Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2010-2011-2012
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
CORPORATIONS AMENDMENT (FUTURE OF FINANCIAL ADVICE) BILL
2011
REPLACEMENT EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Minister for Financial Services and Superannuation, the Hon Bill Shorten MP.)
THIS MEMORANDUM REPLACES THE EXPLANATORY MEMORANDUM
PRESENTED TO THE HOUSE OF REPRESENTATIVES ON
13 OCTOBER 2011
Table of contents
Glossary .................................................................................................. 1
General outline and financial impact ....................................................... 3
Chapter 1 Charging ongoing fees to clients ................................... 5
Chapter 2 Enhancements to ASIC's licensing and banning
powers ......................................................................... 19
Chapter 3 Regulation impact statement ....................................... 29
Index ..................................................................................................... 59
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
AAT Administrative Appeals Tribunal
ASIC Australian Securities and Investments
Commission
Bill Corporations Amendment (Future of
Financial Advice) Bill 2011
Corporations Act Corporations Act 2001
FOFA Future of Financial Advice
Licence Australian Financial Services Licence
Licensee Holder of an Australian Financial Services
Licence
PJC Inquiry Inquiry into Financial Products and Services
in Australia by the Parliamentary Joint
Committee on Corporations and Financial
Services (2009)
1
General outline and financial impact
Outline
On 26 April 2010, the then Minister for Financial Services,
Superannuation and Corporate Law, the Hon Chris Bowen MP,
announced the Future of Financial Advice (FOFA) reforms.
The FOFA reforms represent the Government's response to the 2009
Inquiry into Financial Products and Services in Australia by the
Parliamentary Joint Committee on Corporations and Financial Services
(PJC Inquiry), which considered a variety of issues associated with
corporate collapses, including Storm Financial and Opes Prime.
The Corporations Amendment (Future of Financial Advice) Bill 2011 (the
Bill) implements the first components of the FOFA reforms. The reforms
focus on the framework for the provision of financial advice. The
underlying objective of the reforms is to improve the quality of financial
advice while building trust and confidence in the financial planning
industry through enhanced standards which align the interests of the
adviser with the client and reduce conflicts of interest. The reforms also
focus on facilitating access to financial advice, through the provision of
simple or limited advice. To this end, the Bill sets up a framework with
the following features:
· a requirement for providers of financial advice to obtain
client agreement to ongoing advice fees and enhanced
disclosure of fees and services associated with ongoing fees
(charging ongoing fees to clients); and
· enhancement of the ability of the Australian Securities and
Investments Commission (ASIC) to supervise the financial
services industry through changes to its licensing and
banning powers.
The reforms also include the introduction of a requirement for advisers to
act in the best interests of clients and a ban on conflicted remuneration,
including commissions, volume payments and soft-dollar benefits. These
measures will be implemented through the Corporations Amendment
(Further Future of Financial Advice Measures) Bill 2011.
It should be noted that the Rice Warner research referred to in the attached
Regulatory Impact Statement was updated in January 2012 to take account
of policy changes made since the research was conducted in March 2010.
Rice Warner now estimates that total adviser employment will be 17,068
at 30 June 2022 compared to 17,711 at 30 June 2012.
Date of effect: The reforms commence on 1 July 2012.
3
Corporations Amendment (Future of Financial Advice) Bill 2011
Proposal announced: On 26 April 2010, the then Minister for Financial
Services, Superannuation and Corporate Law, the Hon Chris Bowen MP,
announced the FOFA reforms. On 28 April 2011, further detail on the
operation of the FOFA reforms was announced by the Assistant Treasurer
and Minister for Financial Services and Superannuation,
the Hon Bill Shorten MP.
Financial impact: This Bill has no significant financial impact on
Commonwealth expenditure or revenue.
Regulatory Impact: The measure relating to charging ongoing fees to
clients will be subject to a Post Implementation Review.
4
Chapter 1
Charging ongoing fees to clients
Outline of chapter
1.1 Schedule 1 to the Corporations Amendment (Future of Financial
Advice) Bill 2011 (the Bill) amends the Corporations Act 2001
(Corporations Act) to require financial advisers (persons who hold a
licence with an authorisation to provide financial product advice or their
representatives) to obtain their retail clients' agreement in order to charge
them ongoing fees for financial advice. [Schedule 1, item 10, division 3]
Context of amendments
1.2 Financial advisers are traditionally remunerated differently from
other occupations. For example, many advisers have traditionally
received commissions from product providers for placing clients with
particular products, sometimes paid as a percentage of funds under
management. Some commissions are ongoing in nature, forming what are
known as `trail' commissions.
1.3 In situations where the client pays a substantial proportion of the
adviser's remuneration directly (known as `fee for service') it is common
for this remuneration to be ongoing in nature. For example, an adviser
might charge a client an ongoing annual fee calculated as a percentage of
the client's funds under management (known as an asset-based fee) or a
flat dollar amount. This annual fee generally covers a range of advisory
services provided to (or available to) clients. As opposed to professions
or other occupations that tend to charge for transactional, one-off services
or advice, advisers' remuneration structure is partly reflective of the
notion that the benefits of financial advice tend to be realised over the
medium to long-term, and therefore remuneration structures tend to reflect
the ongoing nature of the adviser-client relationship.
1.4 As a result of this unique remuneration structure, in some
situations clients of advisers that pay ongoing fees for financial advice
receive little or no service. Of the clients that do receive a service for the
fees they are paying, some are unaware of the precise magnitude of those
fees (or the fees advisers are receiving from third parties) or they continue
paying ongoing fees as a result of their own disengagement. This is
despite the fact that most ongoing advice contracts allow a client to
`opt-out' at any time.
1.5 The concept of compulsory renewal of ongoing advice fees,
requiring the active renewal by the client to ongoing fees, is designed to
5
Corporations Amendment (Future of Financial Advice) Bill 2011
protect disengaged clients from paying ongoing financial advice fees
where they are receiving little or no service. For those clients that are not
disengaged, the renewal requirement will provide them with an
opportunity to consider whether the service they are receiving equates to
value for money.
1.6 Although ongoing fees are disclosed to clients upon engagement
of the adviser's services (via the Statement of Advice requirement
prescribed under the Corporations Act), there is no ongoing advice fee
disclosure requirement. This initial disclosure requirement alone is not a
guaranteed safeguard for clients that become disengaged after a number of
years of `passively' paying ongoing advice fees.
Summary of new law
1.7 Where an ongoing financial advice relationship exists between
an adviser (the `fee recipient') and a retail client which involves the
charging of an ongoing advice fee (however described), the fee recipient
is required to discharge two separate (albeit intertwined) obligations.
1. Disclosure obligation: In order to continue charging an
ongoing fee for a period longer than 12 months, the fee
recipient must provide a fee disclosure statement to the
client outlining fee and service information relevant to the
client.
2. Renewal notice obligation: In order to continue charging
an ongoing fee for a period longer than 24 months, the fee
recipient must provide both a fee disclosure statement and
a renewal notice to the client.
1.8 If the fee recipient does not fulfil these obligations, the client is
not liable to continue paying the ongoing advice fee past the relevant
12 or 24 month period.
1.9 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.
6
Charging ongoing fees to clients
Comparison of key features of new law and current law
New law Current law
In order to charge an ongoing advice There is no requirement under the
fee to a retail client for a period of current law for advisers/fee recipients
longer than 12 months, the fee to provide ongoing disclosure of
recipient will be required to provide a advice fees to retail clients.
fee disclosure statement to the client
detailing advice fee and service
information for the previous 12
months.
In order to charge an ongoing advice There is no requirement under the
fee to a retail client for a period of current law for advisers/fee recipients
longer than 24 months, the fee to obtain the agreement of retail
recipient will be required to provide a clients to continue charging ongoing
renewal notice and a fee disclosure advice fees.
statement to the client, which will
detail advice fee and service
information for the previous 12
months. If the client opts not to
renew the arrangement with the fee
recipient, or does not respond to the
renewal notice, the arrangement
ceases and an ongoing advice fee can
no longer be charged to the retail
client.
For ongoing fee arrangements, the There is no implied term under the
client can `opt-out' or terminate the current law that retail clients have the
arrangement at any time. right to opt-out of ongoing financial
advice arrangements at any time
(however, it is a common practice in
the industry to allow clients to opt-out
at any time).
Detailed explanation of new law
Preliminary
1.10 Key terms that are used in Part 7.7A of the Bill are defined.
Relevant discussion of these terms is contained in the relevant parts of the
Explanatory Memorandum. The Bill also specifies that it is not possible
to contract out of the requirements imposed by Part 7.7A. [Schedule 1, item
10, division 1, sections 960 and 960A]
7
Corporations Amendment (Future of Financial Advice) Bill 2011
Application
1.11 The compulsory disclosure and renewal notice obligations will
apply to advisers (`fee recipients') in situations where they provide
personal advice to a retail client, and the client pays a fee which does not
relate to advice that has already been given at the time the arrangement is
entered into. This is so the compulsory disclosure and renewal notice
obligations apply to ongoing advice fees. [Schedule 1, item 10, division 3,
sections 962, 962A and 962B]
1.12 In practical terms, these obligations only become relevant to fee
recipients when an ongoing fee is to be charged for a period of 12 months
or more. [Schedule 1, item 10, division 3, sections 962 & 962A]
1.13 An ongoing fee paid by a product issuer or other third party to a
financial services licensee or representative of a financial services licensee
will not constitute a fee for the purposes of section 962A(1)(c) or section
962A(2)(c) unless the fee is paid under the terms of the arrangement
between the client and the financial services licensee or the representative
of the financial services licensee. Fees paid by product issuers or other
third parties will not generally be considered to be paid under the terms of
the arrangement unless the fee is paid at the direction of or with the clear
consent of the client. [Schedule 1, item 10, division 3, subsection 962A]
1.14 Fees paid by product issuers to financial services licensees or
representatives which relate to products acquired by clients of the licensee
or representative are generally required to be disclosed in the periodic
statements given by product issuers to retail clients under section 1017D
of the Corporations Act. The Government intends to make regulations
under paragraph 1017D(5)(g) and section 1017DA of the Corporations
Act to improve the transparency of this disclosure.
1.15 The Bill also specifies several sorts of arrangements that are not
ongoing fee arrangements. Where a person is making ongoing payments
to a fee recipient via instalments for advice that has already been provided
by a fee recipient before the arrangement is entered into, for example a
`payment plan', such an arrangement is not characterised as an ongoing
fee arrangement. This ensures that a client cannot opt-out of paying a fee
they genuinely owe in respect of services already rendered by the fee
recipient. [Schedule 1, item 10, division 3, subsection 962A(3)]
1.16 However, exempt `payments by instalments' must possess the
features one would reasonably anticipate to see in a `payment plan'. For
example, the amount of money owed by the client must be fixed and
specified in the terms of the arrangement, and the client must not have a
right to opt-out at any time. If a client has the right to unilaterally opt-out
of paying an ongoing fee, it is highly unlikely to be regarded as a payment
plan for advice services already provided to the client. [Schedule 1, item 10,
division 3, subparagraphs 962A(3)(a), (b) & (f)]
8
Charging ongoing fees to clients
1.17 If the fee recipient charges the ongoing fee as an asset-based fee
(that is, a fee calculated as a percentage of funds under advice or
management), then the ongoing fee cannot be reasonably regarded as a
payment plan for advice by instalments. It is highly unlikely that a
genuine payment plan for advice services already provided to the client
(or for which the cost is finite and fixed) would need to be charged as an
asset-based fee. [Schedule 1, item 10, division 3, subparagraphs 962A(3)(e)]
1.18 The types of ongoing fee arrangements intended to be captured
are those ongoing fees that are being charged for personal financial advice
(including where the client is not actually receiving ongoing advice but
still paying a fee to an adviser). The ongoing payment of an insurance
premium or a product fee is therefore not intended to be captured as an
ongoing fee arrangement. [Schedule 1, item 10, division 3, subsections
962A(4)&(5)]
1.19 The regulations can prescribe kinds of product fees which are
not ongoing fee arrangements. It is important for the regulations to have
this degree of flexibility to exclude certain kinds of arrangements. The
diversity and complexity of the financial services industry make it
necessary for the Minister to be able to exclude certain arrangements that
this obligation is not intended to apply to, including arrangements that
may not currently exist. This regulation-making power therefore serves
several functions, including keeping the legislation up to date, providing
commercial certainty quickly and efficiently to industry participants that
are unintentionally captured, and to provide efficacy to the legislation.
[Schedule 1, item 10, division 3, subsection 962A(5)]
1.20 Depending on who the client enters into the ongoing fee
arrangement with, either a licensee or a representative of a licensee can be
an ongoing fee recipient. [Schedule 1, item 10, division 3, subsections
962C(1)&(2)]
1.21 Where the rights of a licensee or representative under an
ongoing fee arrangement have been transferred to another person (for
example, where the rights under a book of business are transferred from
one advice business to another), the new holder of those rights is
considered to be the fee recipient. [Schedule 1, item 10, division 3, subsection
962C(3)]
Disclosure obligation
1.22 If an ongoing fee arrangement is to remain in place for a period
longer than 12 months, the fee recipient is required to provide the client
with a fee disclosure statement 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
9
Corporations Amendment (Future of Financial Advice) Bill 2011
disclosure statement). [Schedule 1, item 10, division 3, subsection 962G(1) and
section 962J]
1.23 The fee disclosure statement will need to contain fee information
to assist the client in ascertaining whether they are receiving a service
from their fee recipient commensurate with the ongoing fee that they are
paying. Information to be contained in the statement would include fee
and service information about the previous 12 months. [Schedule 1, item 10,
division 3, subsections 962H(1)&(2)]
1.24 The regulations may provide that details of any other prescribed
matters must also be included in the fee disclosure statement. The
diversity and complexity of the financial services industry make it
necessary for the Minister to be able to add additional details to be
contained in the fee disclosure statement, including details about certain
remuneration arrangements that may not currently exist. This
regulation-making power therefore serves several functions, including
keeping the legislation up to date, providing commercial certainty quickly
and efficiently to industry participants, and to provide efficacy to the
legislation. [Schedule 1, item 10, division 3, subparagraph 962H(2)(d)]
1.25 The regulations may provide that certain information is not
required to be contained in a fee disclosure statement, or that a more
detailed statement of the information required be included. The diversity
and complexity of the financial services industry make it necessary for the
Minister to be able to expand or shorten the information to be disclosed to
clients. This regulation-making power therefore serves several functions,
including keeping the legislation up to date, providing commercial
certainty quickly and efficiently to industry participants, and to provide
efficacy to the legislation. [Schedule 1, item 10, division 3, subsection 962H(3)]
1.26 Where the disclosure obligation coincides with the renewal
notice obligation (which applies every 24 months to ongoing fee
arrangements) the fee disclosure statement will serve the additional
purpose of assisting the client to decide whether they should renew the
ongoing fee arrangement.
1.27 If the fee recipient does not comply with the requirement to
provide the fee disclosure statement within the specified time, the client is
not liable to continue paying the ongoing fee. This is the case whether it
is the previous or the current fee recipient that failed to comply with the
disclosure requirement. [Schedule 1, item 10, Division 3, subsection 962F(1)]
1.28 The client is not taken to have waived their rights or to have
entered into a new ongoing fee arrangement by merely continuing to pay
an ongoing fee after a breach of the disclosure obligation. This is because
often the mechanism by which clients pay for ongoing advice services is
through an automated process (for example, by a monthly direct debit
from the client's investment). [Schedule 1, item 10, division 3, subsection
962F(2)]
10
Charging ongoing fees to clients
1.29 If a client makes a payment of an ongoing fee after a failure to
comply with the disclosure obligation, the fee recipient is not obliged to
refund the payment in full. A statutory right of a client to a full refund of
any ongoing fee charged after a failure to discharge the disclosure
obligation would, while simple in principle, potentially result in a
disproportionate and unjust result at the expense of the fee recipient. For
example, such a statutory right would mean that one single accidental
breach by a fee recipient could result in the forced refund of advice fees
over a number of years, regardless whether the client continued to engage
and access the services of the fee recipient. [Schedule 1, item 10, division 3,
subsection 962F(3)]
1.30 However, the client (or ASIC) has the right to apply to the Court
for a refund where a fee recipient has knowingly or recklessly continued
to charge a client ongoing fees after an arrangement has terminated as a
result of breaching the disclosure or renewal obligations. This ensures the
client has a right to redress, but fee recipients can be certain that the Court
would only make an order to refund the money where it is reasonable in
the circumstances to do so. [Schedule 1, item 13, division 6, section 1317GA]
1.31 Even where the identity of the fee recipient changes (for
example, where a fee recipient sells a `book' of business to another fee
recipient) and it was the previous fee recipient that failed to comply with
the fee disclosure obligation, this does not alter the fact that the client is
not liable to continue paying the ongoing fee. [Schedule 1, item 10, division 3,
subsection 962F(1)]
1.32 The regulations may provide that the requirement to provide a
fee disclosure statement does not apply in certain situations. The diversity
and complexity of the financial services industry make it necessary for the
Minister to be able to exclude certain arrangements that this obligation is
not intended to apply to, including arrangements that may not currently
exist. This regulation-making power therefore serves several functions,
including providing a mechanism to help keep the legislation up to date
and provide commercial certainty quickly and efficiently to industry
participants that are unintentionally exposed to the disclosure obligation,
and to provide efficacy to the legislation. [Schedule 1, item 10, division 3,
subsection 962G(2)]
Renewal obligation
1.33 If an ongoing fee arrangement is to remain in place for a period
longer than 24 months, the fee recipient is required to provide the client
with a renewal notice before the end of a period of 30 days beginning on
the 24 month anniversary of the day the arrangement was entered into (or,
if the arrangement has since been renewed, before the end of a period of
30 days beginning on the 24 month anniversary of the last day on which
that arrangement was renewed). [Schedule 1, item 10, division 3, subsection
962K(1) and section 962L]
11
Corporations Amendment (Future of Financial Advice) Bill 2011
1.34 The renewal notice will need to contain information indicating
that the client may renew the ongoing fee arrangement. It will also
contain 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. Fee recipients may choose to elaborate in the
renewal notice on the potential deleterious consequences to the client if
they do not renew the ongoing fee arrangement including, for example,
that they will lose access to ongoing advice including in situations where
they may value it most (for example, in times where there are sudden
shocks to capital markets). [Schedule 1, item 10, division 3, subsection 962K(2)]
1.35 Because fee recipients will be required to provide a fee
disclosure statement at the same time they provide a renewal notice to the
client, the fee disclosure statement will also assist the client in deciding
whether they should agree to renew the ongoing fee arrangement. Where
the fee recipient is required to send a client both the fee disclosure
statement and renewal notice, it is expected that fee recipients will be able
to satisfy both of these requirements by providing one comprehensive
notice containing all of the requisite information.
1.36 It is envisaged that the fee disclosure statement and renewal
notice could take simple forms. Provided the required information is
contained in those notices, fee recipients have flexibility in how they
present these documents.
1.37 If the fee recipient does not comply with the requirement to
provide the renewal notice within the specified time, the client is not
liable to continue paying the ongoing fee. This is the case whether it is
the previous or the current fee recipient that failed to comply with the
renewal requirement. [Schedule 1, item 10, Division 3, subsection 962F(1)]
1.38 The client is not taken to have waived their rights or to have
entered into a new ongoing fee arrangement by merely continuing to pay
an ongoing fee after a breach of the renewal obligation. This is because
often the mechanism by which clients pay for ongoing advice services is
through an automated process (for example, by a monthly direct debit
from the client's investment). [Schedule 1, item 10, division 3, subsection
962F(2)]
1.39 If a client makes a payment of an ongoing fee after a failure to
comply with the renewal obligation, the fee recipient is not obliged to
refund the payment in full. A statutory right of a client to a full refund of
any ongoing fee charged after a failure to discharge the renewal obligation
would, while simple in principle, potentially result in a disproportionate
and unjust result at the expense of the fee recipient. For example, such a
statutory right would mean that one single accidental breach by a fee
recipient could result in the forced refund of advice fees over a number of
12
Charging ongoing fees to clients
years, regardless whether the client continued to engage and access the
services of the fee recipient. [Schedule 1, item 10, division 3, subsection 962F(3)]
1.40 However, the client (or ASIC) has the right to apply to the Court
for a refund where a fee recipient has knowingly or recklessly continued
to charge a client ongoing fees after an arrangement has terminated as a
result of breaching the disclosure or renewal obligations. This ensures the
client has a right to redress, but fee recipients can be certain that the Court
would only make an order to refund the money where it is reasonable in
the circumstances to do so. [Schedule 1, item 13, division 6, section 1317GA]
1.41 Even where the identity of the fee recipient changes (for
example, where a fee recipient sells a `book' of business to another fee
recipient) and it was the previous fee recipient that failed to comply with
the renewal notice obligation, this does not alter the fact that the client is
not liable to continue paying the ongoing fee. [Schedule 1, item 10, division 3,
subsection 962F(1)]
1.42 The regulations may provide that the requirement to provide a
renewal notice does not apply in certain situations. The diversity and
complexity of the financial services industry make it necessary for the
Minister to be able to exclude certain arrangements that this obligation is
not intended to apply to, including arrangements that may not currently
exist. It therefore serves several functions, including keeping the
legislation up to date, providing commercial certainty quickly and
efficiently to industry participants that are unintentionally exposed to the
renewal notice obligation, and to provide efficacy to the legislation.
[Schedule 1, item 10, division 3, subsection 962K(3)]
Flexibility of disclosure and renewal notice obligations
1.43 The fee disclosure statement and the renewal notice are required
to be provided before the end of a period of 30 days beginning on the
relevant anniversary date (12 months since the arrangement began in
respect of the disclosure obligation, and 24 months since the arrangement
began in respect of the renewal notice obligation). As such, a fee
recipient can provide these notices in advance of the prescribed time
periods in order to satisfy the obligations sooner than is actually required
if it is convenient to do so. To the extent these obligations are fulfilled by
fee recipients in advance of the prescribed periods, the time within which
these obligations need to be fulfilled in the future will `reset', with the
creation of new disclosure and renewal notice days. [Schedule 1, item 10,
division 3, section 962J and subsection 962L(1)]
1.44 This provides flexibility for fee recipients in choosing when they
discharge these obligations. For example, if the fee recipient and client
have a face-to-face meeting well in advance of the disclosure or renewal
notice days, they can take the opportunity to provide these notices or
obtain their client's agreement to renew in advance of the applicable
anniversary.
13
Corporations Amendment (Future of Financial Advice) Bill 2011
Opt-out process
1.45 The renewal notice requirement establishes a framework by
which clients are asked by the fee recipient if they wish to renew the
ongoing fee arrangement. If the client does not actively renew that
agreement within the renewal period, the client is assumed to have opted
out of the ongoing fee arrangement.
1.46 If the client communicates to the fee recipient in writing within
the renewal period that they do not wish to renew the ongoing fee
arrangement, the arrangement terminates on the day on which the
notification is given. If notification is sent by post, the notification will be
taken to have been given at the time at which the letter would be delivered
in the ordinary course of post in accordance with s29(1) of the Acts
Interpretation Act 1901 (Cth). [Schedule 1, item 10, division 3, section 962M]
1.47 If the client does not notify the fee recipient in writing that they
wish to renew the ongoing fee arrangement, the arrangement terminates at
the end of an additional 30 days after the renewal period. The Bill infers a
client's failure to respond to a renewal notice to mean that the client does
not wish to renew the ongoing fee arrangement. This might be due either
to the client's disengagement or to a conscious decision by the client not
to actively renew because, for example, they considered they were not
receiving value for the fees they were paying. [Schedule 1, item 10, division 3,
section 962N]
1.48 Although there is a built-in 30 day `grace period' where a client
opts-out by failing to respond to a renewal notice, this grace period can be
cut short should the fee recipient make contact with the client during the
grace period. The grace period can be shortened either by agreement
between the fee recipient and client, or by the client exercising their right
to terminate.
1.49 In terms of clients notifying the fee recipient in writing of their
decision to renew or not renew the ongoing fee, this can be administered
flexibly and by using a range of mediums and technologies. The manner
in which `writing' is defined in s25 of the Acts Interpretation Act 1901
(Cth) means that the client can notify the fee recipient in a number of
recordable forms, including by facsimile, email, SMS, or through an
online facility.
1.50 If an ongoing fee arrangement terminates for any reason,
including, for example, because a client opts out, and the fee recipient
continues to charge the ongoing fee, they will be subject to a civil penalty.
Because a breach of such a provision is likely to be relatively less serious
than, for example, a breach of the best interests duty, it is subject to lower
maximum civil penalties ($50,000 for an individual and $250,000 for a
body corporate). [Schedule 1, item 10, division 3, section 962P]
14
Charging ongoing fees to clients
1.51 It is expected that maximum penalties would apply only in the
most serious of breaches of these provisions. Simpler breaches, for
example where a single breach is accidental, would attract a smaller
proportionate penalty (to the extent any action is taken at all).
1.52 The ongoing fee arrangement contains an imported term that the
client may terminate the arrangement at any time. This is intended to
prevent clients being locked into fixed term ongoing fee arrangements as a
result of the new disclosure and renewal notice obligations. It also
reflects a right that clients currently enjoy as a matter of common practice
within the financial planning industry. [Schedule 1, item 10, division 3, sub
section 962E(1)]
1.53 To ensure that clients will not be deleteriously impacted as a
result of their right to terminate the arrangement at any time, the Bill voids
any condition of an ongoing fee arrangement that requires a client to pay
an amount on terminating the ongoing fee arrangement to the extent the
amount exceeds the sum of any liability that the client has accrued but not
satisfied before the termination, or the costs the fee recipient has incurred
solely and directly because of the termination.
1.54 This effectively prohibits fee recipients from applying an `exit'
or `penalty' fee to clients that choose to exercise their right to terminate an
ongoing fee arrangement. However, this would not prevent a fee recipient
from recovering monies already owed by the client (for example, for
services already rendered). `Exit' fees remain permissible to the extent
that they represent no more than a cost-recovery fee incurred as a result of
the termination, which in most situations is likely to constitute only a
modest sum. [Schedule 1, item 10, division 3, subsection 962E(2)]
1.55 To the extent the continued provision of a service by the fee
recipient is dependent on the continued payment of an ongoing fee under
the ongoing fee arrangement, the obligation to continue to provide the
service also terminates. This provides certainty to the fee recipient that in
most cases their obligation to provide continued advice services ceases
after termination, as does their liability for the failure to provide continued
advice services.
1.56 This clarification is particularly important for the situation that
arises where the client does not consciously choose to opt-out, but
terminates the ongoing fee arrangement by virtue of failing to respond to
the fee recipient's renewal notice. While a fee recipient remains liable for
any advice they have provided prior to termination, they cannot be liable
for client losses as a result of failure to provide advice to a client after
termination (for example, in the event of sudden movements in capital
markets after the ongoing fee arrangement has terminated). Fee recipients
may wish to emphasise these matters to the client when they provide them
with the renewal notice. [Schedule 1, item 10, division 3, section 962Q]
15
Corporations Amendment (Future of Financial Advice) Bill 2011
Disclosure requirement to all clients
1.57 Fee recipients must, before the end of a period of 30 days
beginning on the 12 month anniversary of the day the arrangement was
entered into, give the client a fee disclosure statement in regard to all
ongoing fee arrangements to which the other disclosure and renewal
obligations do not apply. Essentially, fee recipients must provide fee
disclosure notices to all of their clients that they currently have ongoing
fee arrangements with, including where those arrangements began or the
clients were engaged prior to the commencement day. [Schedule 1, item 10,
division 3, sections 962R & 962S]
1.58 The regulations may provide that the requirement to provide a
fee disclosure statement does not apply in certain situations. The diversity
and complexity of the financial services industry make it necessary for the
Minister to be able to exclude certain arrangements that this obligation is
not intended to apply to, including arrangements that may not currently
exist. This regulation-making power therefore serves several functions,
including providing a mechanism to help keep the legislation up to date
and provide commercial certainty quickly and efficiently to industry
participants that are unintentionally exposed to the disclosure obligation,
and to provide efficacy to the legislation. [Schedule 1, item 10, division 3,
subsection 962S(2)]
Application and transitional provisions
1.59 Subdivision B (Termination, disclosure and renewal) applies
only to ongoing fee arrangements entered into on or after the commencing
day and where the client has not received financial advice from the
licensee prior to the commencing day. [Schedule 1, item 10, division 3, section
962D]
1.60 This essentially means that subdivision B will only apply to new
clients.
1.61 If a licensee or representative transfers their `grandfathered'
rights under an ongoing fee arrangement to another licensee or
representative after the commencement date (for example, when selling a
book of business), this is unlikely to `trigger' the application of
subdivision B if the character of the arrangement does not change.
However, it will depend on the facts and circumstances of each
arrangement and transfer. If a transfer of business results in the
arrangement changing character to such a degree that it essentially
becomes a new arrangement, subdivision B may apply to that new
arrangement. It is up to fee recipients to determine on a case by case basis
whether a transfer in business results in the creation of a new arrangement
to which the additional obligations would apply.
1.62 Subdivision C (Disclosure for arrangements to which
subdivision B does not apply) applies to all arrangements to which
16
Charging ongoing fees to clients
subdivision B does not apply. Essentially, this disclosure obligation
applies in relation to `existing clients' or `existing ongoing fee
arrangements' which were in place prior to commencement. [Schedule 1,
item 10, division 3, section 962R]
Anti-avoidance
1.63 The Bill contains an anti-avoidance provision which prevents a
person from entering into a scheme if the sole or dominant purpose of
doing so was to avoid the application of any provision in Part 7.7A.
[Schedule 1, item 10, division 6, section 965(1)]
1.64 The anti-avoidance provision will not apply to the extent that its
operation would result in an acquisition of property otherwise than on just
terms. [Schedule 1, item 10, division 6, section 965(2)]
1.65 The Bill sets out the provisions in Part 7.7A which are subject to
civil penalties (if breached), and establishes a lower maximum civil
penalty of $50,000 for an individual and $250,000 for a body corporate
(for example, if a fee recipient charges an ongoing fee after termination or
fails to give a disclosure notice). The lower maximum fees reflect the fact
that a breach of the ongoing fee or disclosure requirements are relatively
minor compared to other breaches of civil penalty provisions in the
Corporations Act. However, contravention of the anti-avoidance
provision will be subject to the standard maximum penalties of $200,000
for an individual and $1 million for a body corporate. [Schedule 1, items 11
and 12, division 6]
1.66 If a fee recipient continues to knowingly or recklessly charge a
client an ongoing fee after the termination of the relevant ongoing fee
arrangement, the Court can make an order for the fee recipient to refund
the fees to the client. However, a Court may only order the payment of a
refund if it is reasonable in all the circumstances to do so. The Court may
make the order on its own initiative, on application by ASIC or the client.
[Schedule 1, item 13, division 6, section 1317GA]
17
Chapter 2
Enhancements to ASIC's licensing and
banning powers
Outline of chapter
2.1 Schedule 1 to the Corporations Amendment (Future of Financial
Advice) Bill 2011 (the Bill) amends the Corporations Act 2001
(Corporations Act) to enhance the ability of the Australian Securities and
Investments Commission (ASIC) to supervise the financial services
industry through changes to its licensing and banning powers. [Schedule 1,
items 2 to 9]
Context of amendments
2.2 ASIC is responsible for regulating persons who carry on a
financial services business in Australia.
2.3 Those persons who wish to carry on a business of providing
financial services are generally required to hold an Australian financial
services licence (licence), issued by ASIC.
2.4 Adequate licensing thresholds provide a basic screening process
to facilitate investor confidence that financial services providers have
appropriate skills, experience and qualifications, are of good character and
that they are required to provide services with honesty and integrity. The
licensing regime also enhances ASIC's ability to supervise the financial
services industry.
2.5 ASIC must grant a licence if certain criteria are satisfied. This
includes that ASIC is satisfied that there is no reason to believe that the
applicant is not of good fame or character. ASIC must also have no
reason to believe that the applicant will not comply with its obligations as
a licensee. As long as these criteria are met and the application is made
properly, ASIC must grant the applicant a licence, as it does not have the
ability to refuse a licence on any other grounds.
2.6 A common exemption from the need to obtain a licence is where
a person (and its employees and directors) is an authorised representative
of a licensee. This reflects the approach to licence all principals rather
than agents. Because of this approach, the licensee that authorises its
representatives must ensure that they are competent to provide the
services, and are generally liable for their actions. The approach is based
on the premise that the principal conducts the relevant business through its
19
Corporations Amendment (Future of Financial Advice) Bill 2011
employees and agents and is under a legal obligation to control and
supervise the employees or agents.
2.7 ASIC is responsible for enforcing the law when it is breached by
a licensee or a person acting on their behalf. This may involve the use of
an administrative remedy, such as cancelling a licence or banning an
individual from providing financial services.
2.8 ASIC has the power to ban or seek disqualification by a court of
persons providing financial services in certain circumstances. ASIC's
banning power applies, for example, if the person is convicted of fraud or
breaches a financial services law.
2.9 During the Inquiry into Financial Products and Services in
Australia by the Parliamentary Joint Committee on Corporations and
Financial Services (PJC Inquiry), ASIC raised concern with its ability to
protect investors by restricting or removing from the industry participants
who might cause or contribute to investor losses. ASIC consider this
issue arises as:
· the threshold for entry into the licensing regime is `low'
while the threshold for cancelling a licence is `relatively
high'; and
· the regime focuses on entities rather than its agents (such as
employees or directors) which means ASIC cannot prevent
persons from entering the industry and can have difficulty
removing them.1
2.10 In its submission to the PJC, ASIC noted that its decisions in
relation to licensing can be appealed to the Administrative Appeals
Tribunal (AAT) and that in practice ASIC has found it very difficult to
establish before the AAT that a licensee `will not' comply with its
obligations in the future. More specifically, in relation to considering
whether a licence should be granted, ASIC has experienced difficulty
when trying to assess whether an applicant `will not' comply with their
obligations and meet their licence conditions before they have
commenced business.2
2.11 Further, ASIC has noted that it has experienced specific issues in
attempting to use its powers to ban persons from providing financial
services. ASIC has found it difficult to establish that it has a reasonable
belief that the person `will not' comply with their obligations under
financial services law: see Re Howarth and ASIC [2008] AATA 278.
Specifically, ASIC found it difficult to establish that a broader range of
conduct (aside from convictions for fraud) can found a belief that the
1 PJC Inquiry into financial products and services in Australia, Submission by the Australian
Securities and Investments Commission, August 2009, 24.
2 Ibid, 26, 31.
20
Enhancements to ASIC's licensing and banning powers
individual `will not' comply with their obligations under financial services
law in the future. For example, ASIC has been unable to establish that the
following conduct should give rise to a banning order based on a finding
under paragraph 920A(1)(f) of the Corporations Act:
· failure to comply with the principal's internal guidelines and
procedures;
· failure to comply with the relevant ASX business rules; or
· conduct which may amount to a serious conflict of interest.3
2.12 ASIC has also noted that it cannot currently ban individuals on
the basis that they are not `fit and proper' (that is, not competent or of
good fame or character).4
2.13 ASIC has experienced difficulty in relation to the banning of
individuals because of the focus on entities in the Corporations Act.
Licensing generally occurs at the entity level and ASIC does not approve
the agents or representatives of that entity. Further the obligations in the
Corporations Act are largely imposed on the licensee (the entity), not the
representatives who work for that entity.5 For example, the requirement
to have a reasonable basis for advice under section 945A of the
Corporations Act applies to a providing entity, which includes the licensee
and authorised representative. The provision does not directly apply to an
employee or director.6
2.14 Further to ASIC's experience in using its powers, broader
concerns have been raised about the effectiveness of licensees being
responsible for the actions of their representatives, with implications for
the professionalism of the industry, as well as investor protection. This
issue was considered in the PJC Inquiry.7
2.15 In light of the above concerns, in its report the PJC
recommended that the Corporations Act should be amended to provide
extended powers for ASIC to ban people from the financial services
industry under section 920A (recommendation 6). The PJC also
recommended that ASIC be able to deny a licence application or suspend/
cancel a licence, where there is a reasonable belief that the licensee `may
3 Ibid, 33.
4 Ibid, 32.
5 Under the Corporations Act, some of the Chapter 7 conduct and disclosure obligations are
also imposed on an authorised representative, in addition to the licensee. However
obligations are not generally imposed on other representatives, such as employees and
directors.
6 Ibid, 26.
7 Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into
financial products and services in Australia, November 2009, 134, paragraph 6.130.
21
Corporations Amendment (Future of Financial Advice) Bill 2011
not comply' with its obligations under sections 913B and 915C of the
Corporations Act (recommendation 8).8
Summary of new law
2.16 The enhancements to ASIC's licensing and banning powers are:
· a change to the licensing threshold so that ASIC can refuse or
cancel/suspend a licence where a person is likely to
contravene (rather than will breach) its obligations;
· extend the statutory tests so that ASIC can ban a person who
is not of good fame and character or not adequately trained or
competent to provide financial services (in essence they are
not a fit and proper person);
· ensure that ASIC can consider any conviction for an offence
involving dishonesty that is punishable by imprisonment for
at least three months, in having a reason to believe a person
is not of good fame and character for licensing and banning
decisions.
· a change to the banning threshold so that ASIC can ban a
person if they are likely to (rather than will) contravene a
financial services law; and
· clarification that ASIC can ban a person who is involved, or
is likely to be involved, in a contravention of obligations by
another person.
Comparison of key features of new law and current law
New law Current law
In relation to an ASIC decision to In relation to an ASIC decision to
grant a licence, the statutory test grant a licence, the statutory test
under paragraph 913B(1)(b) is under paragraph 913B(1)(b) is
whether the applicant is likely to whether the applicant will not comply
contravene its obligations under with its obligations under section
section 912A, rather than they will 912A.
not comply with the obligations.
In relation to ASIC having a reason to In relation to ASIC having a reason to
believe that the applicant is not of believe that the applicant is not of
good fame and character under good fame and character under
paragraph 913B(4)(a), ASIC must paragraph 913B(4)(a), ASIC must
8 Ibid, 151.
22
Enhancements to ASIC's licensing and banning powers
consider any conviction for an consider any conviction for serious
offence that involves dishonesty and fraud.
is punishable by imprisonment for at
least three months.
In relation to an ASIC decision to In relation to an ASIC decision to
suspend or cancel a licence, the suspend or cancel a licence, the
statutory test under paragraph statutory test under paragraph
915C(1)(aa) is whether the applicant 915C(1)(aa) is whether the applicant
is likely to contravene its obligations will not comply with its obligations
under section 912A, rather than they under section 912A.
will not comply with the obligations.
In relation to an ASIC decision to In relation to an ASIC decision to ban
make a banning order against a a person, the statutory test under
person, the statutory test under paragraph 920A(1)(ba) is whether the
paragraph 920A(1)(ba) is whether the person will not comply with its
person is likely to contravene its obligations under section 912A.
obligations under section 912A,
rather than they will not comply with
the obligations.
In relation to an ASIC decision to There are no equivalent statutory
make a banning order against a tests.
person, the new statutory tests under Under existing subsection 920B(2)
paragraphs 920A(1)(d) and (da) is the fact that a person is not of good
whether the person is not of good fame and character can only be taken
fame and character or that they are into account to determine the effect of
not adequately trained or competent a banning order.
to provide financial services.
There is no change to existing
subsection 920B(2), where the fact
that a person is not of good fame and
character is relevant to determining
the effect of a banning order.
In relation to an ASIC decision to In relation to an ASIC decision to ban
make a banning order against a a person, the statutory test under
person, the statutory test under paragraph 920A(1)(f) is whether the
paragraph 920A(1)(f) is whether the person will not comply with a
person is likely to contravene a financial services law.
financial services law rather than they
will not comply with the law.
In relation to an ASIC decision to ban There is no equivalent statutory test.
a person, the statutory test under
paragraphs 920A(1)(g) and (h) is
whether the person has been
involved, or is likely to be involved,
in a contravention of a financial
services law.
23
Corporations Amendment (Future of Financial Advice) Bill 2011
Detailed explanation of new law
2.17 The Bill amends ASIC's licensing and banning powers to clarify
the operation of its powers, as well as prescribe additional tests under
which ASIC can remove persons from the industry. The amendments
enhance ASIC's ability to supervise the financial services industry to
protect consumers of financial services.
2.18 The changes to ASIC's powers remain subject to the broader
principles of administrative law that would underpin the exercise of its
powers. This includes that the decision must be within its power, and that
only relevant considerations must be taken into account. Further, the
exercise of ASIC's powers must be for a proper purpose and not in bad
faith, with facts based on sufficient evidence, and any decision taken by
ASIC must be reasonable and with procedural fairness afforded.
2.19 While administrative action by ASIC would be taken on the
individual circumstances of each case, action would generally take
account of things like the nature and seriousness of the misconduct, the
internal controls on the licensee or the person and the previous regulatory
record of the licensee or person.
2.20 Existing review rights in relation to ASIC decisions about
licensing and banning continue to apply, including to the AAT.
Amendments to ASIC's licensing power
2.21 The Bill amends the operation of ASIC's licensing power to
clarify that ASIC is not required to believe as a matter of certainty that the
person will contravene the obligations in future.
2.22 ASIC can refuse to grant a licence if the statutory test under
existing paragraph 913B(1)(b) is satisfied. The amendment to the
statutory test is whether the applicant is likely to contravene its
obligations as a licensee under section 912A, rather than they will
contravene the obligations (that is, the applicant will not comply with the
obligations). In the 10 years since the introduction of the Financial
Services Reform Act, interpretation of this provision has tended to a view
that ASIC is required to believe, as a matter of certainty, that the person
will contravene the obligations in future. Such a standard would be so
onerous that it could result, in practice, in ASIC never being able to refuse
a licence using this part of the test. This new formulation is designed to
ensure that ASIC can more appropriately account for the likelihood or
probability of a future contravention. [Schedule 1, item 2, paragraph 913B(1)(b)]
2.23 The statutory test is whether the applicant is likely to contravene
the obligations under section 912A. ASIC may take into account any
information relevant to this question, such as:
· conduct of the applicant that shows deliberation and planning
in wilfully disregarding the law;
24
Enhancements to ASIC's licensing and banning powers
· the extent of compliance by the applicant with analogous
obligations in another regime; or
· any other conduct of the applicant that may lead ASIC to
conclude, on reasonable grounds, that the applicant is not
likely to comply.
2.24 The same amendment is also made to the statutory test under
paragraph 915C(1)(aa) of the Corporations Act, which relates to an ASIC
decision to suspend or cancel a licence. The amendment to the statutory
test is whether a licensee is likely to contravene the obligations under
section 912A, rather than they will contravene the obligations (that is, the
licensee will not comply with the obligations). Similar to the amendment
in paragraph 2.22, the amendment addresses interpretation of this
provision which has tended to a view that ASIC is required to believe, as a
matter of certainty, that the person will contravene the obligations in
future. [Schedule 1, item 4, paragraph 915C(1)(aa)]
2.25 ASIC must grant a licence unless it has no `reason to believe'
that the applicant is likely to contravene the obligations or other factors in
subsection 913B(1) apply. There is no change to the `reason to believe'
element of the test in relation to the granting or suspension/cancellation of
a licence, which requires actual evidence that the person was involved in
wrongdoing rather than just mere suspicion.
2.26 Clarification is also provided on the matters ASIC must consider
in having a reason to believe that the applicant is not of good fame and
character for the purposes of licensing decisions. The amendment is
ASIC must consider any conviction of a person for an offence that
involves dishonesty (within 10 years before the application was made)
that is punishable by imprisonment for at least three months. [Schedule 1,
item 3, paragraph 913B(4)(a)] While ASIC must also consider any other
relevant matter under existing paragraph 913B(4)(d), the amendment
clarifies that ASIC must have regard to offences of dishonesty, which
would include fraud. This approach is consistent with existing
arrangements under subparagraph 206B(1)(b)(ii) of the Corporations Act,
where a person is disqualified from managing corporations if they are
convicted of an offence that involves dishonesty and is punishable by
imprisonment for at least three months.
2.27 There is no policy change relating to the replacement of
`comply' with `contravene' in both amendments. It brings consistency
with similar provisions ASIC also administers under the National
Consumer Credit Protection Act 2009. [Schedule 1, items 2 and 4, paragraphs
913B(1)(b)] and 915C(1)(aa)]
25
Corporations Amendment (Future of Financial Advice) Bill 2011
Amendments to ASIC's banning powers
2.28 The Bill clarifies the operation of ASIC's banning power and
sets out new tests under which ASIC can exercise its discretion to remove
persons from the financial services industry.
Clarifications to banning power
2.29 ASIC may ban a person if either statutory tests under paragraphs
920A(1)(ba) and 920A(1)(f) of the Corporations Act are satisfied.
2.30 The amendment to the statutory tests is whether the person is
likely to contravene its obligations under section 912A or financial
services law, rather than they will contravene the obligations (that is, the
person will not comply with its obligations or financial services law). In
the 10 years since the introduction of the Financial Services Reform Act,
interpretation of this provision has tended to a view that ASIC is required
to believe, as a matter of certainty, that the person will contravene the
obligations in future. Such a standard would be so onerous that it could
result, in practice, in ASIC never being able to ban a person using these
tests. This new formulation is designed to ensure that ASIC can more
appropriately account for the likelihood or probability of a future
contravention. [Schedule 1, items 5 and 7, paragraphs 920A(1)(ba) and 920A(1)(f)]
2.31 There is no policy change relating to the replacement of
`comply' with `contravene' in both amendments. It brings consistency
with similar provisions ASIC also administers under the National
Consumer Credit Protection Act 2009. [Schedule 1, items 5 and 7, paragraphs
920A(1)(ba) and 920A(1)(f)]
New statutory tests and other clarifications
2.32 The Bill includes new tests for when ASIC can make a banning
order against a person. The tests relate to a person's fame and character
and competence. In essence, this introduces a `fit and proper' test
however the limbs of good fame and character and competence are
adopted for consistency with the rest of the Corporations Act which uses
the good fame and character test.
2.33 ASIC can ban a person if their conduct gives ASIC reason to
believe they are not of good fame and character. [Schedule 1, item 6,
paragraph 920A(1)(d)] In determining whether a person is not of good fame
and character ASIC must take into account (subject to Part VIIC of the
Crimes Act relating to spent convictions):
· any conviction of the person, within 10 years before that
time, for an offence that involves dishonesty and is
punishable by imprisonment for at least three months; and
· whether the person has held a licence that was suspended or
cancelled; and
26
Enhancements to ASIC's licensing and banning powers
· whether a banning order or disqualification order under
Division 8 has previously been made against the person; and
· any other matter ASIC considers relevant. [Schedule 1, item 9,
paragraph 920A(1)(1A]
2.34 The factors that ASIC must take into account in considering
whether a person is not of good fame and character is consistent with the
factors used in its decisions on licensing.
2.35 Given that it can be expected that ASIC will principally use this
power to ban individuals, this would enable ASIC to take into account
conduct such as where:
· ASIC believes the individual has committed a fraud, but the
individual has not been prosecuted or there is a delay or
uncertainty in prosecution;
· the individual has engaged in conduct causing serious
detriment or financial loss to consumers, so that there is a
need to protect the public;
· the individual has been subject to adverse findings in relevant
criminal or civil proceedings, reflecting on their character;
· the individual has demonstrated a consistent failure to
comply with the law, or with directions from any licensee or
employer; or
· the individual has been a director or senior manager of a
licensee that has had its licence suspended or cancelled.
2.36 Further, the amendment also introduces a statutory test that
ASIC can ban a person if their conduct gives ASIC reason to believe they
are not adequately trained or competent to provide financial services.
[Schedule 1, item 6, paragraph 920A(1)(da)] It is expected that ASIC will
principally use this power to ban individuals where the person lacks
appropriate skills, knowledge and experience to provide financial services.
2.37 The Bill also clarifies ASIC's ability to ban individuals, given
the focus of obligations on the entity or licensee. The Bill extends the
grounds of banning to whether the person is involved in (or likely to be
involved in) a contravention of a financial services law, which enables
ASIC to take into account conduct where the person is not under a legal
responsibility to comply with the legislation themselves but they
contributed or caused another person to breach the legislation. Where the
licensee is, for example a body corporate, then any contravention of the
law will necessarily be the result of an act or omission of a natural person,
such as a director or employee. The amendments clarify that ASIC can
take into account conduct of these persons where they have been involved
in a contravention of the financial services law, in deciding whether or not
these individuals should be banned. The amendment also applies in
27
Corporations Amendment (Future of Financial Advice) Bill 2011
circumstances where the licensee is a natural person, but an employee of
the licensee was involved in a contravention of the licensee's obligations
under law. [Schedule 1, item 8, paragraphs 920A(1)(g) and (h)]
2.38 Under existing section 79 of the Corporations Act, a person is
`involved in' a contravention of a financial services law if the person:
· has aided, abetted, counselled or procured the contravention;
or
· has been induced, whether by threats or promises or
otherwise, the contravention; or
· has been in any way, by act or omission, directly or
indirectly, knowingly concerned in, or party to, the
contravention; or
· has conspired with others to effect the contravention.
2.39 To avoid doubt, the Bill also clarifies that a person contravenes a
financial services law if a person fails to with comply with the duty, even
if the provisions which impose the duty is not an offence or civil penalty
provision. [Schedule 1, item 9, paragraph 920A(1)(1B]
Application and transitional provisions
2.40 The amendments commence on 1 July 2012, noting it is possible
that in the exercise of these powers ASIC may take into account conduct
that occurred before the commencement date. However the purpose of the
provisions is to prevent unsuitable people from providing financial
services to protect the public. [Item 2]
28
Chapter 3
Regulation impact statement
Background and problem identification
3.1 This Regulation Impact Statement represents certain policies
announced by the Government in April 2010. Further related policy was
developed and announced by Government in April 2011.
3.2 The Corporations Act 2001 (the Corporations Act) regulates
financial products and services in Australia. One way in which an
investor acquires a financial product is as a result of following financial
product advice. There are relevant conduct rules around the giving of
financial product advice and rules to ensure participants behave fairly and
honestly. There are also disclosure requirements designed to overcome
information asymmetry between industry participants and investors where
disclosure assists investors to make informed decisions.
3.3 Currently, the Corporations Act requires that conflicts of interest
be managed and disclosed. The law requires that fees or remuneration
(including commissions and other payments) are disclosed clearly to retail
investors. It does not set limits on what can be charged or how it can be
charged. The Corporations Act also requires that advisers have a
reasonable basis for financial product personal advice (that is the advice
must be suitable). Under equitable principles, there are some duties owed
by persons providing advice to their clients arising out of the
adviser/client relationship. However, there is a lack of clarity around
when those duties apply and precisely what is required to comply with
them.
3.4 Under the Corporations Act, generally before the financial
service is provided, a retail client must be provided with a Financial
Services Guide (FSG) that contains information about remuneration,
including commissions or other benefits to be received by an adviser. If
personal advice is provided, the retail client also generally receives a
Statement of Advice (SOA) from an adviser which includes information
about the advice and remuneration and commissions that might
reasonably influence the adviser in providing advice. Before a product is
provided, a retail client must further receive a Product Disclosure
Statement which must also include information about the cost of the
product and information about commissions or other payments that may
impact on returns.
29
Corporations Amendment (Future of Financial Advice) Bill 2011
Retail investments
3.5 Retail investors hold a variety of financial products. In the main
this includes superannuation, life insurance, deposit products, shares, debt
securities (including debentures) and managed funds (other than
superannuation). The total value of household investment in these
investment products is around $350 billion or 5.5 per cent of total
household wealth.9
3.6 Retail investors can purchase products in different ways. This
includes products:
· distributed without advice, that is directly from a product
provider or third party broker or dealer;
· distributed with some advice, but not by a financial planner10
(that is, representative of the product provider who provides
some general or personal advice about the product); and
· distributed by a financial planner who provides personal
advice to retail clients. The planner may or may not be
associated with a product provider but is likely to receive
commissions from them. Financial planners also may use
platforms11 to invest in financial products on behalf of
clients.
Fees
3.7 Investors pay fees when they acquire financial products. In
some circumstances, and generally for managed funds, investors tend to
pay the same total in product fees whether the product is distributed
through a financial planner or not.
3.8 An investor purchasing a managed fund will generally make a
substantial initial investment in the fund, and may well make additional
contributions. Fees are then deducted from this investment, including
entry and contribution fees, administration/account fees, transaction fees
9 Australian Bureau of Statistics, Cat No 5204, Australian System of National Accounts,
2007-08. Household investment in debt securities at 30 June 2008 was $11.9 billion or
0.2 per cent of total household assets. The ABS data do not provide information on specific
investments in shares and managed funds other than superannuation. However, the total
amount of wealth invested in shares and other equity, including investment in shares and
managed funds other than superannuation, at 30 June 2008, was $338.6 billion, or
5.4 per cent of total household assets. (ASIC's Submission to PJC, August 2009, 101).
10 There is no legislative definition of the term financial planner.
11 A platform is an administration facility that simplifies acquisition and management of a
portfolio of investments. Platforms allow retail investors to purchase a range of investments
through the one facility. In one sense platforms are like a department store where you can
choose from different brand names and products in the one place, rather than having to visit
a number of specialty stores.
30
Regulation impact statement
and fund management fees (investment and performance fees). Fees are
generally set by the product manufacturer and built into the product.
3.9 Each financial service provider receives a payment from the
product fees the investor pays. That is:
· the product provider pays its fund manager fees for managing
the investment; and
· where there is a financial planner, the planner and dealer
group are also paid for advice/sale of the product;
· the product provider may pay a commission for the sale of
the product, generally to the dealer group. The dealer group
then passes on part of the commission to an individual
planner. Where there is an employee adviser, they may not
receive part of the commission but rather a salary. However
often the sale counts towards sales targets that may earn the
planner a bonus; and
· the dealer group or planner is paid an ongoing commission
(trail commission) and this is paid out of administration fees
from the retail investor's account.12
Financial Planning Industry
3.10 Financial advice comes from many sources including financial
planners, brokers and accountants.13
3.11 In the Australian market, there are 700-1,000 adviser dealer
groups operating more than 8,000 financial planning practices and
employing around 18,200 people. Industry revenue for the 2008-09
financial year is expected to be $4.36 billion, an estimated fall of
18.1 per cent compared with 2007-08. The average financial planner has
380 clients, of whom 40 per cent are advised regularly and on a
face-to-face basis.14
3.12 Approximately 85 per cent of advisers are associated with a
product provider. Of the remainder, the vast majority receive
commissions from product providers.15
12 ASIC Submission to the PJC Inquiry, August 2009, 107-8.
13 There are some differences between the common usage of the term `financial planner' and
legal concept of `provider for financial product advice'. A broad range of people may
provide `financial product advice'. The data under `financial planning industry' relates to
the industry as the term is more commonly understood.
14 ASIC submission to the PJC Inquiry on Financial Products and Services in Australia, 109,
per Rainmaker, Financial Planning. Rainmaker considers there are 749 advisory groups.
The above figure reflects alternative estimates.
15 Ibid, 110.
31
Corporations Amendment (Future of Financial Advice) Bill 2011
Remuneration models
3.13 Financial planners receive a mix of salaries, `fee for services',
bonuses and commissions. The Financial Planning Association (FPA)
identified the most common remuneration types to be hourly rate/time
based charging; service based charging; asset based charging; commission
and subsidised advice.
3.14 Many planners tend to charge zero or minimal advice fees and
instead receive their remuneration from product providers. Product
providers recover these charges from the charges levied within products.
3.15 Trailing commissions (usually 0.6 per cent of account balances)
are the main remuneration method for financial planners, with seven in ten
planners citing them as a form of remuneration. Other forms of
remuneration include initial commission on new investment/contribution
(up to 4-5 per cent of contributions), volume bonuses (that is, additional
commission of up to 0.25 per cent of account balances), and fee for
service charged to the client (up to 1 per cent of account balance, or a flat
fee, perhaps related to the hours involved). These amounts would not all
be paid at the maximum level.
3.16 Trailing commissions are more common among aligned
independent and aligned planners,16 while bank-based planners favour
up-front commissions.
3.17 Remuneration models vary across organisations and according
to the market segment to which a client belongs. Low to mid-wealth
clients tend to pay initial and trail commissions, while `high net worth'
and `affluent' clients tend to pay a greater proportion of service fees as a
percentage of assets invested, or flat dollar adviser fees. This is most
likely because wealthy clients are more sophisticated about how much the
advice is costing, and more able to negotiate fees than less-wealthy
clients. Wealthy clients tend to receive sophisticated treatment and
periodic reviews from their advisers, while smaller customers tend to be
offered simple strategies, packaged products and one-off sales. Again,
this segmentation is likely based on both customers' needs and ability to
pay.
3.18 Revenue from fixed-rate and hourly-rate fee for service was
16 per cent of total planner revenue in 2008. Independent planners have a
16 An aligned planner is a planner who works for a financial planning firm, which is owned by
a product manufacturer. That is, the licensee/dealer group and the planners within are
aligned to the product manufacturer (AMP Financial Planning is an example). An aligned
independent is an employee of a financial planning firm, which is owned by a product
manufacturer but the firm is independently branded (for example, Hillross (owned by
AMP)). The independence refers to the level of influence the product manufacturer has over
the planners within the firm regarding what they sell/advise on and who owns the clients.
32
Regulation impact statement
higher proportion of fee for service arrangements than bank planners, with
around 13 per cent of independent planners deriving over half of their
revenue from pure fee for service in 2008, compared to 6 per cent of
aligned planners and 1 per cent of bank planners. Forty eight per cent of
bank planners did not derive any revenue from pure `fee for service' in
2008 (and 9 per cent of all practices).
3.19 Planners deriving most of their revenue from pure fee for service
spend almost half (47 per cent) of their time with clients planning for
financial and lifestyle goals, and put less of their client portfolios into
managed funds and more into direct equities. Planners deriving no
revenue from pure for fee service were more risk-oriented.17
3.20 Advisers derive revenue from:
· trail commissions (per cent of assets) (estimated at
35 per cent of adviser revenue);
· initial or up-front commission (per cent of initial investment)
(estimated at 26 per cent of adviser revenue);
· fee for service as a per cent of assets under management
(called an asset based fee) (estimated at 23per cent of adviser
revenue); and
· fee for service as a fixed dollar amount or an hourly rate paid
up-front or out of the product (estimated at 16 per cent of
adviser revenue).18
Access to advice
3.21 Not all investors obtain financial advice. Available figures
indicated that between 22 per cent and 34 per cent of adult Australians
access financial advice. Use of a financial adviser increases with age.19
CONFLICTS OF INTEREST
3.22 Remuneration structures in the financial services industry must
be disclosed as they can create real and potential conflicts of interest that
may distort the quality of advice. While all remuneration structures may
create some form of conflict, there is some evidence that certain structures
are creating strong conflicts which are not being sufficiently addressed
through current regulation that requires conflicts to be managed and
disclosed.
17 Ibid, 110-11.
18 ASIC submission to the PJC Inquiry on Financial Products and Services in Australia,
48-49 per Investment Trends October 2008 Planner Business Model Report, 27.
19 Ibid, 114.
33
Corporations Amendment (Future of Financial Advice) Bill 2011
3.23 Problems have been identified with commission-based
remuneration arrangements, sales and volume incentives and the use of
asset based fees. The issues are outlined below.
Commission based remuneration arrangements -- product provider
influence over adviser recommendations
3.24 Typically a commission is an arrangement between a product
provider and the adviser or the adviser's licensee and is built into a
financial product.
3.25 Upfront and ongoing (trail) commissions paid from product
providers to licensees are built into product charges (for example entry
and administration fees). For ease of reference, commissions also refer to
other product provider payments, including those based on volume or
funds under management (other than soft-dollar benefits)20, as these are
payments that come from product providers and may also influence
adviser recommendations.
3.26 Where commissions are used, the income of a financial advice
business is linked to which products are recommended (for example,
industry superannuation funds do not pay commissions, whereas retail
superannuation funds do). Advisers earn income according to the type
and volume of products sold. There are many incentives to meet
volume-based or sales-driven targets.
3.27 Commissions may encourage advisers to sell products rather
than give unbiased advice that is focused on serving the interest of the
clients. Financial advisers have potentially competing objectives of
maximising revenue from product sales and providing professional advice
that serves the client's interests.
3.28 There is some evidence that these conflicts affect the quality of
advice. The 2006 Shadow Shopping exercise of the Australian Securities
and Investments Commission (ASIC) found that advice that was clearly or
probably non-compliant was around six times more common where the
adviser had an actual conflict of interest over remuneration. The conflict
may lead to advice that is not compliant and not in the client's interests.
There is anecdotal evidence that high commissions motivated the
mis-selling of Westpoint products.
3.29 In its 2009 report on Financial Products and Services in
Australia21, the Parliamentary Joint Committee (PJC) noted that the
ineffectiveness of current disclosure of conflicts and conduct rules that
20 A soft-dollar benefit is a benefit received by a financial adviser (or its associates) other than
a basic cash or direct client fee. Examples include subsidised business equipment and
luxury overseas conferences.
21 Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into
Financial Products and Services into Australia, November 2009.
34
Regulation impact statement
allow an adviser to favour their own interests over the interests of clients
is more likely to lead to sub-optimal investment strategies or excessive fee
arrangements than catastrophic outcomes for investors.
3.30 The issue of conflicted remuneration structures has been debated
for many years. It more broadly reflects the ongoing debate about the
sales focus of the financial advice industry and mismatch with consumer
expectations about receiving a professional unbiased advice service.
3.31 In its report, the PJC noted it received considerable evidence
suggesting that the most effective way to improve the quality of financial
advice for consumers is to remove conflicts altogether by banning
commissions and other conflicted remuneration practices. The PJC
recommended, among other things, that the Government consult and
support industry in developing the most appropriate mechanisms to cease
payments from product providers to financial advisers.22
3.32 The significance of this issue has been recognised both locally
and internationally. Locally, important industry associations, including
the Financial Planning Association (FPA) and Investment and Financial
Services Association (IFSA), have adopted policies to transition away
from commission-based payments. The United Kingdom's Financial
Services Authority (FSA) is introducing `Adviser Charging' which will
remove commission bias from advice on retail investment products. The
United States Treasury is proposing to give the Securities and Exchange
Commission (SEC) the power to examine and ban forms of compensation
that encourage intermediaries to put investors into products that are
profitable to them, but are not in the investors' best interest.
3.33 Although not conflict related, other issues arise with
commissions. After the investor has invested in the product, they cannot
control the commission payments to advisers unless they leave the product
or nominate another adviser (who receives the ongoing commission
payments). Also, ongoing commissions are often paid even if no ongoing
advice is being received (only around 40 per cent are clients are advised
regularly and on a face-to-face basis). There are also clear transparency
issues where investors may not know what they pay for advice or what
service they are entitled to in relation to the payment of ongoing
commissions.
Other volume based and sales incentives
3.34 A variety of payments throughout the financial services industry
are based on volume or sales targets. Some volume based payments are
noted above, as they are payments from product providers. However,
there are other volume based payments in the financial services value
22 Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into
Financial Products and Services into Australia, November 2009.
35
Corporations Amendment (Future of Financial Advice) Bill 2011
chain that do not flow directly from a product provider, for example that
flow to and from platforms (in the form of shelf fees), as well as
incentives provided by licensees to its employees or authorised
representatives to meet sales or volume targets.
3.35 In relation to platforms23, there are ongoing payments from
platforms to licensees based on volume (relating to funds under
management), which also may create conflicts and distort advice. This
payment could be characterised as a commission in another guise. There
are also Fund Manager Payments, which are ongoing payments that are
volume based from the fund manager to the platform. These fees are
interrelated, where generally the fund manager pays the platform to sit on
the investment menu and the platform pays the licensee to be on the
approved product list and the licensee pays the planner for the
recommendation of the platform.
3.36 In relation to adviser employees, the very nature of volume
based payments and sales incentives encourages the sale of products,
rather than the giving of unbiased advice. The indirect conflicts through
employee remuneration operate in a similar fashion to conflicts in product
provider set remuneration. While it is noted that many employee
remuneration bonus arrangements are supplemented by other criteria, such
as quality and compliance, often sales targets in some shape or form are
the primary determinant of the bonus. Licensees may indicate that quality
advice or compliance requirements appropriately manage the conflicts
created by sales incentives, so that planners who fall short of required
compliance standards will not be eligible for a bonus. However, there are
concerns about the effectiveness of these controls in some circumstances
and sometimes there will be enormous pressure internally to allow the
planner to receive a bonus, notwithstanding shortfalls in terms of
compliance.
Asset based fees
3.37 An asset based fee is a fee agreed between a client and adviser.
The fee is calculated as a percentage of funds under management. The fee
changes with any changes to funds under management.
· Given the transition away from commission based
arrangements, there is an expectation that advisers will more
heavily rely on the use of asset based fees for remuneration.
23 A platform is an administration facility that simplifies acquisition and management of a
portfolio of investments. Platforms allow retail investors to purchase a range of investments
through the one facility. In one sense platforms are like a department store where a customer
can choose from different brand names and products in the one place, rather than having to
visit a number of specialty stores.
36
Regulation impact statement
3.38 Asset based fees can also create conflicts of interest that can
distort the quality of advice. It is important to note that the conflicts
related to commissions and asset based fees are different in origin but can
present the same type of issues.
3.39 Advisers who are remunerated by the quantity of funds under
management can also have conflicts of interest. They have more of an
interest in selling investment products to their clients and encouraging
their clients to borrow to invest, or use other strategies to maximise funds
under management (such as recommending that a client sell other assets,
such as real estate and/or property, to invest in products that will expand
available funds under management). The conflicts arise most notably
where leverage is recommended or where leverage is included in the
product.
Storm and asset based fees
3.40 The recent collapse of Storm Financial received close attention
by the PJC.
3.41 Storm's remuneration model involved the use of asset based fees
and commissions. For geared clients, Storm had a fee for service model
(plus trail commissions) equating to roughly 7.5 per cent on all new
money invested by clients. This covered the initial advice and ongoing
regular servicing of the portfolio. Any additional money invested by the
client also attracted this upfront fee for service. Also the product
manufacturers would pay Storm annual trail commissions of between
0.2 per cent and 0.385 per cent on the value of that client's investment at
the time (including the margin loan).
3.42 Under the Storm model, the fact that fees were generated based
on the amount of funds invested and the amount of funds under
management created an inevitable conflict of interest between the
adviser/licensee's interests in increasing revenue on the one hand and the
interests of the client in receiving appropriate advice. Asset based fees
create a conflict of interest that encourages advisers to recommend
aggressive gearing to increase the upfront fee generated when the
borrowed money is invested and to increase the balance of funds under
management and thereby the ongoing fees generated. It also acts as a
disincentive for advisers to build into the client's strategy an exit plan
whereby investors can realise gains as a result of market increases to
reduce overall debt, as this would reduce the fees earned by the adviser
and licensee.
3.43 In addition, in the case of Storm the overall financial viability of
the licensee relied heavily on these asset based fees, which meant that
when the global financial crisis occurred, and the value of the clients
funds dropped, and clients also stopped investing new monies, the income
of the licensee effectively disappeared. By relying on bull market inflows
for revenue, Storm was highly susceptible to collapse.
37
Corporations Amendment (Future of Financial Advice) Bill 2011
3.44 ASIC noted in its PJC submission that `Storm may be an
example of the potential impact on clients of failure to manage conflicts of
interest created by commissions and remuneration based on funds under
advice'.
3.45 There are also transparency concerns with the use of asset based
fees. The fee can mask the cost of advice, both up-front and in the case of
ongoing fees -- where the fee rises with normal asset appreciation. There
may or may not be a higher level of service when the fee rises due to
greater funds under management. This reflects the potential for ongoing
fees that do not match the service provided.
Objectives of Government action
3.46 The objective of Government is to:
· minimise or eliminate the use of remuneration practices that
distort the quality of advice and adversely affect consumer
outcomes;
· encourage the provision of professional unbiased financial
advice;
· enable consumers to understand the fees they are paying for
advice and the services that they are paying for; and
· facilitate better market outcomes.
Options that may achieve objective(s)
Option A: Status Quo (including simplified fee disclosure)
3.47 This option would maintain the status quo. Current obligations
for licensees to manage and disclose conflicts of interest (including
remuneration and other payments) would continue. Various disclosure
documents would continue to be provided to investors, designed to assist
them to understand the potential impact of remuneration based and other
conflicts on the advice they receive from financial advisers.
3.48 The Government has already committed to shortening lengthy,
complex and unreadable financial services disclosure documentation.
Based on current government action to simplify disclosure of financial
products and services (which is currently underway), the option would
also involve simplified one or two page fee disclosure in the short PDS,
supplemented by additional detailed information made available via
incorporation by reference (IBR). The disclosure about advice fees is
achieved through summary information in the short PDS and more detail
provided in the Financial Services Guide (FSG) and the Statement of
Advice (SOA).
38
Regulation impact statement
3.49 This option would see more effective disclosure of financial
advice services offered to investors. This includes simplified fee
disclosure such that consumers are able to understand the remuneration
costs, separate product and advice fees and that those costs are
comparable and clear.
Option B: Prospective legislative ban on conflicted remuneration
structures. Introduction of new adviser charging rules
3.50 This option would involve a direct ban on conflicted
remuneration structures for new contracts (that is, existing contracts are
grandfathered such that the ban does not apply to them) from 1 July 2012.
As a consequence of the ban on conflicted remuneration structures, the
option would also introduce new rules on adviser charging. This includes:
Removing product provider influence over adviser recommendations
3.51 Ban any form of commission from any financial services
business in relation to the distribution and provision of advice for retail
financial products (excluding risk insurance).
· It would allow adviser charges to be deducted from a client's
investments.
3.52 Product providers must distinguish the cost of the product from
advice.
Removing the influence of sales incentives and/or other volume based
payment
3.53 This would prevent payments throughout the financial services
industry that are based on volume or sales targets in relation to the
distribution and provision of advice for retail financial products
(excluding risk insurance).
Removing adviser incentives to sell and gear clients -- ban on the use of
asset based fee
3.54 This would prevent an adviser from charging an asset based fee
in relation to services provided to a retail client where the adviser
recommends their clients borrow to invest or leverage is included in the
product (an asset based fee is a fee calculated based on a percentage of
funds under management). For example, where a client is advised to
borrow funds to invest the adviser would be prohibited from charging an
asset-based fee based on both the original equity and the additional
leverage.
Introduction of adviser charging rules
3.55 This would require advisers to agree their fees directly with
clients and disclose the charging structure to clients in a clear manner,
including as far as practicable, total adviser charges payable. Ongoing
adviser charges could also only be levied if it relates to the provision of an
39
Corporations Amendment (Future of Financial Advice) Bill 2011
ongoing service, which clients must renew annually, or if a payment plan
is agreed up-front for advice.
Option C: Industry led action to address conflicted remuneration
structures, with Government support
3.56 In Australia, there have been some recent moves to adopt fee for
service models instead of commission based payments. While views are
not unified across industry, the Financial Planning Association (FPA) and
the Investment and Financial Services Association (IFSA) have led action
in this regard. Some product providers and/or financial advice firms have,
or are in the process of, transitioning away from commission based
payments. This includes some of the larger adviser groups.
3.57 This option would involve government and industry developing
the most appropriate mechanism to address conflicted remuneration
structures. This option was supported by the PJC, although the PJC
recommendation involved the government consulting with and supporting
industry to develop an appropriate mechanism to cease payments from
product providers to financial advisers (that is, this would not cover, for
example, asset based fees or employee sales incentives from the licensee).
Option D: Introduce a statutory duty to prefer the client's interests over
the interests of the advisor (Client first rule)
3.58 Under this option, a new statutory duty would prohibit advisers,
in the event of a conflict, to prefer their own interests over those of the
client. This option would clarify for all parties that in no circumstances is
it permissible for advisers to put their own interests ahead of those of their
client. There would be no possibility of avoiding that duty through
disclosure or by obtaining consent of clients to breach it.
3.59 The proposed duty recognises that conflicts do exist in many
cases, but will require that advisers ensure that they do not prefer their
own interests over those of their clients, thereby compromising the quality
of advice. The duty would overlay the existing duties of disclosure and
giving appropriate advice. Breaches would be enforceable by clients and
the regulator in the same manner as the existing duties and would include
civil (including compensation claims) and criminal action, and action by
the regulator regarding the financial services licence.
Option E: Introduce a rule banning advisers who have a conflict of
interest from providing advice (No conflicts rule)
3.60 Under this option, advisers would be prohibited from providing
financial advice in the event that they had a conflict of interest that might
compromise the quality of the advice. There would be no possibility of
avoiding that rule through disclosure or obtaining the consent of clients to
breach it.
40
Regulation impact statement
3.61 The proposed rule would prohibit all conflicts of interest. It
would overlay the existing duties of disclosure and giving appropriate
advice. Breaches would be enforceable by clients and the regulator in the
same manner as the existing duties and would include civil (including
compensation claims) and criminal action, and action by the regulator
regarding the financial services licence.
Option F: Introduce a fiduciary-like statutory duty to act in the best
interests of clients, subject to a `reasonable steps' qualification and to
place client's best interests ahead of their own
3.62 Under this option, advisers must act in the best interests of their
clients and must place the best interests of their clients ahead of their own
when providing personal advice. Advisers must already provide advice
that is appropriate. Overall, this is supplemented by a requirement that
advisers act in the client's best interest in giving personal advice.
3.63 The duty will include a `reasonable steps' qualification, so that
advisers must take `reasonable steps' to discharge the duty but are not
expected to base their recommendations on an assessment of every single
product available in the market. If an adviser cannot recommend a
product that is in the best interests of the client from their own `approved
product list' (APL) (a list of products that their licensee has authorised
them to sell), then the duty may require them to search beyond the APL or
recommend that the client should see another adviser. There would be no
possibility of avoiding that duty through disclosure or by obtaining
consent of clients to breach it.
3.64 Breaches would be enforceable by clients and the regulator in
the same manner as the existing duties and would include civil (including
compensation claims) and criminal action, and action by the regulator
regarding the financial services licence.
Impact analysis
Option A: Status Quo (including simplified fee disclosure)
3.65 This option would preserve the status quo. Conduct and
disclosure rules would continue to regulate conflicts of interest, which is
that conflicts of interest must be managed and disclosed.
3.66 This means that fees or remuneration (including commissions
and other payments) must be disclosed clearly to retail investors and there
would be no limits on what can be charged or how it can be charged. The
requirement that advisers have a reasonable basis for financial product
personal advice (that is the advice must be suitable) would continue to
operate as is.
3.67 Current government work also means that this option would
involve the simplification of information provided to consumers on fees
and commissions in disclosure documents, such as Product Disclosure
41
Corporations Amendment (Future of Financial Advice) Bill 2011
Statements (PDSs) and Financial Services Guides (FSGs). It involves
developing `short form' disclosure documents in an attempt to summarise
and simplify complex fee information for consumers in a way that is
meaningful to them, with further detail available using Incorporation by
Reference (IBR) mechanisms.
3.68 The benefit of this option is that it facilitates choice of
remuneration which suits the client and particular adviser. Consumers
may also benefit from more understandable fee disclosure. Further
market forces may continue to drive a transition to a fee for service
environment for adviser remuneration to reflect broader community
concerns. The approach is also consistent with existing regulatory
measures which to some extent does minimise the compliance burden for
industry. There would be no substantive compliance burden on industry,
other than a broad impact that, in some circumstances, consumers may
continue to not seek financial advice based on the perception of conflicts
(noting that consumers may not seek advice for a variety of different
reasons). A NewsPoll/Industry Super Network survey in February 2010
indicated that most respondents would prefer a fee-for-service model.
79 per cent of those surveyed believed commissions and other
inducements compromised the quality of advice received.
3.69 While not quantifiable, there are costs to consumers in
maintaining the status quo. The costs relate to the continued conflicts of
interest and its potential adverse impact on the quality of advice. In
general, the level of trust that consumers place in their adviser, and the
strength of that conflict, often means they are unable to assess the impact
of the conflict on the advice received. Further, the inherent sales versus
advice conflict may continue to misalign the interests of the consumer and
adviser.
3.70 Further, from a consumer perspective, there are also serious
questions about whether complex fee arrangements, in particular the way
advice fees can be remunerated through the product provider via
commission structures and/or calculated as a percentage of funds under
management (FUM), can be communicated in a simple and meaningful
manner to consumers. The complexity in which advice fees can be
incurred pose a significant challenge to achieving `simplified fee
disclosure'.
3.71 A key objective of simplified fee disclosure is to clearly separate
product fees from advice fees. Advice fees, however, can be charged in
many different ways, including being deducted from the consumer's
account in such a way that the advice may appear to the consumer to be
`free'. Advice fees can also be paid as volume bonuses and soft dollar
benefits. Disclosure that includes information on advice fees under
current remuneration structures becomes, by its very nature, no longer
`simple'.
42
Regulation impact statement
3.72 While it is possible that simplified disclosure may improve
consumer understanding and engagement, this measure alone may not be
sufficient to address the conflicts created by conflicted remuneration
structures. The conflicts created are strong and consumers may continue
to have difficulty understanding the impact of the remuneration on advice.
Benefits Costs
Consumers Consumers can choose the method by There is some evidence that conflicted
which they pay for advice. remuneration structures may lead to advice
that is not legally compliant or otherwise
Some consumers may benefit from comprises the client's interest. This can have
simpler disclosure to enable them to a wide range of impacts for the investor
understand the fees they are paying. ranging from possible catastrophic
consequences (noting these are more
atypical) to sub-optimal investment outcomes
(for example even a small difference in a
fund's fees and costs can have a significant
impact on long term investment returns).
Even with simpler disclosure of remuneration,
this may not alone be sufficient to address the
conflicts created by conflicted remuneration
structures.
Simplified disclosure is unlikely to improve the
quality of advice; as it will not remove
conflicted structures.
No changes to current arrangements would
permit continued potential for misalignment of
the interests of consumers in receiving
professional unbiased advice and the
interests of the adviser.
Consumers may also continue to pay for
advice services they do not receive.
Industry Industry can choose the remuneration In relation to simplified disclosure, there
methods which suits them and their would be some minimal compliance impact
clients. on product providers, platform providers,
licensees and advisers. This would involve
one-off compliance costs in adapting new
disclosure requirements (for example,
structuring and amendments to existing
documents). However given a reasonable
transitional period, these costs would be
relatively minor (and part of normal business
costs) given that disclosure documents must
be renewed after a certain period.
Potential for `first mover disadvantage' -- that
is those who have adopted fee for service
arrangements may face some competitive
disadvantage (it is a highly competitive
market for experienced advisers and advisers
may move to ensure they can continue to
receive commissions).
Government The existence of conflicts may continue to
adversely the quality of advice and consumer
outcomes.
43
Corporations Amendment (Future of Financial Advice) Bill 2011
Option B: Prospective legislative ban on conflicted remuneration
structures. Introduction of new adviser charging rules
3.73 This option would involve a direct ban on conflicted
remuneration structures, generally in relation to the distribution and
provision of advice for retail financial products (excluding risk insurance).
3.74 Retail investors will benefit from this option because it will
reduce the incidence of investors being directed to products as a result of
incentives offered to advisers, rather than because investment in the
products is in the investors' interests. This may reduce instances of
sub-optimal advice, may help to prevent and address the rarer instance of
major failures affected by high commissions and result in an overall
improvement in advice quality, particularly product recommendations.
Further the changes clearly align the interests of the adviser and client,
and may build trust in an industry where some consumers may not seek
advice because of the perceived conflicts within the industry.
3.75 There have been suggestions that retail investors will no longer
be able to afford advice if commission are removed. Some investors may
consider that they can no longer obtain `free' (that is, commission based)
advice, notwithstanding that investors indirectly pay for the advice (for
example through product charges) and in some instances these payments
may cost them more over the long term. This may be a difficult
perception change for these clients and may impact on demand for full
advice. However retail investors will not be restricted to having to pay a
large fee up-front. The ban on commissions and asset-based fees (where
leverage is used) will still allow investors to be able to pay for advice
using flexible payment mechanisms, such as adviser charges being
deducted from a client's investments over time24 or through a payment
plan.
· The available research, undertaken by Rice Warner Actuaries
(Rice Warner) on behalf of Industry Super Network (ISN),
suggests that clients receiving full advice are likely to pay the
same or less in fees after the change. More so, most clients
will see the value of the advice provided, even when the cost
is transparent. The research also suggests that clients will
assess that they often need simple advice and demand for this
need will be met.
3.76 The ban on asset based fees only applies to recommendations
that include leverage and where leverage is built into the product. There
is some potential for consumer detriment in that it does not address a
potential issue where advisers can use other strategies to increase funds
24 This mechanism allows product providers to remit adviser payments but as an
administrative facility only.
44
Regulation impact statement
under management. However under proposed adviser charging rules,
there will be requirements for advisers to agree the fee with the client, as
well as the adviser making dollar disclosure and only charging an ongoing
fee if it relates to ongoing service. This addresses concerns about
transparency and clients paying more than the value of the service.
3.77 The ban does not initially apply to risk insurance. Insurance has
different features than general investment products. Unlike investments,
there are no investment funds from which clients can often draw from to
pay for financial advice. Therefore there are concerns about the
affordability of advice in a fee for service environment and the potential
for under-insurance should be explored in this context. In addition, more
work needs to be done at a product level to facilitate a move away from
commissions to fees for risk products. Further consultation with
stakeholders on these issues will be undertaken before a decision is made
about the ban and its application to risk insurance.
3.78 There are costs to the industry to implement this option, and the
option will also have broader longer-term implications.
3.79 The option is likely to drive structural reform in the industry. It
has implications for the way in which products are distributed and
businesses are structured. It is a new model for the industry where fees
paid for a product must be transparently distinct from the fees paid for
advice. This will alter the financial services industry over the long term.
However, the grandfathering of existing contracts means that changes to
the industry will be more gradual and will occur over time. The
grandfathering of existing contracts means that existing fee arrangements
(prior to the commencement of the ban) can continue. For example, this
means where a person is already invested in a product (prior to the ban)
and the adviser is remunerated by commissions; the product provider can
continue to pay the adviser the ongoing trail commission and the adviser
can continue to receive it.
3.80 There is an expectation that some persons will exit the industry,
as with any major reform. The number of persons who may exit the
industry is unknown. It is further expected that there will be consolidation
of the industry, with larger institutionally owned dealer groups (licensees)
acquiring a number of smaller dealer groups to grow their adviser
numbers and achieve economies of scale. While this means there will be
fewer participants in the market, it does not necessarily represent a
reduction in competition and will drive overall efficiency improvements
of financial advisory groups.
· The available research from Rice Warner notes that many
full service advisers rely on substantial trail commissions and
platform rebates to sustain their businesses and, after the
regulatory change, advisers will be compelled to demonstrate
the value of their services to retain and attract clients. The
45
Corporations Amendment (Future of Financial Advice) Bill 2011
research notes that as advice is a growth industry, and
coupled with overall efficiency improvements, there is still
significant scope for financial planners to maintain and
develop viable businesses (even if product provider payments
are banned for new business).
3.81 These changes may impact on the demand and supply of advice.
· The available research from Rice Warner suggests that
demand will be broadly stable and even though adviser
numbers will reduce over time, more efficient delivery
models for simple advice and efficiency improvements
means that demand will be met.
3.82 It is expected that adviser remuneration, as well as the number
of advisers, will reduce over the long term.
· The available research from Rice Warner suggests that
adviser remuneration will still increase in real terms,
although by significantly less than under the current
regulatory environment. The reduction in overall adviser
remuneration will be $2.5 billion (in 2009 dollars) in 2024
representing 0.23 per cent of GDP. The report also suggests
that adviser numbers will reduce25 and the characteristics of
advisers will change.
3.83 There will be a reasonable change management process for
participants adopting the proposals. There will be one-off costs to
implement the ban on payments and adviser charging, some additional
ongoing compliance costs and costs involved with getting across new
regulatory requirements.
· Product providers will need to implement `factory gate
pricing' (a UK term for separating the cost of the product
from the cost of advice). For investment type products, there
are current products in the market which separate product
and advice costs, and in those circumstances the system
changes required should be less than where the provider has
no products of this kind. The extent to which product
providers already have these systems is not known. Product
providers will also need to put procedures and mechanisms in
place so they can comply with the ban and associated
requirements, such as remitting adviser service fees from the
client's investment.
25 Rice Warner research estimates there are around 15,400 advisers which will remain broadly
stable over the next five years and decline to around 8,600 in 2024.
46
Regulation impact statement
· The immediate impact for financial planning practices will be
to set up alternative cash-flow mechanisms. Currently the
value of a financial advice business is calculated on a
valuation which is based on the income stream from trail
commissions times a multiplier (generally between 1.9 and
2.9). The client book becomes the businesses' primary asset.
The valuation on this basis is also used by lenders in
providing finance to the business secured against the income
stream coming from the trail commissions, so there may be a
need for advisers to re-negotiate loan arrangements with their
financiers based on some other valuation of the business (for
example, good will). It should be noted that grandfathering
of existing contracts will mean that remuneration that comes
from existing arrangements will largely be unaffected.
· Advisers and its licensees will need to devise and introduce
an adviser charging structure and make relevant disclosures
(noting there are some current disclosure requirements).
They will need to cost their services, articulate what and how
they provide their services and demonstrate a clear value
proposition to their clients.
· Advisers will need to make substantial changes to its
disclosure documentation. There would also be changes
required to policy documents and employment contracts and
so forth. However, the transitional period would likely allow
for documentation to be updated according to normal
roll-over schedules, which would reduce the impact by
spreading it out and making it a part of normal business
practice.
· Financial planning practices will have to renegotiate fees
with their clients and set up new payment mechanisms.
Advisers will also need to change systems and procedures to
adopt the new charging structure and are expected to spend
more time with clients explaining the fee structure, to
demonstrate the value of advice.
· There may be cost saving with regard to the systems and staff
that are currently needed to manage commission payments.
This can be a complicated and time-consuming process
involving calculating commissions and doing manual
`clawbacks', for example, where the clients exercise a
cooling off period and the commissions need to be repaid to
the product provider. These systems and staff add extra cost,
and would no longer be required, so there is likely to be a
cost saving to business in this regard.
47
Corporations Amendment (Future of Financial Advice) Bill 2011
· Advisers who will be most impacted will be the businesses
that rely substantially on ongoing trail commissions and do
not maintain an existing ongoing client relationship. There is
no available data on the number of businesses who might fall
into this category.
· Advisers will also incur ongoing annual costs in that they
must have clients opt-in each year to continue to provide
ongoing service.
· Advisers and licensees may need to re-negotiate their
fee-sharing arrangements and may need to adjust other
elements of the commercial relationship, such as key
performance indicators.
· The overall costs depend on the extent to which participants
are already structured to adopt this model, for which there is
no available data. Some businesses have made these at least
some of the changes. The costs to industry have not been
quantified, and were not considered in detail in the PJC
Inquiry.
Benefits Costs
Consumers Consumers will benefit from improved Consumers may continue under the
quality of advice that is not distorted by apprehension that commission based
conflicted remuneration structures. advice is `free' advice and they may
Consumers will benefit from an alignment perceive an increase in the cost of
of adviser interests through remuneration advice. This may impact of some
practices that support the clients' interests consumers' willingness to seek advice.
in receiving professional unbiased advice.
The removal of conflicted remuneration There may be some compliance costs
structures may enhance trust in the passed on to consumers.
industry and encourage some consumers
to seek advice.
Consumers will benefit from adviser
charging that is clear and directly related
to the services provided.
Industry The removal of conflicted remuneration The ban on conflicted remuneration
structures may improve the level of structures will change the way in which
generalised trust in the industry and products are distributed and businesses
encourage some consumers to seek are structured.
advice. It is a new model for the industry where
It is an opportunity for industry to develop fees paid for a product must be
more efficient adviser delivery models. transparently distinct from the fees paid
No first mover disadvantage. for advice. This will alter the financial
services industry over the long term.
However the grandfathering of existing
contracts means that changes to the
industry will be more gradual.
There will be one-off costs to industry
(product providers, platforms, licences
and advisers) to implement the ban.
There will be some ongoing costs to
industry, as a result of new rules (such as
48
Regulation impact statement
opt-in annual renewal notices).
Some businesses are expected to exit
the industry.
Government Consumers will benefit from better quality
of advice and outcomes.
Option C: Industry led action to address conflicted remuneration
structures, with Government support
3.84 Option C would build upon existing industry measures to
transition away from commission based payments. The Government
would work with industry to develop the most appropriate mechanism to
cease these payments.
3.85 To date, not all of industry support a transition away from
commission based payments. Further the moves by some parts of industry
to transition away from commissions are limited in some way. For
example, the policies only apply to certain products or to certain types of
payments.
3.86 The benefit of this option, is that in some instances, it will
benefit consumers by reducing the incidence of investors being directed to
products as a result of incentives offered to advisers, rather than because
investment in the products is in the investors' interests. This may result in
an overall improvement in advice quality, particularly product
recommendations.
3.87 However the key limitation of this option is that those benefits
will only ensue where the initiatives apply. As the initiatives will not
apply to all products and payments that create conflicts, the costs to
consumers will continue in those circumstances. Further if certain
payments continue (as per current industry initiatives) there is a real risk
that removed benefits will flow through those mechanisms and in fact
there will no substantive change to current arrangements.
Benefits Costs
Consumers Consumers will benefit from improved To the extent that the initiatives apply,
quality of advice that is not distorted by consumers may continue under the
conflicted remuneration structures, but only apprehension that commission based
to the extent that the initiatives apply. advice is `free' advice and they may
The removal of some conflicted perceive an increase in the cost of
remuneration structures may enhance trust advice. This may impact of some
in the industry and encourage some consumers' willingness to seek advice.
consumers to seek advice. To the extent that the initiatives apply,
To the extent that the initiatives apply, there may be some compliance costs
consumers will benefit from adviser passed on to consumers.
charging that is clear and directly related to Where the initiatives do not apply,
the services provided. consumer detriment will continue (as
described under costs of maintaining the
status quo).
49
Corporations Amendment (Future of Financial Advice) Bill 2011
Industry To the extent that the initiatives apply, the To some extent, the initiatives will
removal of conflicted remuneration change the way in which products are
structures may improve the level of distributed and businesses are
generalised trust in the industry and structured.
encourage some consumers to seek There will be one-off costs to industry
advice. (product providers, platforms, licences
It is an opportunity for industry to develop and advisers) to implement the relevant
more efficient adviser delivery models. initiative.
The implications and costs relate solely
to the scope of initiatives which have
been developed by industry associations
or companies.
Government To the extent that the initiatives apply, The measures are not comprehensive
consumers will benefit from better quality of and this allows certain consumer
advice and outcomes. detriment to continue.
Option D: Introduce a fiduciary-like statutory duty to prefer the client's
interests over the interests of the advisor (Client first rule)
3.88 Option D will not necessarily ban any particular form of
remuneration. The proposed duty is a more generic standard that will
address issues that might arise from all types of conflicts -- for example,
ownership-based conflicts.
3.89 It would be able to operate in connection with future provision
of advice connected to an existing arrangement with a client. In contrast,
the proposal to ban particular remuneration structures can only operate
prospectively, due to constitutional restrictions concerning acquisition of
property.
3.90 The rule would benefit consumers by reducing the incidence of
advice being compromised through conflicts, resulting in sub-optimal
outcomes for consumers of financial advice.
3.91 A further possible result of the proposal for the new duty to
place the client's interests first is that it would serve to strengthen, from
the perspective of potential enforcement, the existing duties of
intermediaries to ensure the advice has a reasonable basis and is
appropriate for the client's need. When that test is paired together a
statutory duty to place the interests of the client first when there is a
conflict, there is a clearer message in the statute about unacceptable
conduct which would be of benefit to the regulator in its enforcement
efforts.
3.92 For persons conducting the business of financial advice, despite
the existing of equitable principles that have similar elements, there would
be some transitional costs associated with ensuring that their business
structure and practice does not violate the rule. On some occasions on an
ongoing basis, the rule would require advisors to, for example, change
50
Regulation impact statement
recommendations to a product that offers less benefits to the advisor in
order to ensure the client's interest is preferred over their own.
Benefits Costs
Consumers Consumers will benefit from improved There may be some compliance costs
quality of advice that is not distorted by passed on to consumers.
conflicted remuneration structures.
Consumers will benefit from an alignment
of adviser interests through remuneration
practices that support the clients' interests
in receiving professional unbiased advice.
Industry Clarification of the duty may offer some Transitional costs for some financial
savings in the longer terms as the conduct advice providers in ensuring that
that is permitted and not permitted is business structures and practices do not
certain. violate the client first rule.
Lesser ongoing costs resulting from the
need to prefer the client's interest over
their own.
A degree of complication and uncertainty
due to the limitation of the duty to
circumstances where the client and the
adviser's interests are in conflict.
Government Supplementation of existing rules will
clarify required behaviours and assist
regulators to enforce requirements against
advisors engaging in practices detrimental
to consumers.
Option E: Introduce a rule banning advisers who have a conflict of
interest from providing advice (No conflicts rule)
3.93 Option E would effectively prohibit many forms of
remuneration currently used. Commission payments would violate the
rule. There may also be significant impact on the structure of vertically
integrated business (where a product provider owns a financial advice
business).
3.94 The benefit of the rule for consumers would be that all advice
would be free of any `skewing' as a result of a conflict. However, a no
conflict rule would require large scale restructuring of a large proportion
of the financial advice industry. Many market participants are likely to
leave the industry, and those that are left would need to operate on a fee
for service basis. This would result in some serious risks that access and
affordability of advice for most consumers would be detrimentally
affected.
3.95 For industry, the majority of participants in the financial advice
industry may not be able do business as usual without violating the
no-conflict rule and/or that carve outs would be required (for example the
position of conflict an employee adviser of the Commonwealth Bank may
51
Corporations Amendment (Future of Financial Advice) Bill 2011
find themselves in). There would need to be a major shift to a fee for
service model and the costs of doing so is likely to result in a significant
number of market exits.
3.96 For Government, there are likely to be some costs involved with
supporting industry participants (including employees) of advice
businesses unwilling or unable to make the transition to a no-conflict
environment.
Benefits Costs
Consumers Consumers will benefit from improved Cost of advice would increase
quality of advice that is not distorted by significantly and availability of advice
conflicted remuneration structures or other would decrease significantly.
conflicts.
Consumers will benefit from an alignment
of adviser interests through remuneration
practices that support the clients' interests
in receiving professional unbiased advice.
Industry Clarification of the duty may offer some Significant transitional costs for some
savings in the longer terms as the conduct financial advice providers -- which in
that is permitted and not permitted is some cases would be high enough to
certain. provoke market exit.
Ongoing costs resulting from the need
to withhold services in cases where
conflict exists.
Government Possible need for government support
of exiting advisors.
Option F: Introduce a fiduciary-like statutory duty to act in the best
interests of clients, subject to a `reasonable steps' qualification and to
place client's best interests ahead of their own (best interest's
formulation)
3.97 Option F may preclude advisers from receiving commission
payments in many circumstances but not in all cases. For example, there
may be cases where it could be argued that the advisers' interests
coincided with those of the client and the commission could be payable in
those circumstances.
3.98 The benefit of the rule for consumers is that it encompasses the
benefits of the client first rule (option D), including that it reduces the
incidence of advice being compromised through conflicts, resulting in
sub-optimal outcomes for consumers of financial advice. More generally,
consumers will also benefit from advice that is in their best interests, as
advice may be compromised by remuneration and other conflicts. The
option strengthens the existing duties of intermediaries to ensure the
advice has a reasonable basis and is appropriate for the client's need.
52
Regulation impact statement
3.99 For persons conducting the business of financial advice, despite
the existence of equitable principles that have similar elements, there
would be transitional costs associated with ensuring that their business
structure and practice does not violate the rule. The costs include a review
of and/or changes to processes supporting the giving of advice, including
product selection, the scope of the approved product lists and training of
advisers. It is expected to increase the requirements for research and due
diligence before products are approved for sale, as they will need to be in
the client's best interest.
· The quantum of these changes, and costs involved, depend
on the extent to which businesses are structured to implement
the best interest's formulation, which is unknown.
3.100 While Option D requires that in the event of a conflict, an
adviser must not prefer their own interests over those of the client, it does
not require advisers to act in the client's best interest generally. However
Option F has the effect that an adviser must act in the client's best interest.
For example, if an adviser cannot recommend a product that is in the best
interests of the client from their own `approved product list' (APL) (a list
of products that their licensee has authorised them to sell), then the duty
may require them to search beyond the APL or recommend that the client
should see another adviser.
· Given this, there would likely be some rationalisation of
investment products, including the development of simpler
investment products for `approved product lists' (for
example, investment products based on standard age/asset
mixes).
3.101 The option does not propose an impractical standard on industry.
The duty will include a `reasonable steps' qualification, so that advisers
must take `reasonable steps' to discharge the duty but are not expected to
base their recommendations on an assessment of every single product
available in the market.
3.102 Industry already complies with a best interest test in relation to
obligations placed on responsible entities of managed investment
schemes. This means that there is already some understanding and
application of these principles within the Corporations Law.
The option will provide greater scope to the regulator to address consumer
detriment arising from sub-optimal product recommendations.
53
Corporations Amendment (Future of Financial Advice) Bill 2011
Benefits Costs
Consumers Consumers will benefit from advice that is There may be compliance costs passed
in their best interests, including more to consumers. Particularly in the short
appropriate product recommendations. tern, the cost of advice may increase.
Consumers will benefit from advice that is
not distorted by conflicts.
Potential for development of simpler
investment products for retail clients
Industry Clarification of the duty may offer some Transitional costs for some financial
savings in the longer terms as the conduct advice providers, including a review and
that is permitted and not permitted is or changes to procedures relating to the
certain. giving of personal advice to retail clients.
It is broadly consistent with other This includes costs for research and due
obligations in the Corporations Act. diligence requirements, scope of
approved product lists and training
Reasonable care qualification clarifies the requirements for advisers.
scope of the duty, in that it does not
impose an impractical standard on
advisers to base their recommendations
on an assessment of every single product
in the market.
Government Consumers will benefit from better quality
of advice and consumer outcomes.
The regulator is given greater scope to
address consumer detriment.
Consultation
3.103 The PJC undertook an extensive public consultation process in
developing its recommendations. During the inquiry, the PJC received
and considered evidence from a broad range of sources, including
investors, banks, industry bodies, advisers, product providers, consumer
groups, law firms and regulatory bodies. In addition, the PJC conducted
public hearings on the issues raised by the PJC.
3.104 Following the PJC inquiry, no further consultation was
undertaken by Treasury.
3.105 There will be further consultation with stakeholders on whether
the ban on conflicted remuneration structures should apply to risk
insurance (including group insurance).
Views on conflicted remuneration structures
3.106 In its report, the PJC noted it received considerable evidence
suggesting that the most effective way to improve the quality of financial
advice for consumers is to remove conflicts altogether by banning
commissions and other conflicted remuneration practices. The PJC
recommended, among other things, that the Government consult and
54
Regulation impact statement
support industry in developing the most appropriate mechanisms to cease
payments from product providers to financial advisers.
3.107 ASIC recommended, that in addition to banning commissions
and other incentives, asset-based fees also be banned, due to the
equivalent conflicts. Many other submitters indicated they favoured fee
for advice models: ANZ supports fee-for-service arrangements for the
provision of holistic advice, the Accounting Professional and Ethical
Standards Board consider advisers should adopt fee-for-service models,
The Institute of Actuaries of Australia think that commissions should not
be payable for advice, and the Institute of Chartered Accountants in
Australia consider that advisers should be remunerated based on `genuine
fee for service arrangements (that is, an asset based fee is not a genuine
fee for service), with an industry led solution. The Australian Investors
Association (AIA) supports an outright ban on commissions and asset
based fees. CHOICE supports a ban on 'remuneration incentives that are
inconsistent with fiduciary duties an adviser owes a client'. CHOICE
further suggests that ASIC should be given the power to outlaw particular
conflicts of interest where it is satisfied that disclosure and management
will not prevent inappropriate or biased advice. The Industry Super
Network (ISN) recommends a ban on commissions and other forms of
conflicted remuneration structures.
3.108 MLC favour a transition to fee for service models, which
includes the use of asset based fees but suggest an outright ban on
commissions is not appropriate.
3.109 The FPA gave evidence to the PJC that a client directed fee for
service model was the most important measure and that asset based fees
should be allowed under this model. The FPA stated that asset based fees
support the affordability of advice.
3.110 Some do not support a transition away from commission based
payments. The Stockbrokers Association of Australia (formerly the
Securities and Derivates Industry Association) think disclosure deals with
conflicts created by commissions. The Association of Financial Advisers
(AFA) and Millenium3 think that consumers and business should be able
to choose the remuneration structure that suits them and that the removal
of commissions will affect the affordability of comprehensive financial
advice. The Commonwealth Bank of Australia (CBA) note that
comprehensive advice is expensive and existing subsidies through
commissions make it affordable. Further that any regulation should be
industry based. APT Strategy argue that banning commissions would
ultimately have negative impacts on consumers through increased advice
costs. In its evidence to the PJC, the Investment and Financial Services
Association (IFSA) noted that removing existing fee structures would
increase the cost to consumers.
55
Corporations Amendment (Future of Financial Advice) Bill 2011
3.111 The Australian Compliance Institute acknowledge the
remuneration based conflicts but consider that alternatives other than fee
for service may be required, given concerns about affordability and access
to advice.
3.112 Some other submissions from adviser groups also did not
support an outright ban on commissions, some arguing that clients should
be able to choose remuneration methods and others argued the method of
payment for advisers is not important in addressing poor
quality/conflicted advice. There were a few submissions that suggest that
many planners would go out of business as a result of the changes.
3.113 The submissions did not address the direct implementation costs
to industry.
Fiduciary duty
3.114 A number of witnesses appearing before the committee
supported the imposition of an explicit fiduciary duty on financial
advisers, requiring them to give priority to their clients' interests ahead of
their own. ASIC's submission to the PJC inquiry supported a fiduciary
like duty.
3.115 Professional Investment Services did not oppose the
introduction of a statutory fiduciary duty, indicating that such a duty
already exists. The Trustee Corporations Association of Australia argued
that advisers should always place their clients' interests first. The
Australasian Compliance Institute (ACI) supported a fiduciary duty being
imposed on individual advisers.
3.116 ANZ's submission to the PJC noted that the obligation of
financial planners [those who provide holistic advice] to put the client's
interests first should be legislatively enshrined in order to formally
establish that financial advisers owe fiduciary duties to their clients.
3.117 Many submissions raise the possibility of introducing a fiduciary
duty and indicate their general support for this option. The submitters
below provided detail on how they saw the formulation of the duty.
3.118 ISN proposes that all advisers be required to act in their client's
best interest, and this obligation would replace the need for advice to have
a reasonable basis. The obligation would require the planner to give
clients their undivided loyalty, which means the financial planner must
strive to avoid any actual or perceived conflict of interest. Where a
conflict is unavoidable, a fiduciary must obtain `informed consent' of the
client which they say goes beyond the type of disclosure typically
provided in financial services. ISN say this duty does not lead to an
obligation to predict the best or highest performing products but state that
this requirement would require licensees to include a variety of product
types on its approved product list and would preclude volume based
payments.
56
Regulation impact statement
3.119 Choice proposes to establish a legal fiduciary duty on advisers,
either similar to options being considered in the US, or like that of the UK
where advisers are required to act in the best interests of clients, rather
current requirements to provide a `reasonable basis' for advice. Choice
also considers that the fiduciary duty would facilitate the removal of
commissions from the industry.
3.120 The FPA acknowledge and willingly accept the fiduciary
obligation and propose that a fiduciary relationship based on an obligation
to put the `Client's interest first'. Placing `Client's interests first' is
consistent with the fiduciary duty of loyalty and trust, which suggests that
a planner who undertakes to act on the client's behalf must not misuse the
position to their own or a third party's possible advantage. The FPA has
several concerns with the application of a `best interests' style
requirement for financial planners, one being that it would result in a
requirement for advisers to provide the best possible advice.
3.121 AMP supports the recommendation that financial planners act in
the best interests of their clients, however AMP considers that under the
general law, financial advisers already have a fiduciary obligation to their
clients in many aspects of their relationship. It is argued that section
945A of the Corporations Act (requirement to have a reasonable basis for
advice) contains a stricter application than a fiduciary duty as it imposes
an objective standard that an adviser must meet in preparing and giving
advice. AMP believes this extends beyond a fiduciary duty which would
require planners to act honestly, for a proper purpose, and to obtain
consent to any collateral benefits. AMP thinks it is important that the
duties applying to advisers are consistent with other professions.
3.122 The Association of Financial Advisers (AFA) told the
committee that the category 'financial adviser' should be legislatively
defined before a fiduciary duty could be imposed by legislation.
Conclusion and recommended option
3.123 Option A does not sufficiently address the objectives of
Government action, notwithstanding that there may be some benefits to
consumers from simplified fee disclosure, which is consistent with other
current (or planned) regulation and would offer a much relatively lower
compliance burden than the other options.
3.124 Further, Option C does not sufficiently address the objectives of
Government action, as industry moves to transition away from
commission based payments are limited in scope (both in terms of the
types of payments covered and which products they apply to). This limits
the effectiveness of industry led action.
3.125 While Option D is attractive, it is not preferred because it would
introduce a degree of complication and uncertainty due to the limitation of
57
Corporations Amendment (Future of Financial Advice) Bill 2011
the duty to circumstances where the client and the adviser's interests are
in conflict. Further, the duty would not, however, be strong enough to
require the adviser (or authorised representative) to ensure that products
recommended from their `approved product list' were not only
appropriate but also in the best interests of the client.
3.126 Option E is also not preferred, because notwithstanding its
benefits in addressing Government objectives, the costs and potential
industry impact are too prohibitive.
3.127 The preferred option is a combination of options B (legislative
ban on conflicted remuneration structures) and F (best interest's
formulation). The options impose a ban on conflicted remuneration
structures and also introduce a fiduciary-like best interests formulation
(which supports the ban on conflicted remuneration structures). The best
interests formulation recognises that many conflicts exist but places
additional obligations on advisers which reflect the possible detriment to
consumers arising from these conflicts and imposes a general requirement
for advisers to act in the best interests of their clients when giving
personal advice. The best interest's formulation also encompasses the
benefits of Option D.
3.128 A combination of Options B and F was found, on balance of the
potential costs, benefits and risks considered for each option, to yield the
greatest net benefit to the community. The analysis of impacts however,
was limited because there was insufficient quantitative evidence about the
costs and benefits associated with each option. The impact analysis and
recommendations is largely based on a high level assessment of the
potential qualitative impacts. The recommended options are however
expected to have a very significant impact in this market.
Implementation and review
3.129 Treasury and ASIC will work closely with industry to devise an
implementation strategy. There will be an appropriate implementation
period. The ban on conflicted remuneration structures may be progressed
in phases.
3.130 Further public consultation on any draft legislation
implementing the recommendations is also envisaged prior to introduction
of the Bill into Parliament.
3.131 ASIC will need to closely monitor and enforce the ban, in
particular to monitor for developments that may see these payments be
progressed through alternative mechanisms. The Government will also
continue to monitor the application of the regime to ensure that it is
operating effectively.
58
Index
Schedule 1: Amendments
Bill reference Paragraph number
Items 2 to 9 2.1
Item 2, paragraph 913B(1)(b) 2.22
Items 2 and 4, paragraphs 913B(1)(b) 2.27
Item 3, paragraph 913B(4)(a) 2.26
Item 4, paragraph 915C(1)(aa) 2.24
Items 5 and 7, paragraphs 920A(1)(ba) and 920A(1)(f) 2.30, 2.31
Item 6, paragraph 920A(1)(d) 2.33
Item 6, paragraph 920A(1)(da) 2.36
Item 8, paragraphs 920A(1)(g) and (h) 2.37
Item 9, paragraph 920A(1)(1A 2.33
Item 9, paragraph 920A(1)(1B 2.39
Item 10, division 3, subsection 962C(3) 1.21
Item 10, division 3, subsection 962G(1) and section 962J 1.22
Item 10, division 3, subsections 962H(1)&(2) 1.23
Item 10, division 3, subparagraph 962H(2)(d) 1.24
Item 10, division 3, subsection 962H(3) 1.25
Item 10, Division 3, subsection 962F(1) 1.27, 1.37
Item 10, division 3, subsection 962F(2) 1.28, 1.38
Item 10, division 3, subsection 962F(3) 1.29, 1.39
Item 10, division 3, subsection 962F(1) 1.31, 1.41
Item 10, division 3, subsection 962G(2) 1.32
Item 10, division 3, subsection 962K(1) and section 962L 1.33
Item 10, division 3, subsection 962K(2) 1.34
Item 10, division 3, subsection 962K(3) 1.42
Item 10, division 3, section 962J and subsection 962L(1) 1.43
Item 10, division 3, section 962M 1.46
Item 10, division 3, section 962N 1.47
Item 10, division 3, section 962P 1.50
Item 10, division 3, sub section 962E(1) 1.52
59
Corporations Amendment (Future of Financial Advice) Bill 2011
Item 10, division 3, subsection 962E(2) 1.54
Item 10, division 3, section 962Q 1.56
Item 10, division 3, sections 962R & 962S 1.57
Item 10, division 3, subsection 962S(2) 1.58
Item 10, division 3, section 962D 1.59
Item 10, division 3, section 962R 1.62
Item 10, division 6, section 965(1) 1.63
Item 10, division 6, section 965(2) 1.64
Item 10, division 3 1.1
Item 10, division 1, sections 960 and 960A 1.10
Item 10, division 3, sections 962, 962A and 962B 1.11
Item 10, division 3, sections 962 & 962A 1.12
Item 10, division 3, subsection 962A 1.13
Item 10, division 3, subsection 962A(3) 1.15
Item 10, division 3, subparagraphs 962A(3)(a), (b) & (f) 1.16
Item 10, division 3, subparagraphs 962A(3)(e) 1.17
Item 10, division 3, subsections 962A(4)&(5) 1.18
Item 10, division 3, subsection 962A(5) 1.19
Item 10, division 3, subsections 962C(1)&(2) 1.20
Items 11 and 12, division 6 1.65
Item 13, division 6, section 1317GA 1.30, 1.40, 1.66
60
Index]
[Search]
[Download]
[Bill]
[Help]