general advice from the definition of conflicted remuneration, will leave consumers vulnerable to poor quality advice by reducing the standard of advice provided. Furthermore, it is suggested that the amendments could reduce the level of trust and confidence in the financial advice industry, all of which runs contrary to the recommendations of both FOFA-as introduced by the former Government-and the Ripoll Inquiry.

6.60 A more detailed analysis of the benefits and costs of each of the amendments are presented below.

Cost savings

Estimates

6.61 Treasury's estimates of the ongoing cost savings are approximately $190 million per year, with one-off implementation savings of approximately $90 million; these estimates represent just over half of the estimated $375 million ongoing costs of complying with FOFA[48]. A breakdown of the estimates is presented in Table 6.3.

Table 6.3: Breakdown of FOFA amendment savings estimates

Proposed change Estimated average ongoing cost saving per year ($Million)* Estimated implementation cost saving ($Million)*
Remove opt-in requirements $45.1 $76.9
Limit the annual fee disclosure requirements to be for prospective clients only $40.8 $0.8
Removal of the 'catch all' provision in the best interests duty $33.3 Nil
Explicit provision of scaled advice $34.1 Nil
Limit the banning of commissions on life (risk) insurance provided under superannuation Nil Nil
Exempt 'general advice' from 'conflicted remuneration' under certain circumstances $36.3[49] $10.0
Clarify the exemption from the ban for execution-only services Nil Nil
That the training exemption permits training expenses related to conducting a financial services business, rather than just the provision of advice Nil Nil
Amendments to volume-based shelf-space fees Nil Nil
Clarify the definition of intra-fund advice Nil Nil
Grandfather existing remuneration from the ban on conflicted remuneration Nil Nil
Explicitly recognise that a 'balanced' remuneration structure is not conflicted remuneration Nil Nil
Allow bonuses to be paid in relation to revenue that is permissible under FOFA Nil Nil
Include consumer credit insurance in the basic banking carve-out Nil Nil
Amendments to the FOFA stockbroking exemptions Nil Nil
Other minor technical changes Nil Nil
Total $189.7 $87.7

*These estimated cost savings refer only to direct cost savings.

Methodology

6.62 Given the size and disparity of the financial advice sector, and differences in operational aspects and cost structures within the industry, it is difficult to reliably estimate costs and cost savings. Notwithstanding this fact, the Australian Government's Business Cost Calculator was used to produce an estimate of the cost savings from the proposed amendments to FOFA (in accordance with OBPR guidelines)[50].

6.63 For the purposes of calculating the cost savings figures, the financial services industry was split into three segments based on firm size. Adviser groups with more than 1000 advisers were classified as 'large' firms. All adviser groups with less than 60 advisers were classified as 'small' firms, and the remaining adviser groups were deemed to be 'medium' firms.

6.64 Industry data was obtained from all three industry segments through consultations with key industry bodies-these bodies in turn liaised with their membership base-and large industry participants. Industry participants were asked to provide accurate data indicating the cost savings for each of the amendments.

6.65 Firms were asked to identify their cost savings as either 'labour cost savings', which are calculated by reference to the amount of time saved per firm multiplied by a cost of labour, or 'purchase cost savings', which are purchases that the firm would no longer be required to make as a result of the amendments to FOFA. For each amendment, firms provided labour cost savings data on: the number of employees affected, if any; the amount of time that would be saved per employee; and the cost of labour for the affected employee(s). For purchase cost savings, firms provided an estimate of the cost savings that would arise under each of the proposed amendments.

6.66 A bottom-up approach was used to estimate industry savings. The inputs provided from each industry segment were averaged-on a per firm basis-then multiplied by the number of firms in the industry to generate a cost savings estimate for that segment. These segment estimates were added to arrive at a total industry cost savings estimate.

6.67 A detailed breakdown of the cost estimate inputs cannot be publicly released as some of the data was provided on an in-confidence basis. That said, a summary table of average inputs is provided in Table 6.4. As shown, the majority of cost savings are derived from labour cost savings, with relatively small savings from purchase costs.

6.68 As an example, the removal of the 'catch-all' provision within the best interests duty is estimated to save $33.3 million per year. This calculation is based on an average labour cost per person of approximately $62 per hour, and an estimated average time saving of just over 14 hours per firm, per week.

6.69 The average labour cost varies across amendments due to the different wage rates of employees performing different functions. For example, the scaled advice provision has the highest labour cost because this amendment directly affects the time of financial advisers, who are typically on higher wage rates than other staff members in the organisation. By contrast, the opt-in amendment has the lowest labour cost because this function is able to be performed by staff on lower wages: mainly administrative or clerical staff.

6.70 The estimated cost savings, which were calculated using data provided by industry, are based on the assumptions and methodology set out above. It should be noted that industry cannot perfectly foresee the impact of the amendments on their cost structures; therefore, actual cost savings may differ from those estimated in this document: these figures are estimates only.

Table 6.4: Summary of cost savings inputs

FOFA amendment [51] Number of hours per firm (per week) [52] Average labour cost ($ per hour) [53] Total labour cost savings ($M per year) [54] Total purchase cost savings ($M per year) [55] Total cost savings ($M per year) [56]
Fee disclosure statement requirements 20.0 $60.5 $46.1M $0.3M $46.4M
Removal of opt-in 18.4 $54.1 $37.9M $2.3M $40.2M
Removal of the catch all provision 14.2 $61.9 $33.3M Nil $33.3M
Explicit provision of scaled advice 14.3 $63.2 $34.1M Nil $34.1M
Exempt 'general advice' from 'conflicted remuneration' under certain circumstances 17.9 $59.5 $36.3m Nil $36.3m

Limitations

6.71 Whilst it is anticipated that some of the cost savings to industry will be passed through to consumers, it is difficult to quantify the extent to which this will occur. Cost savings could flow through to consumers either through a reduction in the cost of advice, or through the avoidance of (an otherwise necessary) price increase. It is anticipated that, in any case, the cost of advice under the proposed amendments will be lower than if the amendments were not implemented.

6.72 It is important to note that the Business Cost Calculator only calculates the direct cost savings of the proposed amendments, and does not consider indirect or 'second-round' savings or opportunity cost savings. Whilst some of the amendments, such as those designed to provide clarity to industry, may not result in direct and quantifiable cost savings, second-round or indirect cost savings are likely to arise.

6.73 For example, if an adviser attends a training course to increase their understating of the best interests duty, the cost of that training course would be included in the Business Cost Calculator as it represents a direct cost related to compliance. By contrast, if the adviser were to forego giving advice for a few hours in order to research their best interests duty obligations (that is, at no external cost), the foregone revenue from the advice that could otherwise have been earned is not included as it is an opportunity cost.

6.74 Similarly, the cost savings to consumers is not included in the calculations, as it is a 'second-round' saving; the 'first-round' saving occurs to firms. The impact of the amendments on consumers is discussed in more detail throughout this section.

Stakeholder feedback on estimates

6.75 Treasury's initial impact analysis and cost savings estimates were published in the options-stage RIS, and provided an opportunity for stakeholders to engage with the Government on the impact of the proposed changes. Stakeholders were also provided an opportunity to comment on the RIS during consultations on the draft amendments; these consultations were conducted during February 2014.

6.76 Key industry bodies broadly agreed with the qualitative impact analysis presented in the options-stage RIS. They reiterated their belief that the proposed amendments will reduce the regulatory burden on industry and increase the affordability of financial advice for consumers, whilst also ensuring appropriate protections are in place for investors. They consider that the amendments are necessary to provide certainty to all stakeholders and reduce the unnecessary complexity and burden that is inhibiting their ability to provide cost-effective advice to consumers.

6.77 Industry bodies also agreed with the quantitative analysis of the cost savings presented in the options-stage RIS. No key industry bodies or industry participants brought forward new data or amended their previously provided data for the details-stage RIS.

6.78 Whilst some industry stakeholders indicated that the published numbers appeared conservative, there was insufficient substantive new information to warrant increasing the cost savings estimates for the details-stage RIS.

6.79 Consumer groups did not raise any specific concerns with cost savings estimates calculated except to indicate that the cost savings to consumers should be considered in addition to the cost savings to industry.

6.80 As noted above, whilst this RIS quantifies the direct cost impacts to the industry, there are not expected to be any direct or 'first-round' compliance cost impacts for consumers. Instead, a qualitative explanation of the costs to consumers will be provided in the measure-by-measure analysis below.

6.81 Following feedback from industry and consumer groups, no changes were made to the cost savings as calculated in the options-stage RIS. However, an adjustment has been made to the cost saving estimate for the general advice exemption; this adjustment reflects the revised exemption (see detailed analysis below for further details).

Detailed analysis on Dissenting Report amendments

6.82 As mentioned above, feedback was received on the options-stage RIS as part of the consultations on the proposed FOFA amendments. The primary theme that emerged was that the options-stage discussion of the impacts of each of the proposed amendments was overly technical, and primarily focused on the benefits to industry; many stakeholders felt that the options-stage RIS contained insufficient consideration of the costs to consumers, or that the impact of some of the amendments on consumers was understated.

6.83 This details-stage RIS has attempted to address these concerns. For the purposes of this RIS, the proceeding section presents, for each of the proposed amendments: a technical description of the change; a description of the industry impacts; a description of the consumer impacts; a critical analysis of these impacts and conclusion as to the net impact for each amendment. Any conclusion as to the net impact of the proposed amendments is an 'on balance' assessment.

Remove opt-in requirements

6.84 This amendment removes the requirement for advisers to obtain their client's approval, at least every two years, to continue an ongoing fee arrangement; the opt-in provisions only relate to clients who enter into an ongoing fee arrangement from 1 July 2013. Whilst FOFA became mandatory on 1 July 2013, the effective start date for opt-in is 1 July 2015 as clients only need to opt-in every two years.

6.85 The opt-in requirement was introduced to enable customers to assess the quality of service they receive for the fees they pay. Currently, if a client does not opt-in within 30 days of receiving an opt-in notice, their ongoing arrangement is terminated (termination occurs 60 days after receiving the opt-in notice). Under the proposed amendment, clients will no longer be required to opt-in, and will maintain their existing right to opt-out of their ongoing fee arrangements.

6.86 Industry stakeholders have been largely supportive of this proposed change, although the reasons have varied. Many stakeholders have cited the high implementation and ongoing costs of the opt-in system, which are likely to be passed through to the consumer, as a strong motivation for removing the requirement. These costs relate to implementing and maintaining systems, additional staff involvement, other administrative overheads, and are closely linked to the number of customers; as such, these costs are anticipated to increase over time as client numbers increase.

6.87 Other industry stakeholders have argued that firms in the financial services industry, particularly those who are members of a professional industry association, should be actively promoting client engagement independent of statutory requirements. The argument is that these firms should be engaging with their clients to earn their trust and prove their 'value add'. These stakeholders, therefore, argue that opt-in, of some form or another, is already occurring in many instances, and that the driver of this consumer engagement should come from industry rather than be mandated by government.

6.88 One final, albeit related, argument is that the opt-in provisions impose too high a standard on financial advisers. Whilst these stakeholders laud government attempts to improve consumer engagement, they argue that the provisions that apply to financial advisers are out-of-sync with the rest of the financial services industry: nowhere else is an opt-in requirement mandated. As such, the argument is that the opt-in provisions should be removed and only reinstated as part of a much broader, systemic attempt to ensure greater consumer engagement.

6.89 Consumer groups have argued that opt-in is important to promote client engagement and transparency of fees charged. An ASIC report found that only 33 per cent of clients serviced by the top 20 licensees were considered active[57], which suggests that the majority of clients are inactive or disengaged. For such consumers, the opt-in requirement provides an opportunity to assess whether they wish to continue their arrangement(s) with their adviser, a decision that is aided by the fee disclosure statement-see discussion on fee disclosure statements below.

6.90 Client engagement is considered important in ensuring that clients actively monitor their financial position and are aware of any changes to their account(s). Consumer groups have argued that removing the opt-in requirement will drive up the cost of advice, as advisers will earn revenue from disengaged or 'passive' clients without providing any advice to them. It is argued that if these clients were more engaged, they would be in a better position to weigh up their options and consider switching into a lower cost (possibly fee-for-service) product.

6.91 Some stakeholders have argued that the opt-in requirements are necessary as FOFA has allowed ongoing percentage-based fees to continue to be charged: under FOFA, asset-based fees-which are calculated based on the value of the assets invested with the adviser-are able to be deducted from a client's account on a regular basis, and for an indefinite period of time, as long as the client initially consents to the charges. These stakeholders have argued that these asset-based fees have exactly the same effect as sales commissions, and that, with the removal of opt-in, there will be no mechanism to ensure that ongoing fees are only being charged where ongoing advice, or at least ongoing communication, is being received.

6.92 According to these stakeholders, removing the opt-in requirements will be at a heavy cost to consumers. One submission argued that a 0.5 per cent ongoing fee would equate to a $46,000 reduction in the super balance of an average superannuation member over their working life. Given that, according to these stakeholders, around two million super fund members were paying ongoing fees but were not receiving any financial advice, the removal of opt-in has far reaching consequences.

6.93 The consumer benefits of the opt-in requirements cannot be denied. The opt-in requirements were, and are, a paradigm shift in the battle to increase client engagement. By requiring advisers to seek client approval to continue arrangements, opt-in nudges clients into actively considering whether they are receiving service commensurate to the fees that they have paid and thereby raises the service levels of the industry.

6.94 That said, the opt-in requirement places a disproportionately large burden on financial advisers; a burden not replicated in other areas of, or even outside of, the financial services industry. Whilst there is no doubt that the removal of the opt-in requirement is likely to reduce client engagement, there are a range of other measures within the legislation that are intended to promote client engagement; for example: statements from superannuation trustees, product manufacturers, and fee disclosure statements will provide consumers with information on the fees and charges they are incurring. Furthermore, consumers will continue to be able to opt-out at any time.

6.95 The opt-in requirement was not recommended by the Ripoll Inquiry. The Dissenting Report comments:


The Ripoll Inquiry, having comprehensively considered the state of Australian financial products and services back in 2009, made no recommendation to force Australians to re-sign contracts with their financial advisers on a regular basis[58].

...

There is no precedent for this sort of government red tape in the context of financial services and advice relationships anywhere in the world[59].

6.96 Notwithstanding the consumer benefits that arise from opt-in, the disproportionate treatment of financial advisers relative to the rest of the financial services industry, and the significant ongoing and implementation costs to achieve these measures, indicate that the cost savings to industry outweigh the consumer benefits from the removal of the opt-in provisions.

Limit the annual fee disclosure requirements to be for prospective clients only

6.97 This amendment removes the requirement for advisers to provide a fee disclosure statement to clients who entered into their advice arrangement prior to 1 July 2013. Advisers will still need to provide an annual fee disclosure statement to post-1 July 2013 clients. Fee disclosure statements provide customers with a single statement that shows, for the previous 12 months, the fees paid by the client, the services the client received, and the services the client was entitled to receive.

6.98 Industry has strongly supported the removal of the fee disclosure statement requirements for pre-1 July 2013 clients. Industry stakeholders have argued that it costs significantly more to produce a fee disclosure statement for a pre-1 July 2013 client than for a post-1 July 2013 client[60]. These stakeholders have indicated that these costs will be passed onto the client and will reduce the accessibility and affordability of financial advice. They have also argued that collecting the information for fee disclosure statements can be a convoluted process, as the information needs to flow from (often multiple) product manufacturers to licensees, and are then passed onto the relevant adviser(s) before the statement can be created and sent to the client. It is argued that this process can involve a significant investment of time and resources, especially for pre-1 July 2013 clients.

6.99 Consultations have suggested that the higher costs for old clients are primarily driven by the age of systems, which struggle to provide accurate fee information for pre-1 July 2013 clients. As a result, to ensure that fee disclosure statements to pre-1 July 2013 clients are accurate, a significant amount of adviser time is required to quality assure the disclosure statements. The annual cost saving for this proposed amendment is estimated to decrease over time as a greater portion of clients receive fee disclosure statements.

6.100 Consumer groups have argued that the fee disclosure statement is an important source of information, particularly for consumers who may not have the time or skills to collate and fully understand the fees they are paying. It is argued that this amendment adversely affects pre-1 July 2013 clients, who may continue to be placed in ongoing, expensive fee arrangements-even if there are better alternatives available-as they will not have a simple source of information to prompt them to compare their arrangements to others. It is therefore argued that, due to information asymmetry, this amendment would affect the bargaining power of clients when negotiating fee arrangements with their adviser.

6.101 In the absence of fee disclosure statements, pre-1 July 2013 clients will be required to piece together the fee details from multiple statements, often with different cut-off dates, to calculate an annual fee; such an exercise would be beyond the capabilities of many advice clients. Whilst advisers may help their clients complete such a task, it would most likely be at a substantial cost to the client.

6.102 Notwithstanding the benefits to pre-1 July 2013 clients from receiving a single statement outlining the fees they have paid, most of these clients are currently paying conflicted remuneration (in the form of grandfathered commissions) to their advisers rather than a 'fee for service' charge. Conflicted remuneration is not included in the fee disclosure statements, so there may be little additional information obtained by the statements for the pre-1 July 2013 clients. Both pre- and post-1 July 2013 clients will continue to receive other reports that identify the fees paid to an adviser; for example: superannuation and product statements. This, in conjunction with the other client engagement mechanisms, both in the legislation and through the professional conduct standards promoted through professional bodies, should ensure that clients remain engaged and are able to monitor and change their investments when necessary.

6.103 Fee disclosure statements were not included as part of the recommendations from the Ripoll Inquiry. The Dissenting Report comments:


The Ripoll Inquiry made no recommendation to introduce an additional annual fee disclosure statement over and above the current regular statements provided by financial service product providers to their clients already[61].

6.104 In addition, when the requirement to provide fee disclosure statements was first announced, it was only intended to apply prospectively, that is, to post-1 July 2013 clients. The Dissenting Report comments:


...the Committee received strong evidence that based on the various FOFA consultations sessions, it was the industry's clear understanding that the government's proposal to impose an additional annual fee disclosure statement would be prospective-that is, only apply to new and not existing clients[62].

6.105 The rationale was that any 'new', post-1 July 2013 clients, would come under the FOFA compliant products and systems; these products and systems would be specifically designed to facilitate the provision of the fee disclosure statements.

6.106 However, and as indicated by many industry stakeholders, the retrospective application of fee disclosure statements appears overly onerous. When considered in conjunction with the questionable value of the fee disclosure statements for pre-1 July 2013 clients, which do not report conflicted remuneration, it would appear-on balance-that the cost savings to industry outweigh the consumer benefits.

Removal of the 'catch all' provision in the best interests duty

6.107 This amendment removes paragraph 961B(2)(g), which is known as the 'catch all' provision, from the best interests duty. Subsection 961B(1) imposes a requirement on advisers to act in the best interests of the client in relation to the advice provided. Subsection 961B(2) then provides a series of steps that an adviser can follow to prove that they have discharged their duty to their client. Paragraph 961B(2)(g) is the last of the steps and states that an adviser must prove that they have 'taken any other step [in addition to the six preceding ones] that ... would reasonably be regarded as being in the best interest of the client'. The intention behind the catch all provision was to make the best interests duty flexible and principles-based, thereby avoiding legislation becoming overly prescriptive. Subsection 961B(2) is often called a 'safe harbour' as it provides protection for advisers looking for certainty in satisfying their duty.

6.108 The proposed removal of paragraph (g) has been supported by industry, which has expressed concerns that the current provision is unclear due to its open-ended nature and has created significant legal uncertainty on how advisers can actually satisfy the best interests duty. Industry has noted that the current drafting of the best interests duty has led to advisers spending more time than otherwise necessary documenting the advice they have provided to their clients to demonstrate compliance with the best interests duty. As such, industry stakeholders claim that the catch all provision renders the safe harbour protection of subsection 961B(2) unworkable. They believe that removing paragraph 961B(2)(g) will ensure that section 961B(2) functions as a true safe harbour, as the remaining six steps are more objective.

6.109 By contrast, some stakeholders have likened removing paragraph (g) to a repeal of the best interests duty. Consumer groups have argued that the catch all provision is the most important part of the best interests duty, as it makes the duty flexible and principles-based. They argue that removing the catch all provision could lead to consumers receiving lower quality advice as it weakens the best interests duty by reducing it to a 'tick-a-box' exercise for advisers. Consumer groups have argued that, under a modified best interests duty, an adviser could satisfy the remaining six steps of the best interests duty but still not provide advice that is in the best interests of their client.

6.110 Some stakeholders have also raised concerns that this amendment, which they argue is likely to lead to an increase in the prevalence of poor advice, will result in an increased risk of financial scandals resulting in consumer losses.

6.111 At the time the original FOFA legislation was being drafted, many stakeholders indicated that, in introducing a best interests duty, only subsection 961B(1) was required. However, concerns were expressed that, without any additional guidance, subsection 961B(1) alone would cause confusion, and it would be left to the courts to provide guidance on how advisers could satisfy their best interests duty.

6.112 In response to this uncertainty, subsection 961B(2) was inserted. This subsection was never intended to be a safe harbour; rather, it was included to provide the guidance advisers were seeking on how they could satisfy their best interests duty. Because this subsection was not intended to be an exhaustive list, paragraph (g) was inserted to ensure the subsection remained flexible. However, over time, perception of this provision has changed, and it is now commonly accepted to be a safe harbour; even ASIC, in its regulatory guides, refers to subsection 961B(2) as a safe harbour[63].

6.113 The proposal to remove the catch-all provision is intended to properly implement the recommendations from the Ripoll Inquiry. The original Ripoll recommendation was to include a fiduciary duty for financial advisers to place their client's interests ahead of their own; there was no requirement that this duty be open ended. As such, subsection 961B(2) without paragraph (g) achieves this aim. The Dissenting Report comments:


The best interests duty is an important and central part of the FOFA changes. Coalition Committee members support the introduction of a statutory best interests duty for financial advisers into the Corporations Act[64].

...

However, we are concerned that the 'catch all' provision contained in section 961B(2)(g) would create uncertainty for both clients and their advisers and leave the legislation subject to potentially protracted legal arguments. We therefore recommend that this clause be removed[65].

6.114 Whilst a best interests duty without paragraph (g) will lower the standard required of advisers, the concerns expressed by consumer groups appears to be disproportionate to the change. The remaining steps in subsection 961B(2) still set a high standard, it just does not require an unending set of actions. When considered in conjunction with other measures-the requirement that advice be appropriate for the client, that advisers must place their client's interests ahead of their own, and the duty to warn clients if information is based on incomplete or inaccurate information-the amended best interests duty will still ensure that clients continue to receive advice that is in their best interests.

6.115 As such, the cost savings to industry appear to outweigh the consumer impacts.

Explicit provision of scaled advice

6.116 This amendment allows clients and advisers to explicitly agree on the scope of any scaled advice provided, whilst still ensuring the advice is appropriate for the client.

6.117 Whilst scaled advice is not specifically defined in the Corporations Act, it is usually referred to in the industry as a targeted form of personal advice; personal advice is advice that considers the financial objectives, situation, and needs of a person. All personal advice is 'scaled' or 'limited in scope' to some extent: advice is either less or more comprehensive in scope along a continuous spectrum. For example, scaled advice may cover a specific area of a client's needs such as insurance or superannuation, and can be contrasted to holistic advice that usually considers all of the client's financial needs.

6.118 The limited scope of scaled advice usually makes it much cheaper than more fulsome personal advice. This is due to the fact that an adviser needs to consider fewer of the client's circumstances, needs and objectives to provide the advice. As holistic personal advice can often be expensive, scaled advice is an affordable avenue for many consumers seeking personal advice.

6.119 This amendment has been welcomed by industry, which has argued that the best interests duty does not give them confidence that scaled advice can be provided. This uncertainty has led to advisers performing more work than necessary to ensure compliance with the best interests duty. In particular, it has resulted in advisers considering all of their client's circumstances when providing scaled advice, rather than only considering their relevant circumstances; this has had the effect of making scaled advice more expensive than otherwise necessary. Industry has indicated that advisers, in some instances, have not been providing scaled advice at all.

6.120 Consumer groups have raised concerns that this amendment could allow advisers to avoid certain obligations imposed by the best interests duty thereby affecting the quality of advice provided to consumers. These stakeholders are particularly concerned that customers could be left vulnerable to poor quality advice, as the amendment could allow an adviser to agree a scope of the advice that may not be in the best interests of their client. This concern is particularly salient for clients who: have low levels of financial literacy, place a great deal of trust in the knowledge and experience of an adviser, and are likely to agree to suggestions from an adviser on the scope of the advice they are to receive without appreciating the implications of what they have agreed to.

6.121 For example, a client may go to an adviser seeking information about their finances. Due to the prohibitive cost of a holistic financial plan, a client may agree-perhaps at the advisers suggestion-to limit the scope of the advice to a particular area, and only consider the products offered by the adviser's employer.

6.122 The concern some stakeholders have with the example above is that the client may need urgent advice on one particular area, but may not actually receive this advice as it has been scoped out. If the client is not told about this other advice area, then the client may not fully appreciate that they are missing out on advice that may be better for them. Furthermore, by limiting the advice to products offered by the adviser's employer, the client may not be informed about alternate investments that may actually be more suitable for their particular circumstances.

6.123 Concerns have also been expressed that this amendment could reduce the number of products offered in the industry, as advisers become incentivised to offer scaled advice on more costly, and hence lucrative, financial products.

6.124 As with the changes to the best interests duty, the proposal to allow clients and advisers to explicitly agree on the scope of scaled advice is intended to properly implement the recommendations from the Ripoll Inquiry, and is closely linked to change to the best interests duty. The Dissenting Report comments:


One way of ensuring that clients are able to access affordable and appropriate financial advice would be to allow advisers and their clients to limit the scope of the advice to a series of discreet areas identified by the client rather than to mandate a full financial plan in every case.

This concept of focusing advice to areas specifically identified by a client has become widely known as 'scalable advice'.

Numerous submissions to the Committee expressed concern that the wording of the best interests provisions in the proposed legislation does not allow for scaled advice to be provided[66].

6.125 There is some debate within industry as to whether the current legislation actually permits scaled advice to be provided. Whilst there is currently no explicit provision that allows the client and adviser to agree a scope of advice, a number of advisers are already providing scaled advice and have not incurred the problems expressed by industry stakeholders. As such, whilst the concerns raised about advisers inappropriately agreeing a scope of advice is possible under the proposed amendment, it may already be possible under the current arrangements.

6.126 It is doubtful whether the dire outcomes indicated by consumer groups will eventuate. The FOFA provisions relating to the appropriateness of advice, and requiring an adviser to place their client's interests ahead of their own, will ensure that, even if the adviser agrees a scope that is inappropriate to the client, they will not be able to provide advice that is inappropriate.

6.127 As such, the cost savings to industry outweigh the consumer benefits.

Commissions on life (risk) insurance provided within superannuation

6.128 The Government originally proposed amendments to expand the range of circumstances under which commissions may be paid on life (risk) insurance products provided within superannuation to include circumstances where personal advice has been provided on these products.

6.129 Through consultation on the proposed amendments and broader industry engagement, the Government has become aware that, whilst the life insurance industry as a whole remains well capitalised and profitable, in relation to certain business lines there are grounds for concern regarding the long term sustainability of some current industry practices, including in relation to remuneration.

6.130 In light of these concerns, the Government intends to undertake a separate process to engage with the life insurance industry on these issues. In order to ensure that the industry's regulatory environment is not subject to further change while this process is underway, the Government does not propose to progress amendments to the treatment of life (risk) insurance at this time.

Exempt 'general advice' from 'conflicted remuneration'

6.131 This amendment exempts general advice from conflicted remuneration under certain circumstances. Currently, the conflicted remuneration provisions capture both general and personal advice; conflicted remuneration cannot be paid on either type of advice. This amendment will allow conflicted remuneration to be paid on general advice under certain circumstances; conflicted remuneration on personal advice will continue to be banned.

6.132 The Government originally proposed to exempt all general advice from the definition of conflicted remuneration. This approach was outlined in the options-stage RIS published by the OBPR in January 2014. Feedback on this proposal was received as part of consultation on the draft amendments.

6.133 Many industry stakeholders support the originally proposed amendment as they believe the current ban on conflicted remuneration captures activities that were not the primary focus of FOFA-the ban currently captures employees such as website designers or general information seminar providers who are not in product sales related areas. Industry argue that they are currently required to maintain complex systems when providing general advice to ensure compliance with the existing conflicted remuneration provisions. These systems are costly to implement and maintain.

6.134 Industry stakeholders have also argued that allowing benefits to be paid on general advice will ensure the provision of more general advice. These stakeholders believe this is a positive outcome for society as general advice often serves to inform and educate, and is a way for consumers to receive financial advice they might otherwise not have access to.

6.135 By contrast, consumer groups believe that exempting general advice from the definition of conflicted remuneration may have a significant negative impact on consumers, and the financial advice industry as a whole.

6.136 These stakeholders agree that excluding general advice from the definition of conflicted remuneration will ensure the provision of more general advice. However, they suggest that it will also result in the industry moving towards general advice models, and may lead to an overprovision of general advice relative to personal advice as advisers would be incentivised to earn conflicted remuneration through general advice based sales.

6.137 These stakeholders argue that there is a significant consumer detriment involved as many consumers do not understand the distinction between personal and general advice. As a result, they may make financial decisions that are not appropriate for them if they mistakenly rely and act on general advice thinking it to be personal advice.

6.138 Stakeholders also argue that the amendments may adversely affect the reputation of the industry by effectively allowing commissions to be re-introduced and could lead to doubt in the minds of consumers as to whether the advice they have received-whether personal or general-is conflicted.

6.139 General advice is one of two forms of financial product advice; the other is personal advice. Financial product advice is defined as a: 'recommendation or opinion that influences a person into making a decision on a financial product[67]' (emphasis added). Whilst general advice, unlike personal advice, does not consider the financial objectives, situation and needs of a person, it still influences a person's decisions. It was for this reason that both general and personal advice were included in the ban of conflicted remuneration.

6.140 The argument that general advice is provided to inform and educate, rather than to persuade and influence, is problematic for two reasons. Firstly, as defined, general advice does influence (or could reasonably be expected to influence) a person's choice. If the advice were truly factual, and couldn't reasonably influence a person's choice, then it wouldn't be financial product advice and thus payments in relation to it would not be conflicted remuneration. However, all general advice, no matter how informative, is-at some level-designed to influence a decision, usually to acquire a product or service from the provider of the general advice; if not, there would be no incentive for the provision of the general advice.

6.141 Secondly, there are many instances where general advice, and only general advice, is used to market and influence sales. Evidence suggests that complex products, such as exchange-traded options strategies-which have high returns but also high risks-are exclusively sold through general advice channels.

6.142 Further, general advice is often misunderstood and confused with personal advice. Whilst general advice does not consider the personal circumstances of the client, and whilst a general advice warning is required to be provided-which states that the advice given does not consider the personal circumstances of the client-many people ignore the warning and mistake general advice for personal advice. This is particularly the case where face-to-face contact is involved. A person attending a seminar who speaks to the presenter and tells them about their financial position could easily be confused into thinking that any answer to questions may have taken into account the personal circumstances disclosed when it has not.

6.143 In response to consumer and stakeholder concerns that the original amendment was too broad, the government has decided to restrict the operation of the carve-out. The revised general advice exemption will exempt benefits from the definition of conflicted remuneration if the following conditions are satisfied:

·
general advice is provided by an employee;
·
the employee has not given personal advice to the person receiving the general advice in the past 12 months; and
·
general advice is in relation to a product issued or sold by the employer.

6.144 The imposed conditions will restrict the general advice exemption to employees who have not provided personal advice to the person receiving the general advice in the past 12 months.

6.145 This amendment alleviates the unintended consequences of the original general advice ban without providing too broad an exemption. Website designers, people giving seminars, and other employees who are involved in the preparation of general advice, but who do not provide personal advice, will now be able to utilise the general advice exemption. However, advisers who provide personal advice as well as general advice will not be able to utilise the exemption. As such, this amendment removes the unintended consequences whilst still allowing consumers who receive personal advice to remain confident that their advice is in no way influenced by conflicted remuneration.

6.146 Further, this amendment discourages a move into a general advice model. Given that the exemption does not apply if both general and personal advice has been provided, and given the significant upfront and ongoing training costs advisers incur to skill themselves to provide personal advice, it is unlikely that advisers who currently provide personal advice would move to a general-advice-only model.

6.147 To address concerns over sales of complex products, the Government has asked ASIC to monitor the use of the conflicted remuneration provisions as they relate to general advice on complex products. ASIC will provide a report to the Government in the next 12-18 months.

6.148 The revised general advice exemption is more restricted than originally proposed; accordingly, the consumer impacts are reduced, although not entirely mitigated. Given the narrower application of the exemption, and given the ongoing monitoring of the use of the provisions in relation to complex products, it would appear-on balance-that the cost savings to industry outweigh the consumer impacts.

6.149 A note on the cost impacts: consultations with stakeholders indicate that the restrictions on the general advice exemption will affect some of the firms in the small and medium segments but none of the large firms. Estimates of the extent to which the small and medium segments would be affected varied; as such, a conservative approach has been adopted when calculating the adjustment to the cost savings.

6.150 The restrictions in the exemption means that, where employees provide general advice only, separate systems no longer need to be maintained to ensure compliance with the conflicted remuneration provisions. As large firms separate advice streams - that is, employees who provide personal advice do not concurrently provide general advice - these large firms will be able to realise all of the cost savings estimated from the originally proposed amendments.

6.151 Whilst many of the small and medium firms have, similarly, separated their advice streams, not all of these firms have done so. Consequently, some of these firms will not qualify for the general advice exemption with the new restrictions. As such, these firms will be required to maintain systems to ensure compliance with the ban on general advice; these firms have been excluded from the cost savings estimates. The cost savings estimates in Table 6.3 have been updated accordingly.

6.152 The restriction on the general advice exemption has resulted in a reduction in the ongoing cost savings estimates of approximately $1.6 million per year; the consumer protections achieved by the restrictions are, therefore, large relative to the reduction in cost savings. The design of the restrictions, which addresses the unintended consequences created by the current conflicted remuneration provisions but avoids the pitfalls from providing too broad an exemption, means that most businesses do not need to incur additional compliance costs. As such, the consumer consequences of the original proposal can be minimised at negligible incremental cost to business.

Clarify the exemption from the ban for execution-only services

6.153 This amendment broadens the existing execution-only exemption from conflicted remuneration. The current exemption permits conflicted remuneration on execution-only services where no advice has been provided to a client by a licensee, or representative of that licensee, in the previous 12 months. This amendment will permit conflicted remuneration if no advice has been provided by the individual receiving the benefit for the execution service (as opposed to the licensee or representative employing the individual). Linking the provision of advice to an individual rather than a licensee or representative (usually a group entity) provides a more direct link between the provision of advice and the execution service.

6.154 Industry has supported this amendment as it enables benefits to be earned on legitimate execution-only services. Industry groups have argued that the drafting of the provision makes it complex and difficult and costly to comply with. They believe that execution-only transactions are not accompanied by any advice, and hence are typically at the request of the client. As such, they believe that there are benefits associated with allowing conflicted remuneration on these transactions. This amendment provides clarity to advisers; the current legislation has had the unintended consequence of rendering advisers unable to receive conflicted remuneration despite there being no conflict of interest.

6.155 Some stakeholders have expressed concerns that financial advice firms will be able to give advice in one part of the business, and then execute the transaction in another part of the business so that conflicted remuneration can be earned. They have argued that this would result in extra charges for clients, whose investment returns would suffer as a result.

6.156 This situation is unlikely to occur given the anti-avoidance provisions within the Corporations Act 2001, which prohibit firms from restructuring their business models purely to circumvent the application of certain parts of the legislation. As such, the benefits to industry outweigh the consumer impact.

Training exemption

6.157 This amendment broadens the training exemption in relation to non-monetary benefits to cover all training relevant to conducting a financial services business. Currently, the exemption states that only training relevant to the provision of financial product advice is excluded from conflicted remuneration.

6.158 Industry has supported this amendment, as it allows them to use the training exemption for a wider range of activities, including administrative, dealing or trading activities. It is argued that the amendment will assist businesses in improving their productivity, and should raise the standard of advice being provided to consumers.

6.159 This amendment is not expected to have any material impact on consumers.

Amendments to volume-based shelf-space fees

6.160 This amendment clarifies the drafting of the ban on volume-based shelf-space fees to clearly define the benefits the ban intends to capture. In particular, it clarifies that incentive payments between fund managers and platform operators to give preferential treatment to certain products on the platform 'shelf'-which could potentially influence advice provided to the client-are prohibited.

6.161 Industry has supported this amendment. They have argued that the current drafting of the legislation has unintended consequences that adversely affect firms in the industry, and that the amendment would clarify the operation of the law.

6.162 Consumer groups have argued that this amendment could result in advisers being influenced in their provision of advice. For example, advisers could place their clients in more costly products in order to earn a volume-based bonus through the platform. They believe that this would reduce the quality of advice provided to consumers and also be detrimental to their investment returns, as the volume-based fees are 'built in' to the cost of their financial product(s).

6.163 This amendment simply clarifies the benefits the ban intends to capture. It does not change the existing law, other than to make it clearer to understand. As such, this amendment is not expected to have any material impact on consumers.

Clarify the definition of intra-fund advice

6.164 Intra-fund advice is defined in the Superannuation Industry (Supervision) Act 1993 (SIS Act) but is not specifically mentioned in FOFA. This amendment cross-references the definition of intra-fund advice from the SIS Act in the FOFA legislation. Intra-fund advice is a type of scaled advice provided by both retail and industry superannuation funds to their members. The advice is simple in nature and solely related to the member's superannuation products.

6.165 This amendment clarifies the operation of the law and does not have any direct impact on consumers.

Other changes

Grandfathering existing remuneration from the ban on conflicted remuneration

6.166 This amendment broadens the circumstances under which conflicted remuneration can continue to be paid (that is, grandfathered). As long as a client maintains their interest in a financial product, the proposed amendment will allow advisers to move licensees and continue to access grandfathered benefits; currently, any move after 1 July 2013 causes grandfathering to cease.

6.167 Industry has supported this amendment. It is argued that the amendment promotes greater competition between licensees and allows advisers to move between firms more freely. Most industry stakeholders argue that the current grandfathering provisions have reduced adviser movements in the industry and have effectively 'frozen' the market; few advisers are willing to move licensees at all due to the loss of grandfathered benefits. Whilst the amendments allows grandfathered benefits to continue for a longer period of time, it is anticipated that industry will transition to a fee-for-service model as advisers cannot receive conflicted remuneration on arrangements entered into with new clients, and existing clients are likely to be transferred into new products/arrangements over time.

6.168 Some stakeholders are concerned that the grandfathering provisions will lock clients indefinitely into products that pay conflicted remuneration. They say that advisers will have no incentive to move their clients out of these products, because they would lose their benefit payments if they did so. These stakeholders believe that these clients will be adversely affected as conflicted benefits erode their investment returns over time, whereas these clients would have the opportunity to consider better alternatives if the grandfathering arrangements were not in place.

6.169 Despite these concerns, advisers will still be bound by the best interests duty, which will force them to consider whether their client's investment options are best suited to their financial needs, objectives and circumstances. The amendments to grandfathering will help the industry transition to a fee-for-service model and relieve the problems associated with the labour market 'freeze' which is currently discouraging advisers from moving between licensees.

6.170 There are also technical amendments to clarify that:

·
when a financial planning business or client book is sold, the rights to the grandfathered benefits can be transferred to the purchaser, who will then receive the ongoing benefit;
·
when an employed adviser becomes a self-employed authorised representative within the same licensing group, the adviser can continue to receive grandfathered benefits; and
·
when a client switches from a superannuation product to a pension product, and both are offered under a multi-product offering, grandfathering will not cease in relation to that client's investment.

6.171 These minor technical amendments provide certainty and clarity to industry.

Explicitly recognise that a 'balanced' remuneration structure is not conflicted

6.172 This amendment clarifies that benefits paid under a 'balanced scorecard' arrangement are not conflicted remuneration. Balanced scorecard benefits are calculated by reference to both volume-based and non-volume-based factors. When FOFA was introduced, it was envisaged that payments made under a balanced scorecard approach would be able to rebut the presumption that volume-based benefits were conflicted.

6.173 Some industry groups have supported this amendment as it provides certainty for employers when paying bonuses under these arrangements. They argue that allowing a 'low' benefit to be paid to employees is consistent with the intent of the legislation, as it will not influence advice in a way which is detrimental to consumers.

6.174 Some consumer groups do not support this arrangement, as they believe that the bonus payments will influence the advice provided by advisers. It has also been argued that this amendment will favour larger firms, providing an incentive for employees to work for large firms, and that this will drive further consolidation in the industry.

6.175 This amendment clarifies that benefits that are already being paid-benefits that are currently allowed under FOFA-are permitted. As such, this amendment is not expected to have any material impacts on consumers.

Include consumer credit insurance in the basic banking carve-out

6.176 This amendment broadens the existing basic banking exemption to include consumer credit insurance. The exemption covers front-line bank employees who typically provide advice on basic banking and general insurance products; these employees were not the target of FOFA.

6.177 Consumer groups believe there to be a risk that conflicted basic products will be packaged with exempt products in a way that maximises the benefits being paid to the adviser.

6.178 This minor amendment clarifies the operation of FOFA. Consumers generally understand that these are basic financial products, so this amendment is not expected to have a material impact on consumers.

Allow bonuses to be paid in relation to revenue that is permissible under FOFA

6.179 This amendment permits payment of performance bonuses that are calculated by reference to remuneration that is exempt from the ban on conflicted remuneration. For example, an employer will be allowed to pay an adviser a bonus calculated by reference to the fee-for-service revenue the adviser generates in a given period. Currently, such a bonus may be banned as it is volume-based, even though the fee-for-service revenue it is based upon is not banned.

6.180 Industry has supported this amendment. It is argued that this amendment will assist industry in shifting to a fee-for-service model-one of the objectives of FOFA-and removes an inconsistency between earning permissible revenue and receiving a bonus on permissible revenue.

6.181 Consumer groups have argued that any bonus payments paid in relation to permissible revenue would like to influence the advice provided by advisers.

6.182 Whilst there is a likelihood that prices may rise as a result of bonus payments, the fact that this amendment will assist industry in shifting to a fee for service model outweighs any consumer concerns.

Amendments to the FOFA stockbroking exemptions

6.183 This amendment clarifies the existing stockbroking-related carve-outs under FOFA, including providing for the application of the brokerage fee exemption to products traded on the ASX24 (the ASX24 is a 24-hour platform for derivatives trading run by the ASX) and the broadening of the stamping fee exemption for initial public offering (IPO) arrangements.

6.184 These amendments are minor and clarify the operation of the legislation - stockbroking was not the intended target of FOFA and stockbroking-related activities have been largely carved-out of the reforms.

6.185 Consumers will not be materially impacted by this change.

Other minor technical amendments

6.186 The other minor amendments are:

·
amendments to ensure that the wholesale and retail client distinction that currently exists in other parts of the Act also applies to the FOFA provisions; and
·
amendments to clarify that the client-pays exemption operates to allow clients to direct product issuers-such as superannuation trustees or responsible entities of managed investment schemes-to deduct payments from the client's funds, or funds the client is beneficially entitled to.

6.187 These proposed changes are purely consequential and provide clarity to the operation of the law.

Specific impact on small businesses

6.188 As a result of these deregulatory amendments, small businesses are likely to be able to spend more time on their core business of providing financial advice to consumers and less time on compliance-related activities. This should result in both cost savings and revenue growth opportunities, both of which should increase the competitiveness of small businesses in the industry.

6.189 As noted earlier, the market is broken into small, medium and large firms. Small businesses, for the purposes of this analysis, are considered to employ fewer than 60 advisers. For the smallest firms, compliance requirements typically come with significant opportunity costs: small businesses have fewer staff available to dedicate to administration and compliance, and any time spent on compliance is time not spent providing advice, and hence earning fees.

Impact on Government

6.190 The impact on Government will be relatively small and non-ongoing. In the short-term, implementation costs will be incurred to draft the legislation for the proposed amendments, and to make changes to the regulations. ASIC's role as the industry regulator will continue, albeit under the new rules and regulations.

Consultation

6.191 Since the Ripoll Inquiry was initially commissioned in February 2009, extensive consultation has occurred with key stakeholders through submissions, consultation groups, public information sessions, consultation papers and meetings with stakeholders. Further consultations occurred in 2012 when the 2012 FOFA Bills were referred to the Parliamentary Joint Committee for Corporations and Financial Services (PJC) for inquiry and report.

6.192 In developing the proposed package of amendments, the Government conducted targeted consultations with a number of stakeholders, including the Association of Financial Advisers, the Association of Independently Owned Financial Professionals, the Australian Bankers' Association, Choice, the Financial Planning Association, Financial Services Council, Industry Super Australia, the Property Council of Australia and the major wealth management companies.

6.193 On 29 January 2014, the Government released, for a three-week consultation period, draft regulations and legislation to enact its proposed reforms to FOFA. Around 50 submissions were received as part of this process, from a range of stakeholders including industry associations, consumer groups, financial planning practices, consultants and individuals. A wide range of views were expressed in the submissions, which provided comment on the amendments, the options-stage RIS and other related issues outside the scope of the amendments. For the large industry associations and consumer groups, submissions were consistent with previously expressed views. The submissions also yielded a number of technical suggestions to ensure that the legislation and regulations achieve the desired policy outcome.

6.194 Treasury also conducted additional stakeholder consultations as part of the consultation period on the draft amendments. Many of the concerns and comments canvassed throughout the consultation period have been considered and incorporated into the final amendments. In particular, this consultation drove the decision not to proceed with the proposed amendments to commissions for life (risk) insurance and the changes to the exemption for general advice from the definition of conflicted remuneration. The information received through these consultations has also been considered in the preparation of this document.

6.195 With regard to the options-stage RIS, Treasury has fully complied with the RIS requirements.

Conclusion

6.196 The proposed amendments to FOFA are deregulatory and are anticipated to result in savings of approximately $90 million in implementation costs and an average of approximately $190 million in ongoing costs per year. These savings are expected to flow through to consumers and increase the affordability of financial advice.

6.197 As discussed in this document, there are risks involved with these amendments. In particular, some stakeholders consider that the amendments compromise consumer protections, and will undermine the goals of FOFA. The Government, however, is committed to maintaining the important consumer protections introduced by FOFA, and these amendments reflect that commitment. The amendments will result in substantial cost savings and increased certainty for industry whilst maintaining the high standards expected by financial advisers, so that consumers of financial products and services remain protected against poor quality advice. On balance, the amendments will be beneficial for stakeholders of the financial services industry and promote the facilitation of high quality and affordable financial advice.

Implementation and review

6.198 The package of amendments will be implemented through legislation as well as regulations. To ensure the amendments are processed as soon as practicable, interim regulations will be made where legally possible; these interim regulations will be subsequently amended through legislation, and will be repealed once the legislative amendments have been passed. Those amendments best addressed through regulations will remain in place.

6.199 The Government anticipates that the legislation will be introduced into Parliament in the 2014 autumn sitting period, for passage in the winter sitting period.

6.200 Regulations are anticipated to be made by the end of March 2014. As with all regulations, there is a risk that the regulations will be disallowed. If this were to occur, the law would revert to the existing requirements and may cause regulatory uncertainty for industry.

6.201 A post-implementation review will commence within five years of these amendments being implemented.

Appendix A: Regulatory Burden and Cost Offset Estimate Table

Average Annual Change in Compliance Costs (from BAU)
Sector/Cost Categories Business Not-for-profit Individuals Total by cost category
Administrative Costs ($198,442,592.58) [68] $0 $0 ($198,442,592.58)
Substantive Compliance Costs $0 $0 $0 $0
Delay Costs $0 $0 $0 $0
Total by Sector ($198,442,592.58) $0 $0 ($198,442,592.58)
Annual Cost Offset
Agency Within portfolio Outside portfolio Total
Business $0 $0 $0 $0
Not-for-profit $0 $0 $0 $0
Individuals $0 $0 $0 $0
Total $0 $0 $0 $0
Proposal is cost neutral? No

Proposal is deregulatory Yes

Balance of cost offsets = ($198,442,592.58)

Index

Schedule 1: Amendments

Bill reference Paragraph number
Item 1, section 960 3.51
Item 1A, subsections 946A(2A) and (2B) 4.6
Item 1A, subsection 946A(2C) 4.7
Item 1A, subsection 946A(2D) 4.11
Item 1A, subsections 946A(2E) and (2G) 4.12
Item 1A, subsection 946A(2F) 4.14
Items 1B, 1C, 1D, 1E, 1F, 1G, 1H and 1J, paragraphs 947B(2)(ca), (cb), (cc), (cd), (ce), (fa), (fb) and (h), 947C(2)(da), (db), (dc), (dd), (de), (ga), (gb) and (i), and notes at the end of subsections 947B(2) and 947C(2) 4.16
Items 2, 30, 41 and 42 3.84
Items 3-5 and 17, 18, 19, 20, 21, Subdivision B of Division 3 of Part 7.7A (heading), sections 960, 962CA, 962K, 962L, 962M and 962N and subsections 962F(1), (2) and (3) 2.21
Items 6 and 38, section 960 and section 964A 3.55
Items 7 and 8, paragraphs 961B(2)(a) and (ba) 1.43
Items 9, 10 and 14, section 961E and subsections 961B(2)(f) and 961B(2)(g) 1.18
Item 11, subsections 961B(2)(note) 1.46
Item 12, subsection 961B(3) 1.59
Item 12, subsection 961B(4) 1.60
Item 13, subsection 961B(4A) 1.28, 1.31
Item 13, subsection 961B(4A)(example) 1.38
Item 14A, paragraph 961F(b) 1.71
Item 15, subsection section 961G 1.48
Item 16, subsection 961J(2) 1.67
Item 16, subsection 961J(3) 1.68
Items 20A and 20B, subsection 962G(1) and subparagraph 962H(1)(b)(i) 2.27
Items 22, 39 and 40, Subdivision C of Division 3 of Part 7.7A, table item 22 of subsection 1317E(1) and subparagraph 1317G(1E)(b)(v) 2.26
Item 23, section 963A (note) 3.61
Items 24, 25, 26, 31, and 32, section 963C, subsection 963B(1), paragraphs 963B(1)(a), 963B(1)(b) and 963C(a) 3.70
Items 27 and 29, subsections 963B(4) and (5) and paragraph 963B(1)(c) 3.43
Item 28, note in subsection 963B(1) 3.64
Item 28, subsection 963B(1) (example) 3.71
Items 29, 34 and 35, subsections 963B(7) and (8), 963C(2) and (3) and 963D(3) and (4) 3.73
Item 29, section 963B (note) 2.37
Item 29, subsections 963B(6) and (9) 3.24
Item 29, paragraph 963B(6)(a) 3.27
Item 29, paragraph 963B(6)(b) 3.28
Item 29, paragraph 963B(6)(c) 3.30
Item 29, paragraph 963B(6)(d) 3.36
Item 29, paragraph 963B(6)(e) 3.39
Item 33, subparagraph 963C(c)(ii) 3.46
Item 35, subsections 963D(1) and 963D(2) 3.50
Items 36 and 37, subsections 964(1) and (2) 3.57
Item 43, sections 1531A and 1531B 1.72
Item 43, sections 1531A and 1531C 2.40
Item 43, sections 1531A and 1531D 2.44
Item 43, sections 1531A and 1531E 3.77
Item 43, sections 1531A and 1531F 3.81
Item 43, section 1531AA 4.19


ToonenaAustralia, CCPR/C/50/D/488/1992, UN Human Rights Committee (HRC), 4 April 1994.


This RIS was published on 19 March 2014 at http://ris.dpmc.gov.au/2014/03/19/future-of-financial-advice-amendments-details-stage-regulation-impact-statement-department-of-the-treasury/


Corporations Amendment (Future of Financial Advice) Bill 2011 and the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011.


ABS - 5204.0 - Australian System of National Accounts, 2012-13.


ABS - 5206.0 - Australian National Accounts: National Income, Expenditure and Product, June 2013.


ASIC Report 224: Access to financial advice in Australia, 2010, p30.


ASIC Report 224: Access to financial advice in Australia, 2010, p30.


IBISWorld Industry Report K6419b Financial planning and investment advice in Australia, August 2013.


ASIC Report 224: Access to financial advice in Australia, 2010, p14.


IBISWorld Industry Report K6419b Financial planning and investment advice in Australia, August 2013.


ASIC Report 362: Review of financial advice industry practice: Phase 2, 2013, p7.


IBISWorld Industry Report K6419b Financial planning and investment advice in Australia, August 2013.


IBISWorld Industry Report K6419b Financial planning and investment advice in Australia, August 2013.


AMP Investor Report: Full Year 2013, AMP, 2014, available from: http://shareholdercentre.amp.com.au/ p27, 39. This is the impact of FOFA as well as other regulatory changes, including the Stronger Super reforms.


Annual Report 2013, Commonwealth Bank, 2013, available from: https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-reports/2013_CBA_Annual_Report_19_August_2013.pdf, p15.


IBISWorld Industry Report K6419b Financial planning and investment advice in Australia, August 2013.


ASIC Report 362: Review of financial advice industry practice: Phase 2, 2013, p13.


ASIC Report 362: Review of financial advice industry practice: Phase 2, 2013, p27.


ASIC Report 362: Review of financial advice industry practice: Phase 2, 2013, p28.


Section 961B(2)(e) of the Corporations Act 2001 (Cth).


Regulatory Guide 79: Research report providers: Improving the quality of investment research, ASIC, December 2012, available from: http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/rg79-published-10-December-2012.pdf/$file/rg79-published-10-December-2012.pdf, p1.


ASIC Report 251: Review of financial advice industry practice, 2011, p7.


ASIC Report 362: Review of financial advice industry practice: Phase 2, 2013, p13.


Annual Review 2011, NAB, 2011, available from: http://cr.nab.com.au/docs/2011annualreview.pdf, p20.


ASIC Report 251: Review of financial advice industry practice, 2011, p11.


ASIC Report 251: Review of financial advice industry practice, 2011, p11.


ASIC Report 251: Review of financial advice industry practice, 2011, p12.


ASIC Report 362: Review of financial advice industry practice: Phase 2, 2013, p13.


Kate Kachor, 'AMP rules out commissions revival', Financial Observor, 21 February 2014 (online), available from: http://www.financialobserver.com.au/articles/amp-rules-out-commissions-revival.


ASIC Report 224: Access to financial advice in Australia, 2010, p43.


ASIC Report 224: Access to financial advice in Australia, 2010, p42.


ASIC Report 224: Access to financial advice in Australia, 2010, p44.


ASIC Report 224: Access to financial advice in Australia, 2010, p44.


IBISWorld Industry Report K6419b Financial planning and investment advice in Australia, August 2013.


PJC Inquiry into financial products and services in Australia, November 2009, p150.


Dissenting Report, February 2012, p151.


Dissenting Report, February 2012, p151.


The cost estimate was indicated to be $375 million by Mr John Brogden, CEO of the Financial Services Council, during PJC hearings.


Dissenting Report, February 2012, p152-153.


Dissenting Report, February 2012, p154.


Dissenting Report, February 2012, p155.


Dissenting Report, February 2012, p156.


Much of the evidence in this RIS has been provided to the Treasury under commercial-in-confidence arrangements and cannot be directly quoted. Where this is the case, the evidence is paraphrased and no source is referenced.


Australia to 2050: future challenges, the Treasury, 2010, available from: http://archive.treasury.gov.au/igr/igr2010/report/pdf/IGR_2010.pdf, p1.


Mid-year Economic and Fiscal Outlook 2013-14, Commonwealth of Australia, December 2013, available from: http://budget.gov.au/2013-14/content/myefo/download/2013_14_MYEFO.pdf, p2.


The Coalition's Policy to Boost Productivity and Reduce Regulation, July 2013, p26.


The Coalition's Policy to Boost Productivity and Reduce Regulation, July 2013, p26.


Assistant Treasurer, Keynote Address to the 2014 Insurance Council of Australia Regulatory Update Seminar, 28 February 2014, available from: http://axs.ministers.treasury.gov.au/speech/008-2014/.


Mr John Brogden, CEO of the Financial Services Council, during PJC hearings.


The cost savings for this amendment differ from the savings published in the options-stage RIS as the general advice exemption has been modified (see detailed analysis for further explanation). It is estimated that the modifications will affect some of the firms in the small and medium firm segments but none of the large firms.


Business Cost Calculator, the Office of Best Practice Regulation in the Department of the Prime Minister and Cabinet, available from: https://bcc.obpr.gov.au/.


The total cost savings figures for the fee disclosure statement and opt-in amendments differ from the cost savings estimates provided in Table 6.3 of the RIS. The figures presented in this table represent the savings achieved in the first year of the amendments, whereas the figures presented in Table 6.3 are average cost savings over ten years (presented as an average to comply with OBPR guidelines). atonl;The savings from the fee disclosure amendment is expected to decrease over time whereas the saving in relation to the opt-in amendment is expected to increase over time.
Cost savings for the remaining three amendments are not expected to change over time, so are identical to the figures in Table 6.3.


Number of hours per firm (per week) have been rounded to one decimal point.


Average labour cost (per hour) have been rounded to one decimal point.


Total labour cost savings have been rounded to the nearest $100,000.


Total purchase cost savings have been rounded to the nearest $100,000.


Total cost savings have been rounded to the nearest $100,000.


ASIC Report 251: Review of financial advice industry practice, 2011.


Dissenting Report, February 2012, p160-161.


Dissenting Report, February 2012, p160-161.


Dissenting Report, February 2012, p165.


Dissenting Report, February 2012, p163.


Dissenting Report, February 2012, p163.


ASIC Regulatory Guide 175: Licensing: Financial product advisers-conduct and disclosure, October 2013, available from: http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/rg175-published-3-October-2013.pdf/$file/rg175-published-3-October-2013.pdf, RG 175.238-175.249.


Dissenting Report, February 2012, p166.


Dissenting Report, February 2012, p168.


Dissenting Report, February 2012, p168.


Section 766B of the Corporations Act 2001 (Cth).


In accordance with OBPR methodology, this figure includes both the average annual ongoing cost savings (of $189.7m) as well as the one-off implementation cost savings (of $87.7m). For this purpose, the implementation costs savings have been annualised over a


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