Lawyers set out FOFA consequences

by |
Keeping your head around what FOFA is now and what FOFA is proposed to become can be, at times, onerous. Halsey Legal Services set out changes to key amendments as clear as day – so you can get on with making that FOFA submission (which closes 19 February) and most importantly, looking after your clients.
Removal of opt-in obligation
Current law: Advisers who have an ongoing fee arrangement with retail clients (where the ongoing fee arrangements commenced after 30 June 2013) must obtain their clients' agreement at least every two years to continue the ongoing fee arrangement. Advisers do this through a renewal notice. The ongoing fee arrangement terminates if the client decides not to renew, or fails to respond to the renewal notice.
Proposal:  Removal of the requirement for advisers to obtain their client's approval at least every two years in order to continue the ongoing fee arrangement. Therefore, under the new law, an "opt-out" system will apply where an ongoing fee arrangement continues to exist unless the arrangement is terminated by either the client or the fee recipient adviser.

Amending the annual fee disclosure statement requirements to only apply to clients who entered such arrangements after 30 June 2013
Current law: Advisers must give all retail clients who have an ongoing fee arrangement (a fee for ongoing services for a period longer than 12 months) a fee disclosure statement which shows fees paid by the client, the services the client received, and the services the client was entitled to receive, in the previous 12 months.
Proposal: Annual fee disclosure statements are only required for arrangements entered into after 30 June 2013 where clients are charged an ongoing fee during a period of more than 12 months. Annual fee disclosure statements will not be required for any ongoing fee arrangements entered into before 1 July 2013.

Amending the best interests duty to allow for scaled advice to be provided to the clients
Current law: The existing best interests duty requires that advisers make investigations into their clients' broader objectives, financial situation and needs before providing scaled advice. However, there is uncertainty as to whether the client and/or the adviser can agree to reduce the scope of the advice.
Scaled advice is advice about a specific client need, such as insurance or superannuation. This contrasts with holistic advice where an adviser makes extensive enquiries about the client's circumstances, needs and objectives and provides advice to the client on all aspects of their financial circumstances in a full financial plan.
Proposal:  The Government proposes to facilitate scaled advice by amending the requirements around the best interests obligation. Subsection 961B(2) of the Corporations Act 2001 provides a number of steps an adviser must take in order to satisfy the best interests obligation. The Government intends to introduce a new subsection 961B(4A) to clarify that nothing in subsection 961B(2) prevents the client agreeing the subject matter of the advice sought with the adviser.
The Government recognises a clear public benefit from scaled advice, because this is often cheaper than traditional holistic advice and, as a result, enables many consumers to access advice they could otherwise not afford.

The removal of the "catch-all" provision of the best interests duty
Current law:  Advisers must act in their clients' best interest when providing personal advice.  Subsection 961B(2) of the Corporations Act 2001 provides seven broad steps that an adviser can take to satisfy the best interests duty. These steps have become known as the "safe-harbour" provisions and were initially intended to provide some guidance and certainty about the adequacy of the advice process. However, the seventh step includes a catch-all provision which states that an adviser must prove that they have taken "any other steps" (in addition to the six preceding ones) that would reasonably be regarded as being in the best interests of the client. This last step reintroduced significant uncertainty into the process. 
Proposal:  The Government's proposes to remove the so-called catch-all seventh step.
Conflicted Remuneration - Exempting remuneration for general advice from the ban on conflicted remuneration
Current law:  The ban on conflicted remuneration applies to general advice (financial product advice that does not take into account the client's objectives, financial situation and needs).
Proposal:  The ban on conflicted remuneration for general advice is removed.

Conflicted Remuneration - Changes to the ban on conflicted remuneration for life risk insurance inside superannuation 
Current law:  Benefits paid in relation to life risk insurance offered inside superannuation are largely  banned, including where advice is provided to fund members on their life risk insurance coverage. Monetary benefits in relation to life risk insurance offered outside of superannuation are exempt from the ban on conflicted remuneration. 
Proposal: The ban will only apply to monetary benefits paid in relation to life risk insurance products inside superannuation where:
(a)  no personal financial advice about life risk insurance has been provided; or
(b)  coverage is provided in relation to MySuper.

Conflicted Remuneration – Clarification relating to the "execution-only" exemption
Current law:  Benefits paid for execution only services (in respect of the issue or sale of financial products) are exempt from the ban on conflicted remuneration except where a person within the licensee group (of the person receiving the benefit) has provided advice on that product, or class of product, to the client in the previous 12 months.  In theory, this could mean that an authorised representative of a major national AFS licensee working in Western Australia could find themselves inadvertently breaking the law by accepting remuneration in relation to execution-only services provided to a client who had recently moved from Victoria to live in Western Australia, and who had received advice in relation to that class of financial products from a Victorian adviser in the past 12 months who just happened to work for the same national AFS licensee.
Proposal:  Execution only benefits may be received except where advice on that product, or class of product, has been provided to the client in the previous 12 months by the same individual.

Conflicted Remuneration – Education and training benefits
Current law:  Education and training benefits are not allowed, except for education and training relating to the provision of "financial product advice".  
Proposal: The Government's proposed amendments will change the law to facilitate industry attempts to up-skill. Education and training benefits that relate to conducting a financial services business will be allowed.

Conflicted Remuneration – Clarifying volume-based shelf-space fees
Current law:  Platform operators are prohibited from receiving volume-based shelf-space fees from product issuers for preferential treatment by the platform operator. 
Proposal:  Amend the ban on volume-based shelf-space fees to clearly identify the benefits the ban is intended to capture.

Conflicted Remuneration – Client-pays exemption
Current law:  Some benefits paid by a client to a licensee or representative are exempt from the ban on conflicted remuneration. 
Proposal:  Where the benefit is given at the direction of the client and with the client's clear consent, it will be acceptable whether the benefit is paid directly by the client, or indirectly by another party.  These proposed amendments seem to be broadly consistent with the position already taken by ASIC in Regulatory Guide 264.

For more publications from Halsey Legal Services, click here.