FOFA and Conflicted Remuneration
Christina Kalantzis, Principal - Alexis
Compliance
Premium Wealth Management Limited
22 November 2012
Overview
 FOFA Status update

Early adopters

Update on FOFA Regulations

Code of Conduct
 Best Interest Duty

The Advice Process (s961B), Advice Quality (s961G)

Conflicts of Interest (s961J)
 Conflicted Remuneration

Volume based benefits

Performance benefits for employees

Asset based fees on borrowed amounts

Anti avoidance
FOFA Status Update
Race to become FOFA Compliant
“.. In respect if this law, an amendment was moved and accepted
in the House of Reps to allow for a voluntary commencement
date of 1 July 2012. With an effective date of 1 July 2013.
… This will allow providers in the industry to do what they do
best:compete with each other to ensure that there is a race to
become FOFA compliant…
… I think that we will see such a race to ensure compliance with
FOFA and that particular firms and advisers will then advertise
their compliance to the market. It will be means of attracting
customers..”
Source: senator Matt Thistlewaite (ALP - NSW) made the statement in the Senate
on Tuesday 19th June 2012.
FOFA Background
 2009 PJC Report
 Government responded to PJC
 13 October 2011 - the House referred the Corporations
Amendment( Future of Financial Advice) Bill 2011
 24 November 2011 the House referred the Corporations
Amendment( Further Future of Financial Advice Measures) Bill
2011
 21 June 2012 the Senate passed the package after introduction of
Corporations Amendment (Further Future of Financial Advice
Measures) Bill 2012
 Received Royal assent on 27 June 2012
Status of Regulations
 3 batches of Regulations
Batch 1 - released 23 May 2012 - responses due 5 June 2012
 Batch 2 - released 23 May 2012 - responses due 5 June 2012
 Batch 3 - released 14 June 2012 - responses due 28 June
2012
 The regulations have provided information regarding;
 Disclosure in FSGs and SOAs for soft dollar benefits
below the prescribed amount
 Product fees are no ongoing fee arrangements
 Prescribed amount of soft dollar is $300
 Ban on conflicted remuneration for inside super starts on
1 July 2013.

Status of Regulatory Guides
 ASIC Powers - released in June 2012
 CP 182 Best Interest duty - released 9 August 2012 - responses
due 20 Sept 2012
 CP 183 Scaled Advice - released 9 August 2012 - responses due
20 Sept 2012
 CP 189 Conflicted Remuneration - 28 due September 2012 -
responses due 9 Nov 2012
 CP Codes of conduct - ???
Best Interest Duty
.. the best interests duty is a legislative requirement
to ensure the processes and motivations of financial
advisers are focused on what is best for their clients.
It is true that this will ultimately lead to better advice
in many cases, but first and foremost it is about
regulating conflicts, not the intrinsic quality of the
advice provided…
Source: Hon Bill Shorten, Minister for Financial Services and
Superannuation, second reading speech to the Corporations
Amendment (Further Future of Financial Advice Measures) Bill 2011.
Best Interest Duty s961B
1. Identity the objectives, financial situation and needs
2.
3.
4.
5.
of the client “that were disclosed to the provider by
the client through instructions”
Identified the subject matter of the advice sought
s961B(2)(b)(i)
Identified the “reasonable relevant” objectives,
needs and circumstances
Make reasonable inquiries where information is
incomplete or inaccurate
Consider whether you have the expertise to provide
the advice (and decline if you do not)
Best Interest Duty s961B
6. If “reasonable to consider recommending a
financial product” investigate the products and
assess the information you gather
7. Base all your judgements on the client’s relevant
personal circumstances
8. Take any other step that “would reasonably be
regarded as being in the best interests of the client”
“meeting the objectives , financial situation and needs of the client
must be the paramount consideration when going through the
process of providing advice..”
CP 182 “Instructions”
Instructions can be provided through a face-to-face
meeting, by phone or email or by “entering
information into an online form or program”, and
instructions can be provided over a period of time and
a series of communications.
CP 182 “Capacity to pay”
CP182, ASIC notes that the client’s capacity to pay, or
willingness to pay for advice is a mechanism by which
advisers can determine the type of service they choose
to provide.
The adviser must act in the best interest of the client,
an adviser can filter the service provided by cost and
either decline to provide advice or offer the client
alternative options such as factual information,
general advice or a referral to anther adviser.
CP 182 “Switching and APLs”
175.A127
We consider that the advice will generally only be appropriate if
it would be reasonable to conclude that the net benefits that are
likely to result from the new product (or option) are better than
under the existing product (or option). This applies where either
the new product or the existing product is (or both products are)
a financial product under Ch 7.
CP 182 “Switching and APLs”
175.A128
Advice will often be appropriate under s961G if there are overall
cost savings for the client that are likely to override the loss of
benefits that are of value to the client.
175.A129
The determination of whether there are overall cost savings for
the client must take into account all the circumstances, including
the cost of the replacement (i.e. making the switch) and the
advice provider fees, if they are payable only if the switch is
made.
CP 182 “Other Obligations”
ASIC intend to administer the best interest duty “in light of other
obligations that apply to AFSL and their reps” (CP183.30 Giving information, general advice and scaled advice) including:
 Common law obligations (including the duty of care and
fiduciary duties)
 Contractual obligations
 Industry standards and codes
 Regulatory requirements (Corps Act and ASIC Act)
 Trustee duties and obligations
 RE duties and obligations
CP 182 “Good Advice”
ASIC (CP175.A23) consider that good advice processes (and quality
advice) are based on:
(a)
a clearly defined scope and an investigation of the client’s
relevant circumstances;
(b)
assistance given by the advice provider to the client, if
required, to set prioritised, specific and measurable goals
and objectives;
(c)
where relevant, consideration of potential strategies and
options that are available to the client to meet their
objectives and needs;
(d)
where relevant, consideration of all aspects of the impact of
the advice or example, tax or social security consequences;
CP 182 “Good Advice”
(CP175.A23)
(e)
good communication with the client.
This includes:
(i)providing a Statement of Advice (SOA) that is logically
structured and easy to understand, if one is required; and
(ii)if appropriate, depending on how the advice is provided,
verbal interactions that aim to ensure that the advice and
recommendations are understood; and
(f)
where relevant, strategic and product recommendations
that are appropriate for the client’s relevant circumstances.
CP 182 “Other steps”
ASIC recommends that the following steps help demonstrate
compliance with the “good advice” requirement;
 Clearly explain what advice services are being provided (and
what is executed);
 Provide strategic recommendations that benefit the client;
 Specify that the advice (and its continuing appropriateness)
should be regularly reviewed; and
 Offer to provide advice on “any other key issues identified by the
advice provider that are not part of the scope of the advice” (RG
175.A111).
CP 182 “Safe harbour”
Other reasonable steps
Section 961B(2)(g) of the safe harbour for the best interests duty
provides that an advice provider needs to take any other step
that, at the time the advice is provided, would reasonably be
regarded as being in the best interests of the client, given the
client’s relevant circumstances.
The words at the time the advice is provided mean that this
provision does not consider what may have been in the client’s
best interests in hindsight.
The Revised Explanatory Memorandum states that:In satisfying
this final step [s961b(2)(g)], [an advice] a provider will need to go
further than in the previous more specific steps [s961b(2)(a)(f)],
and will have to take any step necessary to demonstrate that it
has acted in the best interests of the client (paragraph 1.43).
CP 182 “Client priority rule”
The client priority rule is an active duty and is not simply a matter
of disclosure.
RG175.A142
Using information barriers to avoid becoming aware of a
conflicting interest of a related party would breach s961J if the
advice provider should reasonably have known about the conflict.
RG175.A143
Section 961J(1) requires that an advice provider should not act to
further their interests over those of the client when giving the
client advice. In complying with this obligation, advice providers
should be guided by what an advice provider without a conflict of
interest would do.
CP 182 “Client priority rule”
The client priority rule does not prohibit an adviser
from accepting remuneration from sources other than
the client but if the adviser priorities non-client
sources over the interests of the client then the adviser
has contravened this rule.
CP 182 “Client priority rule”
RG175.A148
The conflicts priority rule means that:
(a)
an advice provider must not recommend a product or
service of a related party to create extra revenue for
themselves, their AFS licensee or the related party, where
additional benefits for the client cannot be demonstrated;
(b)
an advice provider must not “over-service” the client to
generate more remuneration for themselves or one of their
related parties. This means that the advice provider must
provide a level of service commensurate with the client’s
needs. Eg you must not recommend an unduly complex
strategy if the client is unlikely to seek ongoing advice; and
(c)
an advice provider must recommend non-financial product
solutions relevant to the client’s situation, where
appropriate, even if this means the client is less likely to
need financial advice in the future (e.g. advice on debt
reduction, estate planning and/or Centrelink benefits).
CP 183 “Information,General Advice and
Scaled advice”
 All advice is scaled.
 CP183- Giving information, general advice and scaled advice
(August 2012) ASIC distinguished between financial product
advice and factual information by their qualitative nature.
 Financial product advice:generally involves a qualitative
judgement about - or evaluation, assessment and comparison of some or all of the features of a financial product.
 Factual information: is objectively ascertainable information,
the truth or accuracy of which cannot be questioned”.
CP183.25
The role of the client
 The advice relationship involves reciprocal duties and
involves a partnership between the client and the
adviser.
 The adviser relies on the client, after necessary
enquiries, to provide them with accurate information
on their financial and personal circumstances to
enable them to act in the client’s best interests.
 Professional advice is to present consumers with
choices that they understand and value.
CP 189 Conflicted Remuneration
The Corporations Act prohibits:
(a)
AFS licensees and their representatives (including
authorised representatives) from accepting conflicted
remuneration (s963E, 963G and 963H);
(b)
product issuers and sellers from giving conflicted
remuneration to AFS licensees and their representatives
(s963K); and
(c)
employers from giving their AFS licensee or representative
employees conflicted remuneration for work they carry out
as an employee (s963J).
CP 189 Conflicted Remuneration
Conflicted remuneration is any benefit given to an AFS licensee,
or its representative, who provides financial product advice to
retail clients that, because of the nature of the benefit or the
circumstances in which it is given, could reasonably be expected
to influence:
(a)
the choice of financial product recommended to clients by
the AFS licensee or representative; or
(b)
the financial product advice given to clients by the AFS
licensee or representative: s963A
CP 189 Examples of Conflicted
Remuneration
Examples:
(a) upfront and trailing commissions paid by a product issuer to a
licensed dealer group, whether the payment is made directly or
through some other arrangement, such as through a non-cash
payment facility;
(b) volume-based payments from a platform operator to a licensed
dealer group; and
(c) volume-based bonuses and other payments, such as a
commission or one-off payment, to a financial adviser, which is
calculated by reference to the number or value of financial
products acquired by clients based on the advice of the financial
adviser. The payment could be made by:
(i)
(ii)
(iii)
the financial adviser’s dealer group;
a platform operator; or
a product issuer.
CP 189 Substance of the “benefit”
ASIC in deciding whether a benefit is conflicted remuneration, will
look at the substance of a benefit over its form, and consider
the overall circumstances in which the benefit is given.
In forming a view on whether a benefit is conflicted remuneration,
ASIC will look at a range of factors, including:
(a) how the AFS licensee or representative gains access to the
benefit;
(b) who is giving the benefit;
(c) when the benefit is given;
(d) what reasonably appears to be the likely reason why the benefit
is being given;
(e) how the value of the benefit is determined; and
(f) what the benefit is and its features.
CP 189 “Benefit Value”
We propose that a benefit is more likely to be conflicted
remuneration if:
(a)
(b)
its value is greater than $300 for each AFS
licensee or representative that receives the
benefit; or
for benefits that are given on a frequent or
regular basis, the combined value of all benefits
given is greater than $300 for each AFS licensee
or representative that receives the benefit:
CP 189 Other banned
remuneration
In addition to the ban on conflicted remuneration, the
Corporations Act prohibits other forms of remuneration that
have the potential to influence the financial product advice
received by retail clients. The other forms of remuneration that
are generally prohibited are:
(a) a platform operator accepting a volume-based shelf-space fee
from a funds manager; and
(b) an AFS licensee, or its representative, who provides financial
product advice to a retail client charging asset-based fees on
borrowed amounts used to acquire financial products by, or on
behalf of, the client
CP 189 Anti - avoidance
Section 965
There is also a ban on entering into or carrying out a
scheme that is designed to avoid the application of
the provisions in Pt 7.7A of the Corporations Act,
including the conflicted remuneration provisions
CP 189 Volume based benefits
 Volume-based benefits are presumed to be conflicted
remuneration: s963L.
 ASIC consider that the size of a benefit, and the portion of the
benefit that is volume based compared with the portion that is
not, are relevant when looking to prove that a volume-based
benefit is not conflicted remuneration
 ASIC propose that volume-based benefits that may be conflicted
remuneration include:where a platform operator or other
product issuer is also a licensed dealer group, benefits received in
its capacity as platform operator or other product issuer and
equity arrangements with representatives.
CP 189 Volume based benefits
 ASIC propose that, in some circumstances:a volume-based
benefit may not be conflicted remuneration if it is passed on to
the client and
 ASIC are less likely to scrutinise a benefit that is not passed on to
the adviser, if certain controls are in place.
CP 189 Performance benefits for
employees
 Not all performance benefits given to employees are conflicted
remuneration.
 ASIC propose that employers should consider:

the eligibility criteria for the performance benefit;

how difficult it is for staff to meet these criteria;

the purpose of the performance benefit;

the proportion of the benefit that is volume based;

the link between the benefit and the financial product advice
provided to clients; and

the proportion of the benefit to the overall remuneration of the
employee.
CP 189 Performance benefits for
employees
Remuneration based on total profitability
If an employee is remunerated based on the total profitability of
their employer or the business unit in which they work, and not
the employee’s individual sales, we consider this is less likely to
be conflicted remuneration if the size of the business unit is large
enough that the impact of the individual employee’s sales on the
profitability of their employer or the relevant business unit could
not reasonably be expected to influence the financial product
advice.
CP 189 Volume base shelf space
fees
The Corporations Act prohibits a platform operator from
accepting a benefit if it is a volume-based shelf-space fee:
s964A(1). The purpose of the ban is to prevent:
[t]he receipt by platform operators of volume-based benefits to
the extent that such incentives are merely a means of product
issuers or funds managers “purchasing” shelf space or
preferential positions on administration platforms (paragraph
2.61 of the Revised Explanatory Memorandum).
CP 189 Volume base shelf space
fees
The presumption in s964A(2) does not apply if the platform
operator can prove that one of the following applies to all or part
of the benefit:
(a)
(b)
the benefit is a reasonable fee for a service provided to the
funds manager by the platform operator or another person
(fee-for-service exclusion);
the benefit is a discount on an amount payable, or a rebate
of an amount paid, to the funds manager by the platform
operator, the value of which does not exceed an amount
that may reasonably be attributed to efficiencies gained by
the funds manager because of the number or value of
financial products in relation to which the funds manager
provides services to the platform operator, or through the
platform operator to another person (scale efficiencies
exclusion): s964A(3).
CP 189 Asset based fees on
borrowed amounts
 AFS licensees and authorised representatives that provide
financial product advice to retail clients are generally prohibited
from charging asset-based on borrowed amounts that are to be
used to acquire financial products by or on behalf of a client: see
s964D and 964F.
 If an AFS licensee or representative is found to have charged
asset-based fees on borrowed amounts, they may be liable for a
civil penalty.
CP 189 Asset based fees on
borrowed amounts
When does the ban not apply?
 The ban on charging asset-based fees will not apply to an AFS
licensee or authorised representative if they do not know that an
amount used to acquire financial products by or on behalf of a
client has been borrowed, as long as this fact is not reasonably
apparent.
CP 189 Asset based fees on
borrowed amounts
 When a client has a portfolio of products purchased with a
combination of borrowed and non-borrowed amounts, we
consider that:
 (a)if the financial products purchased with borrowed amounts can
be separately identified from the financial products purchased
with non- borrowed amounts, asset-based fees can be charged
on the proportion of the portfolio purchased with non-borrowed
amounts; and
 (b)if the financial products purchased with borrowed amounts
cannot be separately identified, asset-based fees should not be
charged over the whole portfolio. This is because it is not clear
which financial products the borrowed amounts have been used
to acquire.
Any questions?
Christina Kalantzis, Principal
ALEXIS Compliance & Risk Solutions
www.alexisrisk.com.au
www.alexisinsurance.com.au
COMPLIANCE - PI INSURANCE -RISK MANAGEMENT