In passing the FoFA Bills the House of Representatives made a number of amendments to the terms of the Bills that were originally introduced into the Parliament.
The amendments address some but not all of the issues identified in reports published by the parliamentary committees which held inquiries into the Bills. The amendments do not include the deferral of the date for mandatory compliance with the measures from 1 July 2012 to 1 July 2013. Deferral may be effected by amendments in the Senate or by separate legislation.
The FoFA Bills are the Corporations Amendment (Future of Financial Advice) Bill 2011 and the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011. Our alerts on these Bills, as originally introduced into the Parliament, are available here and here. The reports of the Parliamentary Joint Committee on Corporations and Financial Services and the Senate Economics Committee are available here and here.
The amendments made by the House of Representatives address various aspects of the FoFA measures.
The Bill has been amended to give ASIC the power to exempt an adviser who is bound by a code of conduct approved by ASIC for the purpose of the section from the requirement to receive a renewal notice every 24 months (“opt-in”). In Parliament Minister Shorten said that ASIC could approve more than one code of conduct. A code of conduct can be approved by ASIC if ASIC is satisfied that the code of conduct “obviates” the need for the opt-in requirement. Other matters may be prescribed by regulations.
In addition, the provisions relating to ongoing fee arrangements have also been refined as follows:
The original anti-avoidance provision was very broad. Now, the anti-avoidance provision will not apply to the extent that it would result in an unjust acquisition of property within the meaning of paragraph 51(xxxi) of the Constitution. While any narrowing of the provision is welcome, the scope of this narrowing based on paragraph 51(xxxi) of the Constitution is very unclear. For example, it does not provide any real certainty about which pre-commencement schemes may be caught by anti-avoidance and which will not be caught. This practice of drafting legislation in a way which requires people to consider questions of constitutional law in order to understand the primary scope of operation of legislation (as distinct from questioning whether legislation may be unconstitutional in whole or part) is regrettable.
The Bill has also been amended to make it clear that any regulations which make further provision about grandfathering in relation to conflicted remuneration can extend to benefits given by platform operators.
One of the exceptions to the definition of conflicted remuneration is for “execution-only” services. The original exception would only apply where financial product advice in relation to a product (or class of products) had not been given to a retail client by the licensee or representative. Now, the exception will be available so long as advice has not been given in the 12 months immediately before the benefit is given. This broadening of the exception is welcome.
There has been a lot of discussion about whether “scaled advice” will be able to be given while still complying with the proposed new “best interests” obligation. The Government has taken into account the concerns that have been expressed. However, rather than amending the text of the applicable provisions, a new “explanatory note” has been added at the end of the list of required steps under the best interests obligation:
The matters that must be proved under [the best interests steps] relate to the subject matter of the advice sought by the client and the circumstances of the client relevant to that subject matter (the client’s relevant circumstances). That subject matter and the client’s relevant circumstances may be broad or narrow, and so the subsection anticipates that a client may seek scaled advice and that the inquiries made by the provider will be tailored to the advice sought.
While the willingness to address the issue expressly is welcome, the way in which it has been done is not ideal.
Under the last, “catch all” best interests step (the notorious “paragraph (g)”), the adviser must take any other step that would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances. Now, the adviser will have 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. Again, this refinement is welcome but in substance leaves unanswered the likely operation of the “catch all” step in any particular circumstances.
A number of other announced FoFA reforms are not included in the FoFA Bills. These include rules for intra-fund advice, the amended retail/wholesale client test, a statutory compensation scheme and the accountant’s AFS licence exemption.