The Corporations Amendment (Financial Advice Measures) Act 2016 contains a number of amendments made to the Future of Financial Advice (“FOFA”) reforms. The key components of these reforms include the following:
|Best interests duty||The best interests duty means advisers are required to act in the best interests of their retail clients and place their clients’ interests ahead of their own when developing and providing personal advice. |
The Australian Securities and Investments Commission (“ASIC”) provides guidance on the modified best interests duty in Regulatory Guide 175 Licensing: Financial product advisers—conduct and disclosure (“RG 175”), which covers the following areas:
• acting in the best interests of the client;
• providing appropriate personal advice;
• warning the client if advice is based on incomplete or inaccurate information; and
• prioritising the interests of the client.
The modified best interests duty will not apply if an agent or employee of an Authorised Deposit-Taking Institution (“ADI”) provides advice sought by the client that is solely in relation to a basic banking product or general insurance products.
Financial advisers can establish that they have met this requirement by undertaking a number of specified steps to assist in determining what the best interests of the client are. If advisers seek to establish that they have met the best interests duty by taking the steps referred to above, they must take any other reasonable steps (in addition to those specified) if it would have been in the best interests of the client to do so at the time the advice was given.
|Opt-in and fee disclosure||Advisers will be required to request their retail client’s opt-in, or renew, their advice agreements every two years if the ongoing fee arrangement commenced after 1 July 2013. In addition, an annual fee disclosure statement outlining the fees charged and services provided in the previous twelve (12) months must be provided to clients paying ongoing fees. A fee disclosure statement only needs to be provided during a twelve (12) month period or where the ongoing arrangement was entered into after 1 July 2013. As such, a fee disclosure statement is not required to be provided for arrangements entered into before 1 July 2013. |
This means advisers will be in regular contact with their clients and will need to demonstrate the value of the services they are providing their clients. While a client can terminate an ongoing agreement at any time, it is assumed that if they do not actively renew the agreement within the renewal period they have chosen to opt out of the ongoing fee arrangement. An ongoing fee arrangement will continue to exist unless it is terminated by the client or the fee recipient through the opt-out system.
|Ban on conflicted remuneration||The ban on conflicted remuneration means that licensees and authorised representatives will not be allowed to give or receive payments or non-monetary benefits, including commissions if the payment or benefit could reasonably be expected to influence financial product recommendations or financial product advice provided to retail clients. |
The Corporations Amendment (Financial Advice Measures) Act 2016 contains the following amendments:
• benefits on general advice are deemed to not be conflicted remuneration provided that certain conditions are met;
• execution-only provisions apply if monetary benefits are given in relation to the issue or sale of a financial product and the individual receiving the benefit has not provided financial advice associated with the product being sold;
• education relating to the carrying on of a financial services business is not deemed to be conflicted remuneration; and
• benefits given in relation to basic banking products and consumer credit insurance products are not considered conflicted remuneration.
Exceptions to the ban on conflicted remuneration are provided in certain circumstances. ASIC has made it clear that it will look to substance, rather than form, when determining a breach (so simply renaming a banned commission will not pass the test). Volume based benefits, where access to the benefit is dependent on the total number or value of financial products of a particular class or classes is presumed to be conflicted but it will be open to advisers to prove that they are not. This reform aims to encourage financial advisers to become more client-focused, as more of their fees will be paid directly by the client rather than indirectly through product commissions.
|Ban on soft-dollar benefits||Non-monetary (‘soft-dollar’) benefits given to advisers who provide financial product advice to retail clients are considered conflicted remuneration. There are exceptions to the ban for benefits such as (subject to qualifying criteria):|
• information technology support or software;
• education and training; and
• benefits that are below $300 in value.
|Scaled advice||Scaled advice will apply to all industry sectors, including super, financial planners, and banks and insurers, and includes practical guidance and examples about giving scaled personal advice, as well as practical examples about giving factual information and general advice to clients. |
ASIC’s guidance in this area indicates:
• All advice is scaled to some extent – advice is either less complex or more complex along a continuous spectrum (i.e. there are not two categories of advice ‘scaled’ and ‘holistic’);
• In general, the same rules, including the best interests duty, apply to all personal advice, regardless of the scope; and
• It is possible to provide less complex advice in a way that is consistent with the best interests duty and the law generally.
Scaled advice is personal advice about a specific area of an investor’s needs, for example insurance, or about a limited range of issues. This is in contrast to traditional ‘holistic’ advice where advice is provided on all aspects of the client’s financial circumstances in a full financial plan. This will enable consumers to access beneficial advice at an affordable cost.