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2013-2014
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
CORPORATIONS AMENDMENT (STREAMLINING OF FUTURE OF
FINANCIAL ADVICE) BILL 2014
EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Treasurer, the Hon J. B. Hockey MP)
Table of contents
Glossary .................................................................................................. 1
General outline and financial impact ....................................................... 3
Chapter 1 Best interests obligation ................................................. 7
Chapter 2 Ongoing fee arrangements .......................................... 17
Chapter 3 Conflicted remuneration and other banned
remuneration ............................................................... 25
Chapter 4 Statement of Compatibility with Human Rights ............ 39
Chapter 5 Regulation impact statement ....................................... 43
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
ADI Authorised Deposit-taking institution
ASIC Australian Securities and Investments
Commission
Corporations Act Corporations Act 2001
Corporations Regulations Corporations Regulations 2001
Dissenting Report Dissenting Report by Coalition members of
the Parliamentary Joint Committee on
Corporations and Financial Services inquiry
into the FOFA Bills
FOFA Part 7.7A of the Corporations Act 2001, as
introduced by the Corporations Amendment
(Future of Financial Advice) Act 2012 and
the Corporations Amendment (Further
Future of Financial Advice Measures)
Act 2012, also known as the Future of
Financial Advice
FOFA Bills Corporations Amendment (Future of
Financial Advice) Bill 2012 and the
Corporations Amendment (Further Future of
Financial Advice Measures) Bill 2012
ICCPR International Covenant on Civil and Political
Rights
Licence Australian Financial Services Licence
Licensee Holder of an Australian Financial Services
Licence
Representative Representative of an Australian financial
services licensee
RIS regulation impact statement
SIS Act Superannuation Industry (Supervision)
Act 1993
the Bill Corporations Amendment (Streamlining of
Future of Financial Advice) Bill 2014
1
General outline and financial impact
Outline
The Corporations Amendment (Streamlining of Future of Financial
Advice) Bill 2014 (the Bill) implements the Government's election
commitment to reduce compliance costs imposed on the financial services
industry by amending Part 7.7A of the Corporations Act 2001
(Corporations Act). Part 7.7A is also referred to as Future of Financial
Advice (FOFA).
FOFA was announced by the former Government in April 2010, and
introduced to Parliament in 2011. FOFA was the former 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 was established to inquire into,
and report on, issues associated with financial product and services
provider collapses that occurred in the wake of the Global Financial
Crisis.
The underlying objective of FOFA was to improve the quality of financial
advice whilst building trust and confidence in the financial advice
industry.
The FOFA amendments commenced, on an optional basis, from
1 July 2012, and became compulsory from 1 July 2013.
The Government agrees with the policy intent of FOFA, but considers that
the legislation has, in parts, placed an unnecessarily heavy compliance
burden on the financial services industry. When the Corporations
Amendment (Future of Financial Advice) Bill 2012 and the Corporations
Amendment (Further Future of Financial Advice Measures) Bill 2012
(FOFA Bills) were introduced into Parliament, they were referred to the
Parliamentary Joint Committee on Corporations and Financial Services
(the Committee).
The Committee delivered its report on the FOFA Bills in February 2012;
the report included a Dissenting Report by Coalition members of the
Parliamentary Joint Committee (Dissenting Report). The Dissenting
Report put forward 16 recommendations for changes to FOFA, reflecting
the Coalition's concerns that the FOFA Bills were too complex, costly to
implement and created unnecessary red tape.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
In July 2013, the Coalition released its Policy to Boost Productivity and
Reduce Regulation, in which it committed to reduce compliance costs for
small business, financial advisers and consumers who access financial
advice, by implementing the recommendations from the Dissenting
Report.
The amendments in this Bill reduce compliance burdens whilst
maintaining consumer protections.
On 20 December 2013, the Assistant Treasurer, Senator the Hon
Arthur Sinodinos AO, announced amendments to FOFA. The
amendments implement the Government's election commitment to reduce
compliance costs for the financial services industry.
The Bill includes the following key amendments to FOFA:
· removing the need for clients to renew their ongoing fee
arrangement with their adviser every two years (also known
as the `opt-in' requirement);
· making the requirement for advisers to provide a fee
disclosure statement only applicable to clients who entered
into their arrangement after 1 July 2013;
· removing paragraph 961B(2)(g), the `catch-all' provision,
from the list of steps an advice provider may take in order to
satisfy the best interests obligation;
· better facilitating the provision of scaled advice; and
· providing a targeted exemption for general advice from the
ban on conflicted remuneration in certain circumstances.
Time sensitive amendments will be reflected in the Corporations
Regulations to the extent allowed under the relevant regulation-making
powers. These amendments include: the removal of the opt-in
requirement; changes to fee disclosure statements; removal of the
`catch-all' provision under the best interests obligation; the facilitation of
the provision of scaled advice; and changes to conflicted remuneration.
These amendments will subsequently be repealed once this Bill receives
the Royal Assent.
4
General outline and financial impact
Until the amendments are in place, and consistent with Australian
Securities and Investments Commissions (ASIC's) stance during the
introduction of other major policy reforms, ASIC announced on
20 December 20131 that it would take a facilitative approach to the FOFA
reforms until mid-2014.
ASIC has indicated that it will not take enforcement action in relation to
the specific FOFA provisions that the Government is planning to repeal
through this Bill and the associated regulations. For example, ASIC will
not take action for breaches of the section which requires fee disclosure
statements to be provided to retail clients with ongoing fee arrangements
entered into before 1 July 2013.
However, ASIC's stance does not remove a client's right to take private
action against a provider in the event they feel they are disadvantaged.
Consultation: The Government has undertaken extensive consultation on
these amendments to the FOFA legislation.
Consultation on an exposure draft Bill and Regulation was conducted for
three weeks in February 2014. Various consultation meetings were also
held. A total of 57 written submissions were received.
These consultations have informed the final position of this Bill.
Date of effect: The amendments commence upon the day after this Act
receives the Royal Assent.
Proposal announced: The amendments to FOFA were announced on
20 December 2013 by the Assistant Treasurer, Senator the Hon Arthur
Sinodinos AO.
Financial impact: This Bill has no significant financial impact on
Commonwealth expenditure or revenue.
Compliance cost impact: The amendments have no compliance cost
impact; they are deregulatory in nature.
Regulation impact statement
A details-stage regulation impact statement (RIS) for the amendments to
FOFA has been prepared and can be found in Chapter 5.
Information gathered through the consultation process has been used to
inform this details-stage RIS.
1 ASIC 13-355MR
5
Chapter 1
Best interests obligation
Outline of chapter
1.1 Schedule 1 to the Bill amends Part 7.7A of the Corporations Act
to: remove the `catch-all' provision from the list of steps an advice
provider may take in order to satisfy the best interests duty; better
facilitate the provision of scaled advice; and make consequential changes
to the modified best interests duty.
Context of amendments
1.2 The Government has committed to provide certainty and reduce
compliance costs for small business, and financial advisers, whilst
maintaining the quality of advice for consumers who access financial
advice. See Outline for further information.
Removal of the `catch-all' provision
1.3 Currently, the law requires advice providers to act in their
client's best interests when providing personal advice.
Subsection 961B(2) of Corporations Act lists a number of steps that a
provider may take in order to show they have satisfied the best interests
duty. There are seven steps, the last of which is paragraph (g), also
known as the `catch-all' provision. Paragraph (g) states that a provider
must prove that they have `taken any other step [in addition to the six
preceding ones] that ... would reasonably be regarded as being in the best
interest of the client.'
1.4 The Government has committed to removing the catch-all
provision to remove legal uncertainty on how to satisfy the best
interests duty.
Facilitating scaled advice
1.5 Scaled advice is personal advice where the scope of the advice
has been limited or scaled. There is currently uncertainty over the amount
of work that is required for providers to satisfy their best interests duty
when providing scaled advice. There is also uncertainty over the ability
for providers and clients to agree on the scope of scaled advice.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
1.6 The Government has committed to amending the legislation to
better facilitate the provision of scaled advice to reduce uncertainty and
enable cost-effective scaled advice to be provided to consumers.
Modified best interests obligation
1.7 The current best interests duty in the FOFA provisions provides a
modified best interests duty for certain advice providers who provide advice
on basic banking products or general insurance products.
1.8 Consequential changes to the modified best interests obligation
are required given the Government's commitment to include consumer
credit insurance products in section 963D of the Corporations Act.
Exemptions from the client priority obligation
1.9 Under the current law, exemptions from the client priority
obligation in section 961J are provided where the advice sought by the
client relates solely to a basic banking product or a general insurance
product.
1.10 To ensure consistency with the amendments to the modified best
interests duty that flow on from the inclusion of consumer credit insurance
in the basic banking exemption, consequential changes to the client priority
obligation exemptions are required.
Summary of new law
1.11 The Bill amends the best interests duty in section 961B by:
· removing paragraph (g) (the catch-all provision) from the
best interests duty;
· better facilitating scaled advice by explicitly allowing clients
and providers to agree the scope of advice to be provided and
limiting the best interest duty to this agreed scope; and
· consequential changes to the modified best interests duty.
1.12 The Bill also amendments the appropriate advice requirement in
section 961G to clarify that it operates as a separate provision and makes
consequential amendments to the client priority obligation.
8
Best interests obligations
Comparison of key features of new law and current law
New law Current law
There is no requirement for providers In order to satisfy the best interests duty,
to prove they have `taken any other providers may be able to prove that they
step' in order to discharge the best have `taken any other step [in addition to
interests duty. the six preceding ones] that ... would
reasonably be regarded as being in the
best interests of the client.'
Clients and providers can explicitly There is uncertainty on whether clients
agree on the scope of any scaled and providers can agree on the scope of
advice. the advice to be provided.
Providers need only investigate the Some providers are concerned that they
objectives, financial situation and are required to undertake a fulsome
needs of their client that are relevant investigation into the client's objectives,
to the scaled advice to be provided. financial situation and needs before any
However, the scoping of any advice scaled advice can be provided.
would still need to be considered
appropriate to the client.
An agent or employee of an An agent or employee of an Australian
Australian Authorised Deposit-taking Authorised Deposit-taking institution
institution (ADI) need not satisfy (ADI) need not satisfy certain steps in
certain steps in the best interests duty the best interests duty if they provide
in relation to advice provided on a personal advice on a basic banking or
basic banking product or general general insurance product.
insurance product if they provide
personal advice on a basic banking,
or general insurance, or consumer
credit insurance product, or a
combination of these products.
However, the full best interests duty
applies to the advice about consumer
credit in this situation.
Advice provided to a client must be Advice provided to a client must be
appropriate having regard to the best appropriate had the provider satisfied the
interests duty. best interests duty.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
New law Current law
An agent or employee of an ADI will An agent or employee of an ADI is
be exempt from the client priority exempt from the client priority
obligation in relation to advice that obligation if the subject matter of the
relates to a basic banking product or a advice sought by the client relates only
general insurance product, or a to a basic banking product.
combination of these products, if the
Further, all providers are exempt from
subject matter of the advice sought by
the obligation if the subject matter of the
the client relates only to a basic
advice sought by the client relates only
banking product, a general insurance
to a general insurance product.
product, a consumer credit insurance
product, or a combination of any of
these products.
Further, all providers will be exempt
from the client priority obligation in
relation to advice on a general
insurance product to the extent that
the subject matter of the advice
sought by the client relates to a
general insurance product.
Detailed explanation of new law
Remove the `catch-all' provision
1.13 The Bill addresses concerns that there is significant legal
uncertainty over how financial providers can satisfy their duties to their
clients.
1.14 Subsection 961B(2) of the Corporations Act currently provides
seven steps that the provider may take to satisfy the best interests duty.
Paragraph 961B(2)(g) is the last of the seven steps. It states that a provider
must be able to prove that they have `taken any other step [in addition to the
six preceding ones] that, at the time the advice is provided, would
reasonably be regarded as being in the best interest of the client, given the
client's relevant circumstances.' Paragraph 961B(2)(g) is known as the
`catch-all' provision.
1.15 The Bill removes paragraph 961B(2)(g), and makes a related
consequential amendment to section 961E by removing it; section 961E
specifies what would reasonably be regarded as being in the best interests
of the client. As the phrase `reasonably be regarded as being in the best
interests of the client' is only contained in paragraph 961B(2)(g), which is
being removed, section 961E is not required. [Schedule 1, items 9, 10 and 14,
section 961E and subsections 961B(2)(f) and 961B(2)(g)]
10
Best interests obligations
1.16 The removal of paragraph 961B(2)(g) removes the legal
uncertainty over how advice providers can satisfy their best interests
duty whilst maintaining consumer protections. Even without
paragraph 961B(2)(g), subsection 961B(2) still sets a high standard for
providers to show they have acted in the best interests of their client.
Facilitating scaled advice
1.17 The Bill amends the best interests obligation to better facilitate the
provision of scaled advice by clarifying that an advice provider and a client
may agree on the scope of advice to be provided. The Bill provides that the
best interests duty applies to the scope or subject matter of the advice
agreed upon between the client and the provider.
1.18 The Bill also clarifies the appropriateness of advice requirement.
1.19 The best interest duty applies to personal advice provided to retail
clients. Personal advice is advice that considers the financial objectives,
situation, and needs of a person (as defined in subsection 766B(3) of the
Corporations Act). All personal advice is `scaled' or `limited in scope' to
some extent: advice is either less or more comprehensive in scope along a
continuous spectrum.
1.20 Whilst scaled advice is not specifically defined in the
Corporations Act, it is usually referred to in the industry as a targeted form
of personal advice. For example, scaled advice may cover a specific area of
a client's needs such as insurance or superannuation, and can be contrasted
to holistic advice that usually considers all of the client's financial needs.
1.21 The limited scope of scaled advice usually makes it much cheaper
than more fulsome personal advice. This may be due to the fact that a
provider does not need to consider as many of the client's circumstances,
needs and objectives to provide the advice.
1.22 As holistic personal advice can often be expensive, scaled advice
is an affordable avenue for many consumers seeking personal advice.
1.23 The Bill addresses uncertainty over whether a client and adviser
can agree on the scope of the advice to be provided by inserting a specific
provision indicating that such an agreement can occur. [Schedule 1, item 13,
subsection 961B(4A)]
1.24 It is quite common for a client who may not have had any prior
contact with a provider to initially seek advice on either a broad range of
services that, due to the breadth of scope may be unaffordable for the client,
or to not be sure of what advice they really want or need. In many
instances, even if the client knows the advice they want or need, they may
not be able to afford the advice; thus, the scope may need to be limited in
some form to reduce the cost of the advice.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
1.25 In such situations, a provider and their client will usually have a
series of conversations to explore and understand the advice the client
wants; these conversations help to better define possible subjects of the
advice.
1.26 Once the provider and client have explored and better understood
what the client wants, agreement between the provider and the client on the
subject of the advice usually occurs. The new provision explicitly indicates
that this agreement can take place. [Schedule 1, item 13, subsection 961B(4A)]
1.27 It is important to note that this new provision does not alter the
operation of section 947D; section 947D requires an advice provider to
disclose certain information about the costs and benefits of switching
between one financial product and another financial product. As such,
providers must still be mindful of their section 947D obligations when
providing scaled advice.
1.28 In agreeing the subject of the advice, there needs to be a `meeting
of the minds' between both the provider and the client. The provider
should clearly explain to the client the consequences of not receiving advice
on those other subjects.
1.29 For example, a retail client, who does not want to spend too much
money on financial advice, seeks advice on financial matters. After having
a conversation about the client's financial objectives, circumstances and
needs, the client and provider agree that advice on superannuation, debt
consolidation, and life insurance are topics that are particularly relevant to
the client at this time.
1.30 The client, being only able to afford to receive advice on one of
these topics, and having been informed and having considered the benefits
and drawbacks of receiving advice on only one of these topics, can agree
with the provider to receive advice on a particular topic. For the purposes
of this example, assume the client decides to receive advice on debt
consolidation; the new law clarifies that the client and provider can agree
that advice on debt consolidation will be provided.
1.31 There is currently uncertainty over the advice that the best interest
duty applies to, specifically when scaled advice is provided. Some industry
stakeholders have questioned whether the duty applies to the advice as
initially sought by the client (in the scenario above: the advice as initially
sought would be advice on financial matters) or whether the duty applies to
the advice as ultimately sought.
1.32 The Bill inserts an example of a client and provider agreeing the
subject matter of advice. The example clarifies that the best interests
obligations apply to the advice ultimately sought (in the scenario above: the
advice ultimately sought is the advice on debt consolidation). [Schedule 1,
item 13, subsection 961B(4A)(example)]
12
Best interests obligations
1.33 There is also currently uncertainty over the extent of the
investigations that are required to be undertaken when providing scaled
advice.
1.34 A number of industry participants consider that the current
paragraph 961B(2)(a), which is the first of the steps in subsection 961B(2)
and requires the provider to identify the objectives, financial situations and
needs of the client that were disclosed to the provider by the client through
instructions, requires the provider to perform a `full fact-find' with the
client before any other steps are to be taken.
1.35 A full fact-find is generally associated with holistic advice, and
requires a provider to consider--in great detail--the client's financial
objectives, circumstances and needs. Given the time taken by a provider in
considering these details, advice provided when a full fact-find is
undertaken is usually quite expensive.
1.36 A full fact-find was never the intention behind
paragraph 961B(2)(a); rather, paragraph 961B(2)(a) requires consideration
of the objectives, circumstances and needs relevant to the client and the
advice that is sought. The relevant objectives, circumstances and needs
usually only become apparent after talking to the client to understand the
advice they are after.
1.37 The Bill removes doubt about the necessity of a full fact-find by
repealing paragraph 961B(2)(a) and inserting a new paragraph that requires
the provider to identify the objectives, financial situation and needs of the
client that are disclosed to the provider by the client. The new paragraph
will be inserted after paragraph 961B(2)(b). [Schedule 1, items 7 and 8,
paragraphs 961B(2)(a) and (ba)]
1.38 Notwithstanding the fact that the steps in subsection 961B(2) do
not need to be followed in the order as written, the position of the new
paragraph (after paragraph 961B(2)(b)) should help alleviate concerns that
an up-front full fact find is required to be performed ahead of any other
steps.
1.39 The new paragraph requires the provider to assess the facts that
have been presented by the client, and to perform a comparison between the
facts disclosed and the facts that would be relevant to the advice sought as
required by subparagraph 961B(2)(b)(ii); subparagraph 961B(2)(b)(ii)
requires the provider to identify the objectives, financial situation and needs
of the client that would reasonably be considered as relevant to advice
sought on that subject matter (the client's relevant circumstances).
1.40 The Bill further clarifies that the investigations a provider needs to
conduct when providing advice--regardless of the scope--are those that are
reasonably considered as relevant to the subject matter of the advice sought.
[Schedule 1, item 11, subsections 961B(2)(note)]
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
Operation with the appropriate advice requirement
1.41 The best interests duty operates in conjunction with the
appropriate advice requirement set out in section 961G but both operate as
separate obligations. Currently, section 961G requires advice provided to
be appropriate had the best interests duty been satisfied.
1.42 To ensure the appropriateness requirement operates as a separate
obligation, the Bill amends section 961G to provide that advisers must only
provide advice to the client if it would be reasonable to conclude that the
advice is appropriate to the client `having regard to' section 961B.
[Schedule 1, item 15, subsection section 961G]
1.43 By specifying that a provider must have regard to section 961B,
the best interests duty forms a central, although not absolute, basis for
determining the appropriateness of the advice. In some instances,
consideration of the best interests duty may be sufficient; in other instances,
other factors may also need to be considered.
1.44 Consumers who seek financial advice expect that their adviser
will act in their best interests and that, as a result, the advice provided will
leave them in a better position. In addition, consumers expect that any
advice provided will be tailored to their relevant circumstances.
Accordingly, when determining the appropriateness of advice, an adviser
must consider whether the advice provided could reasonably be expected to
leave the client in a better position given their relevant circumstances.
1.45 Whilst the changes to the best interests duty explicitly allow a
client and adviser to agree the scope of the advice, it does not allow a client
and adviser to agree that the advice is appropriate for the client: this is a
judgement call for the adviser. As such, agreeing on the scope of advice
does not mean that inappropriate advice can be given; the appropriateness
of the advice will need to be assessed by reference to the information
obtained from the client and the client's relevant circumstances.
1.46 In certain circumstances, it may not be appropriate for the adviser
to provide advice on the agreed topic, and so it may be necessary to warn
the client or advise that certain action will not be appropriate; in other
instances, a warning may not be necessary. This is ultimately an `on
balance' decision that will depend on the facts at hand and will require the
adviser to exercise their judgement using their skills and experience.
1.47 Where the adviser, in having regard to section 961B, concludes
that it is not appropriate to provide advice on a subject matter that has been
agreed upon, the adviser should not provide that advice to the client.
14
Best interests obligations
Modified best interests obligation
1.48 The Bill makes consequential changes to the modified best
interests duty as a result of the inclusion of consumer credit insurance
products in section 963D of the Corporations Act.
1.49 Currently under subsection 961B(3), an agent or employee of an
ADI is not required to satisfy the steps in paragraphs 961B(2)(d) to (g)
when the subject matter of the advice sought by the client is solely in
relation to a basic banking product. Subsection 961B(4) further provides
that a provider need not satisfy those steps when the subject matter of the
advice sought by the client is solely in relation to a general insurance
product.
1.50 The Corporations Regulations also provide that an agent or
employee of an ADI need not satisfy the steps in paragraphs 961B(2)(d) to
(g) when the only personal advice provided is in relation to a basic banking
product and a general insurance product.
1.51 The Regulations also provide that the steps in paragraphs
961B(2)(d) to (g) do not need to be followed by any provider if the subject
matter of the advice relates to a general insurance product.
1.52 The Bill provides that an agent or employee of an ADI need not
satisfy the steps in paragraphs 961B(2)(d) to (f) in relation to personal
advice on a basic banking or general insurance product where the subject
matter sought by the client relates to a basic banking product, general
insurance product, consumer credit insurance product, or a combination of
these products. [Schedule 1, item 12, subsection 961B(3)]
1.53 To the extent that the subject matter of the advice sought by the
client is a general insurance product, the provider satisfies the best interests
duty if the provider takes the steps outlined in paragraphs (2)(b), (ba) and
(c). [Schedule 1, item 12, subsection 961B(4)]
1.54 It is important to note that this amendment does not extend the
modified best interests duty (under the current law, the need to satisfy the
steps in paragraphs 961B(2)(a) to (c) but not paragraphs 961B(2)(d) to (g)
in relation to personal advice) to the provision of consumer credit
insurance; rather, it allows the modified best interests duty to apply to a
basic banking product and/or general insurance product where the subject
matter of the advice sought also relates to consumer credit insurance.
1.55 As such, the provision of consumer credit insurance still requires
all the steps in subsection 961B(2) (the best interests duty) to be satisfied.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
Exemptions from the client priority obligation
1.56 The Bill amends the exemptions from the client priority obligation
to ensure consistency with the amendments to the modified best interests
duty that flow on from the inclusion of consumer credit insurance in the
basic banking exemption.
1.57 Section 961J places an obligation on the provider to give priority
to the client's interests when the provider knows or reasonably ought to
know that there is a conflict between the client's interests and the provider's
interests, or the interests of one of the other parties listed in
subsection 961J(1).
1.58 Under the current law, an agent or employee of an ADI is exempt
from the client priority obligation if the subject matter of the advice sought
by the client relates only to a basic banking product. Further, all providers
are exempt from the obligation if the subject matter of the advice sought by
the client relates only to a general insurance product.
1.59 The Bill makes consequential amendments to the circumstances in
which a provider may access the exemptions.
1.60 An agent or employee of an ADI will be exempt from the client
priority obligation in relation to advice that relates to a basic banking
product or a general insurance product, or a combination of these products,
if the subject matter of the advice sought by the client relates only to a basic
banking product, a general insurance product, a consumer credit insurance
product, or a combination of any of these products. The client priority rule
will continue to apply to advice provided in relation to a consumer credit
insurance product. [Schedule 1, item 16, subsection 961J(2)]
1.61 Further, all providers will be exempt from the client priority
obligation in relation to advice on a general insurance product to the extent
that the subject matter of the advice sought by the client relates to a general
insurance product. The client priority obligation will continue to apply in
providing advice on matters not relating to a general insurance product
[Schedule 1, item 16, subsection 961J(3)]
Application and transitional provisions
1.62 The amendments to the best interests obligation apply in relation
to the provision of personal advice to a retail client on or after the
commencement day. The amendments commence the day after the
Royal Assent. [Schedule 1, item 43, sections 1531A and 1531B]
1.63 The current requirements continue to apply until the new law is in
place or new regulations are made.
16
Chapter 2
Ongoing fee arrangements
Outline of chapter
2.1 Schedule 1 to the Bill amends Part 7.7A of the Corporations
Act to:
· remove the renewal notice obligation for fee recipients; and
· make the requirement for providers to provide a fee
disclosure statement only applicable to clients who entered
into their arrangement after 1 July 2013.
Context of amendments
2.2 The Government has committed to provide certainty and reduce
compliance costs for small business, financial advisers and consumers
who access financial advice. See Outline for further information.
Removal of the `opt-in' requirement
2.3 The current law provides that licensees who have an ongoing fee
arrangement with a retail client whose ongoing fee arrangement
commenced after 1 July 2013 must obtain their client's agreement at least
every two years to continue the ongoing fee arrangement, for new clients.
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.
2.4 The Government has committed to remove the requirement for
licensees to obtain their client's approval at least every two years in order
to continue an ongoing fee arrangement (known as the `opt-in'
requirement) on the basis that the current law imposes unnecessary costs.
Changes to fee disclosure statements
2.5 The current law provides that licensees must give all retail
clients who have an ongoing fee arrangement a fee disclosure statement
which shows the fees paid by the client, the services the client received,
and the services the client was entitled to receive, in the previous
12 months.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
2.6 The Government has committed to making the annual fee
disclosure statements prospective only. In other words, a fee disclosure
statement only needs to be sent to clients charged an ongoing fee during a
period of 12 months or more where the ongoing arrangement was entered
into after 1 July 2013. It is not required for arrangements entered into
prior to 1 July 2013.
2.7 This is on the basis that retrospectively applying the annual fee
disclosure statement imposes large costs on industry, with minimal
benefit.
Clarification of intra-fund advice
2.8 The current law does not define intra-fund advice. The
Government has committed to clarifying this term in the FOFA
legislation.
Summary of new law
2.9 The Bill provides that where an ongoing financial advice
relationship exists between a licensee (the `fee recipient') and a retail
client which involves the charging of an ongoing advice fee (however
described), the adviser is no longer required to:
· provide a renewal notice for fee recipients; and
· provide a fee disclosure statement to clients who entered into
their ongoing fee arrangement before 1 July 2013.
2.10 Fee recipients still need to provide an annual fee disclosure
statement to all other clients (ie post-1 July 2013 clients).
2.11 The Bill defines the term intra-fund advice.
18
Ongoing fee arrangements
Comparison of key features of new law and current law
New law Current law
No requirement to obtain a client's Licensees who have an ongoing fee
agreement to charge an ongoing fee. arrangement with a retail client must
Any ongoing fee arrangement obtain their client's agreement at least
continues to exist unless the every two years to continue the
arrangement is terminated by either ongoing fee arrangement, for new
the client or the licensee. retail clients who enter into an
ongoing fee arrangement from
1 July 2013.
Licensees who have an ongoing fee Licensees who have an ongoing fee
arrangement with a client must give arrangement with a client must give
retail clients who entered into the all retail clients a fee disclosure
arrangement after 1 July 2013 a fee statement which shows the fees paid
disclosure statement which shows the by the client, the services the client
fees paid by the client, the services received, and the services the client
the client received, and the services was entitled to receive, in the
the client was entitled to receive, in previous 12 months.
the previous 12 months.
The term `intra-fund advice' is The term `intra-fund advice' is not
defined by way of a note which links expressly defined.
the term and the relevant subject rules
under section 99F of the SIS Act.
Detailed explanation of new law
Removal of the renewal notice `opt-in' requirement
2.12 Under the current law, where an ongoing financial advice
relationship exists between a licensee (the `fee recipient') and a retail
client which involves the charging of an ongoing advice fee, the fee
recipient is required to obtain their client's agreement at least every two
years to continue the ongoing fee arrangement by way of a renewal notice,
for clients who entered into an ongoing fee arrangement from 1 July 2013.
2.13 An ongoing fee arrangement exists where a retail client is given
personal advice and charged an ongoing fee during a period of more than
12 months.
2.14 The renewal notice is required to contain information indicating
that the client may renew the ongoing fee arrangement, as well as
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.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
2.15 The renewal notice must to be sent to the client within 30 days
of the end of the two-year period. The client then has 30 days to agree to
renew the arrangement.
2.16 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.
2.17 The current law provides that licensees or representatives may
be exempted from the renewal notice obligation by ASIC if they are
bound by an approved code of conduct.
2.18 The new law removes the obligation for a licensee to provide a
renewal notice to a client. [Schedule 1, items 3-5 and 17-21, Subdivision B of
Division 3 of Part 7.7A (heading), sections 960, 962CA, 962K, 962L, 962M and 962N
and subsections 962F(1), (2) and (3)]
2.19 Therefore, under the new law, an `opt-out' system applies where
any ongoing fee arrangement continues to exist unless the arrangement is
terminated by either the client or the fee recipient.
2.20 The removal of the `opt-in' requirement applies in relation to an
ongoing fee arrangement for those renewal notice days for the
arrangement that occur on or after the day after the Royal Assent.
Changes to fee disclosure statements
2.21 Under the current law, where an ongoing financial advice
relationship exists between a licensee (the `fee recipient') and a retail
client which involves the charging of an ongoing advice fee (a fee for a
period longer than 12 months), the fee recipient is required to give all
retail clients a fee disclosure statement which shows the fees paid by the
client, the services the client received, and the services the client was
entitled to receive, in the previous 12 months.
2.22 The fee disclosure statement must be provided 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 disclosure statement.
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Ongoing fee arrangements
2.23 The new law removes the requirement to provide a yearly fee
disclosure statement to clients who entered into their ongoing arrangement
prior to 1 July 2013, restricting the requirement for licensees to provide a
fee disclosure statement to clients who entered into their ongoing
arrangement after 1 July 2013. [Schedule 1, items 22, 39 and 40, Subdivision C of
Division 3 of Part 7.7A, table item 22 of subsection 1317E(1) and
subparagraph 1317G(1E)(b)(v)]
2.24 The obligations for providing a fee disclosure statement to
post-1 July 2013 clients, set out in Subdivision B of the Corporations Act,
remain unchanged.
2.25 The result is that the obligation to provide a fee disclosure
statement applies to licensees (`fee recipients') in situations where they:
· provide personal advice to a retail client; and
· the client is charged an ongoing fee during a period of
12 months or more; and
· the arrangement was entered into after 1 July 2013.
2.26 Judgment needs to be used to consider what constitutes a new
ongoing arrangement. As discussed below, a significant alteration of the
arrangement between the fee recipient and the client might constitute a
new arrangement, whereas a small alteration in the terms might not.
2.27 Generally speaking, alterations in the terms such as a simple
alteration of an existing fee, an alteration in the duration of the
arrangement, or where the fee recipient merged or was taken over by
another company, but the existing arrangement did not otherwise change,
would not constitute a new ongoing fee arrangement.
Example 2.1: Changes to an existing ongoing arrangement
YPT Financial Planners have recently been taken over by
ABC Incorporated.
Previous YPT clients have had their pre-takeover ongoing fee
arrangements continued under the new company, and the particulars of
the arrangements have not changed.
This would not constitute new ongoing fee arrangements for
YPT clients.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
Example 2.2: Changes to an existing ongoing arrangement
Ellen, a financial adviser, works for Sky Limited Financial. Her clients
have ongoing fee arrangements with Sky Limited. When Ellen moves
on from Sky Limited, she passes her clients to another Sky Limited
employee, Phil.
As Ellen's clients have ongoing arrangements with Sky Limited, Ellen
leaving Sky Limited would not constitute a new ongoing fee
arrangement.
If Phil then negotiates with a particular client to alter the terms of their
arrangement, depending on the changes, this may constitute a new
ongoing fee arrangement.
2.28 However, if the fee recipient substantially alters the terms of an
agreement with a client, for example, through the changing of the advice
from insurance only to a much broader ambit, or a change in the structure
of the fees paid, it might be considered that a new ongoing arrangement
has been entered into.
2.29 Provisions in Part 7.7A of the Corporations Act which support
the fee disclosure statements to post-July 2013 customers (such as those
outlining what information must be included in the fee disclosure
statement, and what happens when the fee recipient does not comply with
the requirement to provide a fee disclosure statement within the specified
time) remain unchanged.
2.30 The changes to fee disclosure statements apply in relation to an
ongoing fee arrangement for those disclosure days for the arrangement
that occur on or after the day after the Royal Assent.
Clarification of intra-fund advice
2.31 Under the current law, the term intra-fund advice is not
expressly defined.
2.32 The Bill inserts a note into section 963B to clarify that the term
intra-fund advice refers to a type of financial product advice provided to a
member of a regulated superannuation fund by a trustee of the fund, or by
persons under an arrangement with the trustee of the fund.
2.33 The note links the commonly used term with the rules under
section 99F of the Superannuation Industry (Supervision) Act 1993, which
deal with the subject area.
22
Ongoing fee arrangements
2.34 In particular the note clarifies that intra-fund advice is not advice
of the kind the cost of which is prohibited from being collectively levied
under section 99F of the SIS Act. [Schedule 1, item 29, section 963B (note)]
2.35 The ban on conflicted remuneration is intended to capture
benefits intended to influence the advice or product choice
recommendation provided to retail clients.
2.36 Where remuneration structures relating to the provision of
intra-fund advice are unlikely to materially influence the intra-fund advice
provided to members, for example the levying of administration or
management fees by trustees or fee for service type payments to third
party advice providers, it is not intended that these arrangements would be
captured by the ban on conflicted remuneration.
Application and transitional provisions
Removal of `opt-in' requirement
2.37 The removal of the `opt-in' requirement applies in relation to
ongoing fee arrangements with renewal notice days (the renewal notice
day being either the second anniversary of the day on which the
arrangement was entered into or, if the arrangement had previously been
renewed, the second anniversary of the last day on which the arrangement
was renewed) that occur on or after the day after the Royal Assent.
[Schedule 1, item 43, sections 1531A and 1531C]
2.38 The current renewal notice obligations compulsorily apply to
clients who entered into an ongoing fee arrangement after 1 July 2013.
Fee renewal notices become due within 30 days of 1 July 2015. As such,
no renewal notice days occur prior to the removal of the `opt-in'
provision.
2.39 However, FOFA was optional from 1 July 2012. For those fee
recipients who chose to comply with FOFA early, the renewal notice
obligations apply to clients who entered into an ongoing fee arrangement
after the fee recipient's opt-in date. As such, fee renewal notices could
become due earlier than 1 July 2015 for these fee recipients.
2.40 The removal of the `opt-in' provisions apply from the earlier of
the day after the regulations are registered, or the time outlined in
paragraph 2.36 above.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
Limitation of fee disclosure statement
2.41 The removal of the requirement to provide a fee disclosure
statement to clients who entered into their ongoing fee arrangement before
1 July 2013 applies in relation to an ongoing fee arrangement for those
disclosure days for the arrangement that occur on or after the day after the
Royal Assent. [Schedule 1, item 43, sections 1531A and 1531D]
2.42 The current requirement to provide clients with a fee disclosure
statement continue to apply until the new law is in place or new
regulations are made.
24
Chapter 3
Conflicted remuneration and other banned
remuneration
Outline of chapter
3.1 Schedule 1 to the Bill amends Part 7.7A of the Corporations Act
to amend the current conflicted remuneration provisions.
Context of amendments
3.2 The Government has committed to provide certainty and reduce
compliance costs for small business, financial advisers and consumers
who access financial advice. See Outline for further information.
General advice
3.3 Under the current law, remuneration (both monetary and
non-monetary) received in relation to the provision of both personal
advice (financial product advice that takes into account the client's
objectives, financial situation and needs) and general advice (financial
product advice that does not take into account the client's objectives,
financial situation and needs) is captured by the ban on conflicted
remuneration.
3.4 The Government considers that the current application of the ban
on conflicted remuneration imposes unnecessary burdens on industry by
capturing individuals not directly involved in providing advice to clients.
As such, the Government has committed to providing a `general advice
exemption' from the ban on conflicted remuneration.
3.5 However, the Government has decided to limit the exemption to
only be available in particular circumstances.
Execution-only exemption
3.6 Under the current law, the `execution-only exemption' provides
that benefits paid for execution-only services (such as the issue or sale of
a financial product) are exempt from the ban on conflicted remuneration.
However, the exemption does not apply in instances where a person
within the licensee group (of the person receiving the benefit) has
provided advice to the client on the product, or class of product, in the
previous 12 months.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
3.7 The Government has committed to broaden the exemption to
reduce unnecessary administrative complexity and ensure that legitimate
execution-only services can be provided.
Education and training exemption
3.8 Under the current law, the `education and training exemption'
provides an exemption from the ban on conflicted remuneration for
education and training relating to the provision of financial product
advice.
3.9 In order to facilitate industry attempts to up-skill, the Government
has committed to broaden the exemption to include training that relates to
conducting a financial services business.
Basic banking exemption
3.10 Under the current law, a `basic banking exemption' is provided
that exempts benefits in relation to basic banking products from the ban
on conflicted remuneration. To access the exemption, the benefit must: be
received by an agent or employee of an ADI; relate to a basic banking or
general insurance product; and the agent or employee of an ADI--at the
time of providing advice on the basic banking product--must not provide
financial product advice on any other financial product except for general
insurance.
3.11 The Government has committed to broaden the existing basic
banking exemption to include all simple, `Tier 2' products.
Ban on volume-based shelf-space fees
3.12 Under the current law, a platform operator is prohibited from
receiving `volume-based shelf-space fees' from a funds manager where
the fee is for `purchasing' shelf space or to receive preferential treatment
by the platform operator.
3.13 In order to clarify the scope of the ban and provide certainty to
industry, the Government has committed to amend the ban on
volume-based shelf-space fees to clearly identify the payments the ban
intends to capture.
Client-pays exemption
3.14 Under the current law, the `client-pays exemption' provides that
certain benefits paid by a client to a licensee or representative are exempt
from the ban on conflicted remuneration.
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Conflicted remuneration and other banned remuneration
3.15 The Government has committed to clarify that the exemption also
applies in circumstances where a benefit is paid by another party as long
as the payment is made out of the client's funds, and the benefit is given at
the direction of the client and with the client's clear consent.
`Mixed' benefits
3.16 The current provisions of the Corporations Act do not explicitly
permit `mixing' of benefits in relation to products or circumstances that
are exempt from the ban on conflicted remuneration. The Corporations
Regulations has addressed this problem; however, these changes have not
been reflected in the Corporations Act.
3.17 The Government has committed to amend the Corporations Act to
reflect the changes in the Corporations Regulation.
Regulation-making powers
3.18 Under the current law, regulation-making powers exist that permit
certain benefits to be excluded from the definition of conflicted
remuneration in prescribed circumstances. However, there are no
regulation-making powers to clarify the operation of the existing
exemptions.
3.19 Given the complexity of payment arrangements within the
financial advice industry, there is a possibility that future remuneration
structures may be developed that are inadvertently captured by the ban on
conflicted remuneration. Regulation-making powers that clarify the
operation of the existing exemptions provide a way to address any future
unintended consequences.
Summary of new law
3.20 The Bill amends the Corporations Act to broaden and clarify
exemptions from the ban on conflicted remuneration. Specifically, the
amendments:
· provide a targeted general advice exemption from the ban on
conflicted remuneration;
· broaden the execution-only exemption so that it applies
where no advice on that product, or the class of products of
which the product is one, has been provided to the client by
the individual performing the execution service in the
previous 12 months;
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
· expand the execution and training exemption to include
training relevant to a financial services business;
· broaden the basic banking exemption so that it can be
accessed when advice on other simple (`Tier 2') financial
products is provided at the same time as advice on a basic
banking product and/or a general insurance product;
· clearly define volume-based shelf-space fees and the
payments the ban on volume-based shelf-space fees intends
to capture;
· clarify the operation of the client-pays exemption;
· clarify the exemptions from the ban on conflicted
remuneration to allow a benefit to relate to more than one
exemption; and
· introduce limited regulation-making powers to address future
remuneration structures that may be inadvertently captured
by the ban on conflicted remuneration.
Comparison of key features of new law and current law
New law Current law
The ban on conflicted remuneration The ban on conflicted remuneration
on personal advice remains, but a applies to both personal and general
limited general advice exemption is advice.
provided. The ban currently applies to benefits
Benefits on general advice are given to a licensee or a representative
exempted if: that could reasonably be expected to
(a) the benefit is given to an influence the financial product advice
employee in relation to general provided or the financial products
advice given to a retail client; and recommended to a retail client.
(b) the employee has not given
personal advice to the retail client in
the last 12 months; and
(c) the financial product in relation to
which the general advice is given is a
product issued or sold by the licensee.
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Conflicted remuneration and other banned remuneration
New law Current law
The execution-only exemption now The execution-only exemption
applies if a monetary benefit is given exempts a monetary benefit from the
in relation to the issue or sale of a ban on conflicted remuneration if it is
financial product, and the licensee or given in relation to the issue or sale of
representative receiving the benefit a financial product, and the licensee
has not provided personal advice to or representative has not provided
the client in relation to the product-- financial product advice to the client
or class of products of which the in relation to the product--or
product is one--in the previous products of that class--in the
12 months. previous 12 months.
The education and training exemption The education and training exemption
now applies if it is relevant to the exempts a non-monetary benefit from
operation of a financial services the ban on conflicted remuneration if
business, which includes the it relates to education and training
provision of financial product advice. that is relevant to the provision of
financial product advice.
The basic banking product exemption The basic banking exemption
now enables a benefit to be given to exempts benefits in relation to basic
an agent or employee of an ADI that banking products from the ban on
also relates to a consumer credit conflicted remuneration.
insurance product. Further, the agent To access the exemption, the benefit
or employee may also provide must: be received by an agent or
personal advice on a consumer credit employee of an ADI; relate to a basic
insurance product at the same time as banking product or a general
providing advice on the basic banking insurance product; and the agent or
product. employee of an ADI, at the time of
providing advice on the basic banking
product, must not provide financial
product advice on any other financial
product except for general insurance.
A clear definition of a volume-based Volume-based shelf-space fees paid
shelf-space fee is provided. by a funds manager to a platform
Payments that are not considered operator are banned.
volume-based shelf-space fees are However, the term volume-based
also clarified. shelf-space fee is broadly defined and
has unintentionally captured many
legitimate payment types
The existing client-pays exemption is The client-pays exemption exempts
clarified to indicate that it also applies certain benefits from the ban on
in circumstances where a benefit is conflicted remuneration if they are
paid by another party as long as the paid by a client to a licensee or
payment is made out of the client's representative
funds, and the benefit is given at the
direction of the client and with the
client's clear consent.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
New law Current law
The Corporations Act now explicitly The Corporations Act does not
permits `mixed benefits', so a benefit explicitly permit `mixing' of benefits
may now be paid in relation to in relation to products or
multiple exempt products or circumstances that are exempt from
circumstances. the ban on conflicted remuneration.
As such, a payment in relation to
multiple exempt products or
circumstances would not be
considered exempt.
The Corporations Regulations has
addressed this problem; however,
these changes have not been reflected
in the Corporations Act.
Limited regulation-making powers No regulation-making powers exist to
are provided to clarify the operation clarify the operation of the
of the exemptions from conflicted exemptions from conflicted
remuneration. remuneration.
Detailed explanation of new law
General advice
3.21 The Bill provides a `general advice exemption' that exempts
benefits that relate to general advice from the ban on conflicted
remuneration in certain circumstances. This exemption addresses
concerns that the current law had unintentionally captured parties that do
not provide personal advice.
3.22 Currently, section 963A of the Corporations Act defines
`conflicted remuneration' as a benefit given to a licensee or representative
that could reasonably be expected to influence the choice of financial
product recommended or the financial product advice provided to a client.
`Financial product advice' is defined in section 766B of the Corporations
Act to include both personal and general advice.
3.23 The Bill inserts a targeted general advice exemption. Monetary
benefits paid on general advice are exempted from the ban on conflicted
remuneration if:
· the benefit is given to an employee in relation to general
advice given to a retail client; and
· the employee has not provided personal advice to the retail
client in the last 12 months; and
30
Conflicted remuneration and other banned remuneration
· the financial product in relation to which the advice is given
is a product issued or sold by the licensee.
[Schedule 1, item 29, subsection 963B(6)]
3.24 All three requirements must be satisfied to obtain the benefit of
the exemption. The imposed conditions will restrict the general advice
exemption to employees who have not provided personal advice to the
person receiving the general advice in the past 12 months.
3.25 As part of consultation on the exposure draft Bill, some
stakeholders flagged concerns about the general advice exemption
extending to complex products. ASIC has indicated that it will monitor
the use of the conflicted remuneration provisions as they relate to general
advice on complex products and will provide a report to the Government
in the next 12-18 months.
3.26 The general advice exemption applies to benefits given on or after
the day after the Royal Assent, that are not otherwise grandfathered.
Execution-only exemption
3.27 The Bill amends the existing `execution-only exemption' in
paragraph 963B(1)(c) to provide a closer nexus between the party
receiving the benefit and any advice that might have been provided in
relation to the benefit.
3.28 The current law provides an exemption from the ban on conflicted
remuneration for a monetary benefit if it is given in relation to the issue or
sale of a financial product and the licensee or representative has not
provided financial product advice to the client in relation to the product--
or products of that class--in the previous 12 months.
3.29 Under the Bill, the execution-only exemption will apply if a
monetary benefit is given in relation to the issue or sale of a financial
product and the licensee or representative receiving the benefit has not
provided personal advice to the client in relation to the product that is to
be issued or sold--or advice on a class of financial products, of which the
product is one--in the previous 12 months. [Schedule 1, items 27 and 29,
subsections 963B(4) and (5) and paragraph 963B(1)(c)]
Training exemption
3.30 The Bill broadens the existing `education and training exemption'
in paragraph 963C(c) to include education and training that relates to the
carrying on of a financial services business.
3.31 The current law provides an exemption for a non-monetary
benefit that is genuine education or training relating to the provision of
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
financial product advice to retail clients and where the benefit complies
with regulations made for the purposes of the exemption.
3.32 The Bill provides that a licensee or representative may receive a
benefit of education or training that relates to the carrying on of a
financial services business (for example, training in relation to client
administrative services). The term `carrying on of a financial services
business' includes the provision of financial product advice. [Schedule 1,
item 33, subparagraph 963C(c)(ii)]
Basic banking exemption
3.33 The Bill broadens the existing `basic banking exemption' to
include all simple, `Tier 2' products.
3.34 ASIC, in its training guidelines, makes a distinction between
`Tier 1' and `Tier 2' products: Tier 2 products are generally considered
simple in nature and therefore require less onerous training when providing
advice than Tier 1 products. Tier 2 products include basic banking
products, general insurance products, and consumer credit insurance
products. Tier 1 products include all other financial products not listed in
Tier 2 (for example, managed investment schemes and superannuation).
3.35 Section 963D currently provides an exemption for benefits that
relate to a basic banking product as long as the agent or employee of an
ADI--at the time of providing advice on the basic banking product--does
not provide financial product advice on any other financial product.
Regulation 7.7A.12H of the Corporations Regulations allows access to the
exemption where the benefit also relates to a general insurance product and
the agent or employee does not provide financial product advice on any
other financial product except a general insurance product.
3.36 The Bill enables the benefit that is given to also relate to a
consumer credit insurance product. Further, the Bill allows the agent or
employee to provide personal advice on a consumer credit insurance
product at the same time as providing advice on a basic banking and/or
general insurance product. [Schedule 1, item 35, subsections 963D(1) and 963D(2)]
3.37 A definition of `consumer credit insurance' is inserted into section
960, and is defined as having the same meaning as in the Insurance
Contracts Act 1984. [Schedule 1, item 1, section 960]
Basic banking products
3.38 Section 961F of the Act defines a `basic banking product'. This
definition captures a range of products, including first home saver accounts,
non-cash payment facilities, basic deposit products and traveller's cheques.
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Conflicted remuneration and other banned remuneration
3.39 Financial products, including basic banking products, are
continually evolving. For this reason, the definition captures a range of
other functionally equivalent products outside those specifically referenced
in the section. For example, whilst travel debit cards are not explicitly
referenced, it serves the same purpose as a traveller's cheque and is thus
considered a basic banking product.
3.40 The definition of basic banking products captures all types of
basic deposit products such as transaction accounts, savings accounts, cash
management accounts, and short term deposits.
3.41 The definition of basic banking products also captures basic
deposit products associated with a credit facility (for example a debit
account with an overdraft facility, or a mortgage offset account).
Employees
3.42 In accordance with ASIC's Regulatory Guide 175: Licensing:
Financial product advisers - Conduct and disclosure, references to an
agent or employee, or otherwise acting by arrangement with an Australian
ADI under the name of an Australian ADI includes: contractors; employees
of employment agencies who may be temporarily working for the
Australian ADI/employer; employees of a body corporate related to the
Australian ADI/employer; and employees of another company who work
exclusively for the Australian ADI/employer.
Ban on volume-based shelf-space fees
3.43 The Bill clarifies the definition of `volume-based shelf-space fee'
and the payments the ban on volume-based shelf-space fees intends to
capture.
3.44 Currently, section 964 of the Corporations Act provides that a
platform operator must not accept volume-based shelf-space fees.
However, the term volume-based shelf-space fee is not clearly defined.
Consequently, concerns have been raised that the current provisions capture
legitimate payments between fund managers and platform operators.
3.45 The Bill amends section 964A to clearly define a volume-based
shelf-space fee. The Bill also clarifies the types of payments that are not
considered volume-based shelf-space fees; platform operators are still
required to not accept benefits that are volume-based shelf-space fees.
[Schedule 1, items 6 and 38, section 960 and subsection 964A]
3.46 Concerns have also been expressed that the current definition of
`funds manager'--which is used in the definition of volume-based shelf-
space fee--is too broad, and captures many entities who are not actually
funds mangers.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
3.47 The Bill amends subsection 964(2) to provide a clear definition of
a funds manager that better describes the entities the ban on volume-based
shelf-space fees intends to capture. [Schedule 1, items 36 and 37,
subsections 964(1) and (2)]
3.48 Changes to the ban on volume-based shelf-space fees apply to
benefits given on or after the day after the Royal Assent that are not
otherwise grandfathered.
Client-pays exemption
3.49 The Bill provides clarity on the operation of the `client-pays
exemption'.
3.50 Under the current law, paragraph 963B(1)(d) provides that
benefits given by a retail client to a licensee or representative in relation to
the issue or sale of a financial product or financial product advice are
exempted from the ban on conflicted remuneration.
3.51 In addition, section 52 of the Corporations Act provides that: `a
reference to doing an act or thing includes a reference to causing or
authorising the act or thing to be done'. As Paragraph 963B(1)(d) exempts
a benefit from conflicted remuneration if it is `given' to a licensee or
representative, applying section 52 would mean that in giving a benefit to a
licensee or representative, a retail client is also causing or authorising the
benefit to be given.
3.52 The Bill inserts a note at the end of section 963A to clarify that
section 52 also operates in relation to the conflicted remuneration
provisions of sections 963A, 963B, 963C and 963D. [Schedule 1, item 23,
section 963A (note)]
3.53 The note clarifies that a benefit may be given either directly by a
client or given by another party at the direction of the client; as long as the
benefit is given using the client's own monies, or funds the client is
beneficially entitled to, the client-pays exemption applies.
3.54 Concerns have been raised over whether the client-pays
exemption can be used to exempt payments made from a superannuation
fund member's balance. The Bill clarifies that such payments can occur.
3.55 The Bill inserts a note at the end of subsection 963B(1) that
specifically indicates that the client-pays exemption operates with respect to
advice paid from a superannuation fund member's fund balance. This
principle also applies to other investments of the client, such as a platform
or a managed investment scheme. [Schedule 1, item 28, subsection 963B(1) (note)]
34
Conflicted remuneration and other banned remuneration
3.56 The trustee of the superannuation fund must still consider whether
payments out of the client's superannuation fund is appropriate given the
trustee's other obligations, such as the sole purpose test under section 62 of
the SIS Act.
3.57 It is important to note that, where the benefit is given by another
party, it must be given with the client's clear consent. A client would not
be considered to have given clear consent if the consent was not clearly and
expressly sought; for example, where consent has been sought as part of a
broad range of terms and conditions agreed by the client in aggregate, clear
consent would not have been provided. Rather, a client's consent could be
expressly sought in a separate and distinct section of the terms and
conditions agreed by the client.
3.58 Benefits given by another party at a client's direction are not
given by the client if the benefits are borne out of the other party's funds.
`Mixed' benefits
3.59 The Bill allows a benefit to relate to more than one exemption
from the ban on conflicted remuneration.
3.60 Under the current law, the exemptions relating to general
insurance, life risk insurance and basic banking products under Division 4
of Part 7.7A of the Corporations Act provide that the benefit must `solely'
relate to one of these products. This means that a benefit cannot be given if
it relates to one or more exemptions in Division 4--that is, a `mixed'
benefit, in relation to more than one exemption, cannot be provided. This
outcome was unintentional, and was rectified through the Corporations
Regulations. However, the change to the Corporations Regulations have
not been reflected in the Corporations Act.
3.61 The Bill permits such mixed benefits by providing that a benefit is
exempt from the ban on conflicted remuneration `to the extent' that it
relates to one or more of the products or circumstances described in
sections 963B, 963C and 963D. This allows a benefit to relate to one or
more exemptions, and also allows for circumstances that fall outside the
definition of conflicted remuneration. [Schedule 1, items 24, 25, 26, 31, and 32,
section 963C, subsection 963B(1), paragraphs 963B(1)(a), 963B(1)(b) and 963C(a)]
3.62 The Bill also confirms that the mere payment of two non-
conflicted remuneration benefits does not, in and of itself, make the
combined payment conflicted. The Bill inserts an example at the end of
subsection 963B(1) that illustrates this point. [Schedule 1, item 28,
subsection 963B(1) (example)]
35
Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
Regulation-making powers
3.63 Under the current law, sections 963B, 963C and 963D contain a
regulation-making power that allows certain benefits to be excluded from
the ban on conflicted remuneration in certain circumstances. However, the
regulation-making power does not extend to clarifying the operation of
existing exemptions.
3.64 The Bill introduces limited regulation-making powers under
sections 963B, 963C and 963D to allow such a clarification. In particular,
the regulation-making powers allow a regulation to be created to prescribe:
· circumstances in which all or part of a benefit is not
considered to be conflicted remuneration; and/or
· the extent to which, or a method for working out the extent to
which, a benefit is not considered conflicted remuneration.
[Schedule 1, items 29, 34 and 35, subsections 963B(7), 963C(2) and 963D(3)]
3.65 Given the complexity of payment arrangements within the
financial advice industry, there is a possibility that future remuneration
structures may be developed that are inadvertently captured by the ban on
conflicted remuneration. Regulation-making powers that clarify the
operation of the existing exemptions provide a way to address any future
unintended consequences.
Application and transitional provisions
3.66 These provisions commence the day after receiving Royal Assent.
Ban on conflicted remuneration
3.67 The amendments made in relation to the ban on conflicted
remuneration apply to a benefit if:
· the benefit is one to which Division 4 of Part 7.7A applies
under section 1528, that is, the benefit is not grandfathered;
and
· the benefit is given on or after the commencement day.
[Schedule 1, item 43, sections 1531A and 1531E]
3.68 Certain benefits given under an arrangement entered into prior to
the application day of the ban on conflicted remuneration, as defined in
subsection 1528(4), are not be subject to the ban as a result of
36
Conflicted remuneration and other banned remuneration
subsection 1528(1) and regulations made for subsection 1528(2). These
benefits are not affected by this Bill.
3.69 Benefits given under an arrangement entered into after the
application day of the ban on conflicted remuneration and certain benefits
given under arrangements entered into prior to the application day are
subject to the ban. Under the current law, such a benefit could not be given
or received if it is conflicted remuneration. The Bill serves to exempt
certain benefits that are subject to the current law. As such, the
amendments are not likely to give rise to the risk of acquisition of property
(within the meaning of paragraph 51(xxxi) of the Australian Constitution).
In any case, subsection 1528(3) provides that Division 4 of Part 7.7A of the
Corporations Act will not apply to the extent it would result in an
acquisition of property from a person otherwise than on just terms (within
the meaning of paragraph 51(xxxi) of the Australian Constitution).
3.70 The current requirements continue to apply until the Bill receives
the Royal Assent or new regulations are made.
Ban on volume-based shelf-space fees
3.71 The amendments made in relation to the ban on volume-based
shelf-space fees apply to a benefit if:
· the benefit is one to which Subdivision A of Division 5 of
Part 7.7A applies under section 1529, that is, the benefit is
not grandfathered; and
· the benefit is given on or after the commencement day.
[Schedule 1, item 43, sections 1531A and 1531F]
3.72 Under subsection 1529(1), the ban on volume-based shelf-space
fees applies where the benefit is given under an arrangement entered into
prior to the application day, as defined in subsection 1529(3).
3.73 The current requirements continue to apply until the Bill receives
the Royal Assent or new regulations are made.
Consequential amendments
3.74 The new law also contains a range of consequential amendments
to address matters such as headings, notes and definitions. [Schedule 1,
items 2, 16, 30, 41 and 42]
37
Statement of Compatibility with Human
Rights
Prepared in accordance with Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011
Corporations Amendment (Streamlining of Future of Advice) Bill 2014
4.0 This Bill is compatible with the human rights and freedoms
recognised or declared in the international instruments listed in section 3 of
the Human Rights (Parliamentary Scrutiny) Act 2011.
Overview
4.1 This Bill fulfils an election commitment made by the Government
to reduce the regulatory overreach of the Future of Financial Advice
(FOFA) legislation.
4.2 The FOFA legislation, which passed through Parliament in March
2012, was introduced to increase trust and confidence in the financial
services industry and increase access to financial advice for retail investors.
FOFA made a number of changes to financial advice laws, including
removing conflicted remuneration structures, to improve the quality of
advice and enhance retail investor protections. The legislation applied
voluntarily from 1 July 2012, and was mandatory from 1 July 2013.
4.3 The Government believes that the FOFA legislation went too far
and imposed unnecessary red tape and costs onto industry, which has
pushed up the price of financial advice for consumers, which is contrary to
the initial goals of FOFA. The Government considers that the legislation
has also had a number of unintended consequences that have led to
uncertainty in the industry. This Bill fulfils the Government's election
commitment to unwind the regulatory overreach created by the FOFA
legislation and provide certainty to the financial services industry.
39
Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
Human rights implications
4.4 The impact of this Bill on the following human rights has been
considered:
· the right to privacy and reputation;
· the right to freedom of opinion and expression; and
· the right to work and rights in work.
Right to privacy and reputation
4.5 Article 17 of the International Covenant on Civil and Political
Rights (ICCPR) provides that no one shall be subjected to arbitrary or
unlawful interference with their privacy. The right to privacy may be
engaged if the Bill involves the collection, security, use, disclosure or
publication of personal information.
4.6 This Bill removes the need for financial advisers to mail out an
annual fee disclosure statement to clients who entered into their ongoing fee
arrangement prior to 1 July 2013. A fee disclosure statement is document
that will typically contain the client's name, address, account number and
account details; at least some of which is personal to the client.
4.7 This Bill also removes the need for financial advisers to obtain
client `opt-in' every two years to continue an ongoing fee arrangement. To
obtain opt-in, an adviser would typically be required to mail out a form for
the client to complete. This form would also contain some personal details
of the client.
4.8 This Bill therefore engages the right to privacy, as it deals with
the disclosure of personal information. However, the Bill does not limit the
right to privacy in any way. The information that would be contained in
these documents will still be available to the client either through other
documents they receive, or upon request.
4.9 In addition, the risk of this information being intercepted in the
mail is eliminated by this amendment. To the extent that this increases the
security of personal information, this may advance the right to privacy for
the affected clients.
40
Statement of Compatibility with Human Rights
The right to freedom of opinion and expression
4.10 The right to freedom of opinion and expression is contained in
articles 19 and 20 of the ICCPR. The right to w freedom of opinion and
expression may be engaged if the Bill deals with aspects of employment or
workplace relations.
4.11 As described above, this Bill removes the need for advisers to
send fee disclosure statements to pre-1 July 2013 clients. These statements
contain information about the client and their account. As a result, the right
to freedom of opinion and expression is engaged because it regulates the
clients' access to this information. The information that is being regulated,
however, is still available to the client through other means so the right to
freedom of opinion and expression is not limited.
The right to work and rights in work
4.12 The right to work and rights in work is contained in articles 6(1),
7 and 8(1)(a) of the International Covenant on Economic, Social and
Cultural Rights (ICESCR). The right to work and rights in work may be
engaged if the Bill deals with aspects of employment or workplace
relations.
4.13 This Bill increases the number of avenues through which certain
employees in the financial services industry can earn commissions. As this
relates to remuneration, which an aspect of employment, it may engage
certain rights in work. That said, it certainly does not limit the rights of
employees; rights in work are advanced to the extent that certain employees
can earn a living through additional income streams.
Conclusion
4.14 This Bill is compatible with human rights as it does not raise any
human rights issues.
41
Chapter 5
Regulation impact statement
Introduction to FOFA
What is FOFA?
5.1 Summarily, the Future of Financial Advice (FOFA)
legislation--part 7.7A of the Corporations Act 2001 (the Act)--imposes
the following standards on providers of financial advice:
· A best interests obligation that requires advisers to act and
provide advice that is in the best interests of their client;
· An obligation to disclose ongoing fees and charges paid by
their client; and
· A requirement to not accept payments that may influence the
advice provided to the client.
5.2 Each of these requirements is discussed in greater detail later in
this Regulation Impact Statement (RIS).
5.3 FOFA represents the former Government's response to the
recommendations of the `Ripoll Inquiry', a Parliamentary Joint
Committee on Corporations and Financial Services (PJC) inquiry into
financial products and services in Australia. The Ripoll Inquiry was set
up in 2009 to inquire into, and report on, issues associated with financial
products and services provider collapses that occurred in the wake of the
Global Financial Crisis (GFC).
5.4 The dual underlying objectives of FOFA are to:
· improve the quality of financial advice;
· increase trust and confidence in the financial advice
industry.
43
Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
Why is FOFA changing?
5.5 The current Government agrees with the policy intent of FOFA,
but considers that the legislation has, in parts, placed an unnecessarily
heavy compliance burden on the financial services industry.
5.6 When the FOFA legislation was first introduced to Parliament in
late 2011, Parliament referred the then Bills--FOFA was introduced in
two tranches2--to the PJC; a report on the PJC's inquiry was released in
early 2012.
5.7 Alongside the main PJC report was a Dissenting Report by the
Coalition members of the PJC (the Dissenting Report). The Dissenting
Report contained a number of recommendations to reduce the regulatory
burden the FOFA Bills were predicted to impose on the financial services
industry.
Timeline of FOFA
Graphic 1: FOFA history
2 Corporations Amendment (Future of Financial Advice) Bill 2011 and the Corporations
Amendment (Further Future of Financial Advice Measures) Bill 2011.
44
Regulation impact statement
Graphic 2: FOFA amendments
Overview of the financial services industry
5.8 The financial services industry is an important part of the
Australian economy; it currently employs over 400,000 people and is the
largest industry in Australia when measured by gross value added (a
measure of the economic worth of the goods and services produced).3
Continued industry growth is expected to be largely driven by Australia's
ageing population and the increasing pool of superannuation funds.
3 ABS - 5204.0 - Australian System of National Accounts, 2012-13.
45
Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
Graphic 3: Structure of financial services industry
5.9 Product manufacturers, or fund managers, are responsible for
creating and managing financial products. Australia's managed funds
industry is one of the largest in the world, and the majority of these funds
are attributable to the advanced superannuation system, which encourages
employees to save for retirement throughout their working life. The pool
of superannuation funds in Australia is roughly the same size as
Australia's economy.4
4 ABS - 5206.0 - Australian National Accounts: National Income, Expenditure and Product,
June 2013.
46
Regulation impact statement
5.10 Platforms act as intermediaries between product
manufacturers and dealer groups. A product manufacturer will
typically place their financial products on a platform to make their
products accessible to dealer groups. A dealer group is made up of
multiple representatives who are authorised by a licensee to provide
financial advice under that licensee's financial services licence. In
Australia, there are more than 750 dealer groups5 who compare and
assess financial products on platforms and select a range of products
(commonly referred to as an `approved product list') for their
aligned advisers to offer to their clients. Dealer groups also offer a
range of other services, including back-end support and
administrative functions.
5.11 Industry estimates indicate that there are around 18,000 financial
advisers in Australia,6 who collectively manage over $500 billion of funds
under advice and generate over $4 billion revenue per annum.7 Between
20 and 40 per cent of Australian adults use or have used a financial
adviser.8
5.12 The financial advice industry is stratified into three distinct
segments: large, medium and small firms. There are five large firms, all
of which directly employ over 1,000 financial advisers. These large firms
are also financial product manufacturers and offer platform services.
Medium sized firms employ between 60 and 1,000 advisers, and small
firms employ less than 60 advisers. Many, but not all, of the small and
medium sized firms are aligned with one of the larger firms, often using
the platform(s) of a large firm to access and manage financial products for
their clients.
5.13 The industry is relatively competitive, with around half the
market accounted for by the top five firms, and the remaining half
occupied by small and medium firms.9 Whilst there are some
impediments for consumers switching financial products and
advisers, the competitive nature and the need for advisers to act in
the best interests of their clients ensures that clients have the ability
to switch products and advisers.
5 ASIC Report 224: Access to financial advice in Australia, 2010, p30.
6 Ibid.
7 IBISWorld Industry Report K6419b Financial planning and investment advice in Australia,
August 2013.
8 Ibid, note 4, p14.
9 Ibid, note 6.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
Increase in Institutional Ownership
5.14 The introduction of FOFA, along with the impact of the
GFC, appears to have had a sizable impact on the industry. The
FOFA amendments led many dealer groups to review their
remuneration models and business entity structures in light of the
shift to fee for service and the ban on conflicted remuneration. The
outcome has been that, since 2008, there have been a number of
major dealer group purchases, with more than a quarter of advisers
changing their home licence since 2008.
5.15 Many of these groups merged with, or were purchased, by
wealth management groups, with institutional ownership of the financial
advice market now controlling the majority of the market. Five advice
conglomerates now control more than half of the advice market.
5.16 Industry consolidation is being driven by the economies of scale
achieved by having a large number of advisers within the same group.
This includes the opportunity to distribute financial products through a
greater number of aligned advisers. ASIC has expressed concerns about
the number of the largest dealer groups being owned by product issuers,
which may give rise to perceived or actual conflicts of interest.10 In
addition, smaller groups which have found it difficult to adapt to FOFA
have proven to be easy and desirable targets for larger groups.11 The
barriers to entry in the industry relate mainly to holding and complying
with licensing requirements, which have increased since FOFA, and
achieving a sufficient scale to be competitive.12
Impact of FOFA
5.17 While the industry was growing rapidly before the GFC, the
economic downturn in 2008 and the FOFA amendments have led to a
decline in financial adviser numbers. More recently, dealer group
numbers appear to have increased and funds under advice have remained
relatively stable, especially compared with the decline following the GFC.
It is likely that the concentration within the industry and FOFA
amendments encouraged advisers to either move to other licensees or to
establish themselves under their own licence.
10 ASIC Report 362: Review of financial advice industry practice: Phase 2, 2013, p7.
11 Ibid, note 6.
12 Ibid.
48
Regulation impact statement
5.18 As revenue has remained relatively steady but compliance and
servicing costs increased because of the FOFA amendments, there has
been a decline in the industry's performance. AMP, for example,
estimated the reduction in embedded value in financial year 2013 because
of FOFA at $176 million in respect of anticipated margin impact and the
remaining cost of implementing FOFA at $4 million in financial year
2014.13 The Commonwealth Bank also increased its spend on risk and
compliance projects by 24 per cent in 2013 compared with 2012 which
was, in part, to satisfy FOFA amendments.14
5.19 The fall in adviser numbers also implies that the industry has
been underperforming population growth. This raises concerns as the
industry tries to service more people, particularly amongst the baby
boomers heading into retirement. The decline in adviser numbers is also
likely to be a reason behind the merger and acquisition activity in the
industry, as groups develop alternative pathways for expanding. Industry
employment is predicted to remain flat as uncertainty leads to career
changes and a pause in recruitment.15
Driving Efficiencies
5.20 The relative stagnation in the advice industry and the costs
associated with FOFA has encouraged advisers and dealer groups to gain
efficiencies through software and other tools. Industries servicing the
advice industry, including platforms and software providers, have been
under increasing pressure to provide these efficiencies.
Platforms
5.21 Platforms are administrative systems used by advisers for their
clients. The big four banks plus AMP and Macquarie control most of the
market. To capture and retain market share, platforms have been focusing
on technological advances such as share trading capability.
13 AMP Investor Report: Full Year 2013, AMP, 2014, available from:
http://shareholdercentre.amp.com.au/phoenix.zhtml?c=142072&p=irol-reports, p27, 39.
14 Annual Report 2013, Commonwealth Bank, 2013, available from:
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-
reports/2013_CBA_Annual_Report_19_August_2013.pdf, p15.
15 Ibid, note 6.
49
Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
5.22 Adviser groups often use a number of platforms to serve
different needs, but with consolidation in both the platform and advice
industries by leading players, there is an increasing push from these
players for their own, or aligned, advisers to use their own `white label'
platforms rather than external platforms.16
Research providers
5.23 As a condition of their licence, advisers are required to
demonstrate why they recommended particular products to their clients.
This research often informs the formulation of Approved Product Lists
(APLs). Sometimes a second subsidiary list is created from the APL, a
Recommended Product List (RPL), which lists the products recommended
for advisers to use at that point in time. Almost all licensees outsource this
research to external research providers, often to more than one provider.17
ASIC has noted that advisers should perform due diligence on potential
external research providers, so that they understand the research
provider's business model and can take that into account when providing
advice to clients.18 Under FOFA, where an advice provider considers it
reasonable to recommend a financial product they must conduct a
reasonable investigation into products relevant to the subject matter of the
advice and assess the information gathered in the investigation.19
5.24 There are only around a dozen research providers in Australia.
The market is very concentrated, with the top five research providers
controlling almost 90 per cent of the market. Fund managers now try to
strategically target advisers through the research providers they have
contracted. Research providers are therefore important gate-keepers,
deciding which products meet the standards required by advisers.20
5.25 A 2011 ASIC review of the top 20 advice licensees found that
despite the median number of products on approved product lists being
around 400, there remained a tendency to concentrate product
recommendations into a few key products.21 This is relevant to any
regulation of the remuneration models used by dealer groups.
16 Ibid, note 9, p13.
17 Ibid, p27.
18 Ibid, p28.
19 Section 961B(2)(e) of the Corporations Act 2001 (Cth).
20 Regulatory Guide 79: Research report providers: Improving the quality of investment
research, ASIC, December 2012, available from:
http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/rg79-published-10-December-
2012.pdf/$file/rg79-published-10-December-2012.pdf, p1.
21 ASIC Report 251: Review of financial advice industry practice, 2011, p7.
50
Regulation impact statement
Remunerations Models
5.26 Aspects of FOFA, including the ban on conflicted remuneration,
the introduction of scaled advice and the best interests duty, have led to a
widespread shift to fee for service payments. This shift has been noticed
by ASIC, and it was an anticipated consequence of FOFA.22 Some groups,
most notably MLC/NAB Wealth and AMP,23 have been moving to a fee
for service model for several years, but the trend has become more
pronounced since FOFA.
5.27 This shift is evident in two ASIC surveys of licensees conducted
in 2011 and 2013. A 2011 ASIC review of the top 20 advice licensees
found that the majority remunerated their advisers based on the volume of
financial products sold, which included ongoing commissions, up-front
commissions and volume rebates.24 In regards to total licensee
remuneration, 90 per cent was paid by product providers (including
asset-based fees), and only 10 per cent were paid directly by clients.25
5.28 Significant product concentration was also evident in the fees
received by advisers. Ongoing commissions from the top three products
recommended by all 20 licensees represented 37 per cent of all ongoing
fees. Further, 43 per cent of all up-front commissions were received from
the top three recommended products.26
5.29 In contrast, in a 2013 ASIC review of the top 21 to 50 licensees,
11 received less than 5 per cent of their remuneration directly from
clients, two received over 90 per cent of their remuneration directly from
clients. On average, approximately 36 per cent of revenue was received
directly from clients.27
22 Ibid, note 9, p13.
23 Annual Review 2011, NAB, 2011, available from:
http://cr.nab.com.au/docs/2011annualreview.pdf, p20.
24 Ibid, note 20, p11.
25 Ibid, note 20, p11.
26 Ibid, note 20, p12.
27 Ibid, note 9, p13.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
5.30 The impact of the proposed reforms on remuneration models
within the industry is uncertain at this stage. There has been only limited
public comment from the industry on their future plans, although AMP
has ruled out reintroducing commission payments on its investment and
superannuation products.28
5.31 The impact of FOFA on the cost of financial advice is not yet
evident. It is possible that groups absorbed compliance costs - instead of
passing these costs onto consumers - to retain clients and maintain market
share. A handful of licensees have been FOFA-compliant for longer than
was mandated, giving them the opportunity to transition and spread their
compliance costs over a longer time frame.
5.32 In general, ASIC has found that the fees charged for advice can
vary significantly across advice providers.29 In 2010, licensees reported
an estimate of the cost of providing comprehensive financial advice to a
client in the range of $2500 to $3500.30 IBISWorld also reports fees of
around $2,500 to receive holistic advice from an adviser.31
5.33 Importantly, ASIC found that a significant gap exists between
what consumers are prepared to pay for financial advice and how much it
costs industry to provide advice. This is the case even though high net
worth clients often cross-subsidise lower value clients.32 This gap existed
prior to the FOFA amendments and would only have been exacerbated by
the compliance costs imposed by FOFA, although this is hard to quantify
at this stage.
5.34 The FOFA amendments were expected to increase the provision
of scaled advice, that is advice limited to a particular product or range of
products. The number of advisers providing scaled advice was expected
to rise from 2 to 2.5 percent in 2013-14 to between 10 and 15 per cent in
2018-19, as scaled advice is often cheaper to provide than holistic advice
under a shift to a fee for service model.33 The proposed explicit provision
of scaled advice will further facilitate this growth trend.
28 Kate Kachor, `AMP rules out commissions revival', Financial Observor, 21 February 2014
(online), available from: http://www.financialobserver.com.au/articles/amp-rules-out-
commissions-revival.
29 Ibid, note 4, p43.
30 Ibid, note 4, p42.
31 Ibid, note 6.
32 Ibid, note 4, p44.
33 Ibid, note 6.
52
Regulation impact statement
Significance of the problem to be addressed
The Ripoll Inquiry
5.35 To understand the significance of the problem to be addressed, it
is important to understand the history and context of FOFA. As noted in
the introduction, and shown in Graphic 1: FOFA history, the current
FOFA legislation was a response by the former Government to the
findings of the Ripoll Inquiry.
5.36 The Ripoll Inquiry was set up in 2009 to inquire into, and report
on, issues associated with financial products and services provider
collapses, such as Storm Financial, Opes Prime, with particular reference
to the role of financial advisers; the general regulatory environment for
financial products and services; the role played by commission
arrangements relating to product sales and advice, including: the potential
for conflicts of interest, the need for appropriate disclosure, and
remuneration models for financial advisers; and the appropriateness of
information and advice provided to consumers considering investing in
products and services, and how the interests of consumers can best be
served.
5.37 The Ripoll Inquiry released its report in November 2009 and
made 11 recommendations for reform. The report commented: `It is the
view of the committee that, if implemented, these changes will act in
synergy to provide better outcomes and protections for consumers of
financial products and services'.34
FOFA
5.38 Most of the recommendations from the Ripoll Inquiry were
adopted by the former Government and formed the basis of FOFA. In
some areas, FOFA went further than the Ripoll Inquiry recommendations
and imposed additional requirements not canvassed. Table 1 summarises
select recommendations from the Ripoll Inquiry that subsequently became
part of FOFA, as well as additional measures introduced as part of the
original FOFA legislation.
34 PJC Inquiry into financial products and services in Australia, November 2009, p150.
53
Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
Table 5.1: Select Ripoll Inquiry recommendations and FOFA
Ripoll Inquiry FOFA response Concerns with FOFA
recommendation
Recommendation 1: That Introduce a statutory best · The current provision is
the Corporations Act be interests duty--Division 2, unclear and
amended to explicitly Part 7.7A--which requires an labour-intensive due to
include a fiduciary duty for advice provider to: its open-ended nature.
financial advisers operating · act in the best interests of the · It has also created
under an AFSL, requiring client; significant legal
them to place their clients' uncertainty as to how
interests ahead of their own. · provide advice that is
appropriate to the client; advisers can actually
satisfy the best interests
· warn the client if the advice duty.
is based on incomplete or
inaccurate information; and
· if there is a conflict between
the client's interests and
those of the advice provider,
give priority to the client's
interests.
Recommendation 4: That Introduce a ban on conflicted · The current ban captures
the government consult remuneration--Division 4, Part activities that were not
with and support industry in 7.7A--which bans benefits, the objective of FOFA.
developing the most whether monetary or non- · The financial advice
appropriate mechanism by monetary, given to advisers in industry is required to
which to cease payments relation to advice that could maintain complex
from product manufacturers reasonably be expected to systems when providing
to financial advisers. influence either the choice of general advice to ensure
financial product recommended compliance with the
or the financial product advice existing conflicted
given. remuneration provisions.
Some exemptions from this ban
were introduced, including for
basic banking products.
Not included in Introduce an opt-in · The opt-in notices do not
recommendations requirement--Division 3, Part arguably offer substantial
7.7A--which requires an adviser benefits to consumers;
to seek, every two years, their particularly as consumers
client's consent to continue an already have the ability
ongoing fee arrangement. to opt-out of their
arrangements.
· This requirement has
imposed significant
implementation and
ongoing costs on
advisers.
54
Regulation impact statement
Ripoll Inquiry FOFA response Concerns with FOFA
recommendation
Not included in Introduce a fee disclosure · Providing fee disclosure
recommendations statement--Division 3, Part statements to
7.7A--which requires an adviser pre-1 July 2013 clients
to provide, every year, a has proven to be difficult
statement that shows the fees and expensive.
paid by the client, the services · Many of these clients are
the client received and the on old legacy systems,
services the client was entitled to predating the FOFA
receive during the preceding changes; as such,
12 months. significant manual work
is required to prepare
statements for these
clients.
Dissenting Report
5.39 Upon introduction to Parliament, the FOFA Bills were referred
to the PJC for inquiry and report. Alongside the PJC's report into the
FOFA Bills was the Coalition's Dissenting Report. The Dissenting
Report affirmed the Coalition's commitment to the recommendations of
the Ripoll Inquiry, but criticised the former Government's proposed
legislation. The Dissent Report comments:
...in pursuing regulatory change the Parliament must focus
on making things better not just more complex and more
costly for everyone. The Parliament must avoid regulatory
overreach where increased red tape increases costs for both
business and consumers for little or no additional consumer
protection benefit.35
...
...the Ripoll Inquiry reported back in November 2009 and
made a number of well considered and reasonable reform
recommendations.36
...
...Instead of implementing the very sensible and widely
supported recommendations made by the Ripoll Inquiry, the
35 Dissenting Report, February 2012, p151.
36 Ibid.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
government allowed its Future of Financial Advice reform
package to be hijacked by vested interests creating more than
two years of unnecessary regulatory uncertainty and
upheaval in our financial services industry.
5.40 The government's decision making processes around FOFA
over the past two years leave much to be desired. There were constant
and at time completely unexpected changes to the proposed regulatory
arrangements under FOFA right up until the introduction of the current
legislation. Invariably this was done without proper appreciation or
assessment of the costs involved, of any unintended consequences or other
implications flowing from the proposed changes to the changes.
5.41 Important financial advice reforms recommended by the Ripoll
inquiry have been delayed by more than two years so the government can
press ahead with a number of additional contentious changes.
5.42 It is the view of Coalition Committee members that the FOFA
package of legislation in its current form is:
· Unnecessarily complex and in large parts unclear;
· Expected to cause increased unemployment;
· Legislating to enshrine an unlevel playing field amonst
advice providers, inappropriately favouring a government
friendly business model; and
· Likely to cost about $700 million to implement and a further
$350 million per annum37 to comply with, according to
conservative industry estimates.
5.43 Based on the evidence provided to the Committee, Coalition
Committee members conclude that this will lead to increased costs and
reduced choice for Australians seeking financial advice. 38
5.44 The Dissenting Report went further to indicate that FOFA would
have a widespread, detrimental effect on the financial advice industry.
The Dissenting Report continues:
37 The cost estimate was indicated to be $375 million by Mr John Brogden, CEO of the
Financial Services Council, during PJC hearings.
38 Ibid, note 34, p152-153.
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Regulation impact statement
The Committee received evidence from many industry
participants about the very serious detrimental effects the
introduction of this legislation in its current form would have
on the industry and on consumers. Detrimental effects
include high additional costs imposed on industry
participants with resulting increased costs of advice for
consumers, reduced employment levels in the financial
services sector leading to reduced availability and access to
affordable high quality advice, as well as a further
concentration of advice providers which would lead to an
undesirable reduction in competition and choice for
consumers.39
...
Stakeholders argue that FOFA, if passed in its current form,
would cause an undesirable restructuring of the financial
advice industry, with increased concentration of players in
the market and less competition.40
...
Coalition Committee members consider that the
disproportionate increase in costs to the industry and
consumers, the reduction in the number of financial advisers
in Australia, the associated additional job losses and the
further concentration of financial advice services providers
will have detrimental impacts on the cost, availability and
accessibility of financial advice across Australia.41
5.45 The Dissenting Report made 16 recommendations that would
address the Coalition Committee members' concerns with FOFA.
FOFA today
5.46 There is evidence42 to suggest that some of the concerns raised
in the Dissenting Report have eventuated. There has been some
evidence--depending on reporting sources--of a decline in adviser
39 Ibid, p154.
40 Ibid, p155.
41 Ibid, p156.
42 Much of the evidence in this RIS has been provided to the Treasury under commercial-in-
confidence arrangements and cannot be directly quoted. Where this is the case, the evidence
is paraphrased and no source is referenced.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
numbers in recent years. There has also been evidence of increasing
industry concentration--particularly through the consolidation of smaller
dealer groups with large institutional advisers; it is reasonable to conclude
that such a concentration may result in less competition and choice
available to consumers.
5.47 During consultations undertaken on the proposed package of
amendments to FOFA, as well as on the draft legislation and regulations, a
number of industry stakeholders have indicated that they have incurred,
and will continue to incur, significant ongoing costs to satisfy the
compliance requirements imposed by FOFA. However, it is currently
unclear whether this has translated into higher costs for consumers.
Similarly, it is unclear whether FOFA has resulted in reduced availability
and accessibility of financial advice. Given the short time since FOFA
became mandatory, and given the continuing adjustments that are taking
place in the industry, these outcomes may not be known for some time.
Looking forward
5.48 The changes the Government intends to make to FOFA should
be considered against the backdrop of an ageing population, declining
workforce participation and the need for increased fiscal discipline.
5.49 The Australia to 2050: future challenges report shows that the
proportion of Australia's population aged 65 and over is projected to
almost double over the next 40 years.43 The increased value of
individuals' superannuation and other private assets represent a significant
business opportunity for advisers. Superannuation and retirement
products currently comprise the majority of the wealth management
market, so growth in this area will have a significant positive impact on
the industry.
5.50 While there will be an increase in the number of retirees to
advise, the number of advisers in industry in recent years has stagnated or
declined slightly. Some industry stakeholders have attributed this to
increased costs and uncertainty arising from FOFA. Reducing the
compliance burden on the industry will free up more resources, and
should facilitate job creation and innovation, which will support
productivity and result in more efficient processes.
43 Australia to 2050: future challenges, the Treasury, 2010, available from:
http://archive.treasury.gov.au/igr/igr2010/report/pdf/IGR_2010.pdf, p1.
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Regulation impact statement
5.51 Higher spending on public health care, pensions and other social
services caused by population ageing will also result in higher fiscal
pressures on the government. One guiding principle for achieving fiscal
sustainability is that government should `do for people what they cannot
do, or cannot do efficiently, for themselves, but no more'.44 Financially
self-reliant individuals will reduce the pressures on government spending,
and encouraging Australians to take responsibility for their own financial
decisions will become increasingly important. The proposed changes to
FOFA will foster an environment where affordable financial advice is
more accessible, which will encourage wealth creation.
5.52 In summary, the changes to FOFA are an important first step in
reducing the regulatory burden on the financial advice industry, and
should help in providing the flexibility to take advantage of future
opportunities.
Objectives of Government action
5.53 In its pre-election Policy to Boost Productivity and Reduce
Regulation, the Coalition committed to amend FOFA to: `reduce
compliance costs for small business financial advisers and consumers who
access financial advice'.45 In particular, it indicated that it would:
`implement all 16 recommendations made as part of the Parliamentary
Joint Committee inquiry into FOFA'.46
5.54 Since the election, the Assistant Treasurer has, in a number of
speeches, re-affirmed the Government's commitment to: `reducing the
regulatory overreach of FOFA'.47
5.55 The objective of Government action is threefold:
· Remove the unnecessary burdens imposed on the financial
advice industry from FOFA measures that went beyond the
recommendations of the Ripoll Inquiry;
44 Mid-year Economic and Fiscal Outlook 2013-14, Commonwealth of Australia, December
2013, available from: http://budget.gov.au/2013-
14/content/myefo/download/2013_14_MYEFO.pdf, p2.
45 The Coalition's Policy to Boost Productivity and Reduce Regulation, July 2013, p26.
46 Ibid.
47 Assistant Treasurer, Keynote Address to the 2014 Insurance Council of Australia
Regulatory Update Seminar, 28 February 2014, available from:
http://axs.ministers.treasury.gov.au/speech/008-2014/.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
· Properly implement the finding of the Ripoll Inquiry so as to
reduce regulatory overreach whilst maintaining the important
consumer protection measures introduced by FOFA; and
· Address other technical and consequential concerns raised by
industry.
5.56 A summary of the key proposed changes is presented in table 2.
These are detailed further in the `impact of changes' section later in this
document.
Table 5.2: Summary of changes to FOFA
FOFA Concern Change
component
Best interests The best interests duty, as currently Government action will remove
duty drafted, has created significant uncertainty the open-ended nature of the best
amongst advisers. Many industry interests duty.
stakeholders have argued that this Whilst the Ripoll Inquiry
uncertainty is ongoing and needs to be recommended imposing a
addressed by regulatory change. fiduciary duty on advisers, it did
These stakeholders argue that the open- not recommend it to be an
ended nature of the duty leaves advisers open-ended obligation.
uncertain on how to satisfy their duty.
They also expressed concern that advisers
are vulnerable to legal action because
adviser's obligations under the duty is not
well defined nor well understood.
Scaled Scaled advice (a form of targeted advice Government action will facilitate
advice that is limited in scope, and is typically the provision of scaled advice,
much cheaper than full, holistic advice), whilst ensuring advice remains
was supposed to have been accommodated appropriate to the client.
by the best interests duty. This action will properly
However, many advisers have indicated implement the policy intent of
that they are not confident that they can the Ripoll Inquiry.
legally provide this form of advice. This
uncertainty has resulted in advisers
spending more time and money on
activities than otherwise necessary, such as
understanding their legal obligations and
documenting compliance with the best
interests duty.
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Regulation impact statement
FOFA Concern Change
component
Fee Fee disclosure statements are currently Government action will remove
disclosure required to be provided to all clients, the requirement for fee
statements including those in ongoing fee disclosure statements to
arrangements prior to the introduction of pre-1 July 2013 clients, but keep
FOFA on 1 July 2013, and were designed the requirement for
to increase the engagement of clients and post-1 July 2013 clients.
improve transparency in the industry. The requirement to provide fee
According to industry stakeholders, disclosure statements was not a
providing fee disclosure statements to recommendation from the Ripoll
pre-1 July 2013 clients is difficult and Inquiry.
expensive: many of these clients are on old
legacy systems, predating the FOFA
changes; as such, significant manual work
is required to prepare statements for these
clients.
By contrast, as post-1 July 2013 clients are
on newer, FOFA compliant systems, it is--
comparatively speaking--much cheaper
and efficient to produce fee disclosure
statements for these clients.
In the exposure draft of the original FOFA
legislation, fee disclosure statements were
only intended for post-1 July 2013 clients.
Opt-in The opt-in requirement was introduced to Government action will remove
provisions increase client engagement. However, the opt-in requirement. Opt-in
many industry stakeholders have argued was not a recommendation from
that the opt-in notices do not offer the Ripoll Inquiry.
substantial benefits to consumers;
particularly as consumers already have the
ability to opt-out of their arrangements.
Many stakeholders have also indicated that,
whilst the opt-in provisions are trying to
institute a behavioural shift in the way
clients interact with advisers, the changes
required are too great for the financial
advice industry to bear alone; rather, any
changes in consumer engagement should
be part of a broader strategy.
Options that may achieve the objectives
5.57 This regulation impact statement (RIS) assesses the impacts of
the Government's proposed amendments based on its election
commitment; it does not explore any other options (in accordance with the
Office of Best Practice Regulation's (OBPR) guidelines).
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
5.58 Whilst the Government's election commitment was to
implement the 16 recommendations of the Dissenting Report, a number of
the recommendations are no longer applicable as changes have already
been made to FOFA that achieve the objectives sought, or the
recommendations are no longer relevant due to the passage of time.
5.59 As such, this RIS considers the impact of a package of
amendments to FOFA, including all of the (still relevant) Dissenting
Report recommendations, as well as some additional amendments to
address industry concerns.
Impact analysis
Overview of impact on industry and consumers
5.60 The proposed amendments to FOFA seek to navigate the fine
line between ensuring that unnecessary and burdensome regulations that
drive up the cost of business are removed, whilst ensuring that the
consumer protections of FOFA are maintained.
5.61 The proposed amendments to FOFA are deregulatory and will
reduce the compliance burden on the financial advice industry. Feedback
from consultations and submissions on the draft amendments varied, and
ranged from a complete rejection that any changes need to be made to
FOFA, through to wholesale support.
5.62 Many industry stakeholders indicated that the proposed
amendments will result in a more practical framework for financial
planners and their clients. These stakeholders have argued that the
changes will: provide clarity to industry, more closely align FOFA with
the intentions of the Ripoll Inquiry, and deliver significant cost savings
that will ultimately benefit consumers.
5.63 Consumer groups--and some industry stakeholders--are far less
enthused. Most of the submissions have argued that the proposed package
of amendments go too far in winding back the consumer protections
introduced by FOFA. In particular, some stakeholders expressed concern
that a number of proposed amendments, including the changes to the best
interests duty, the removal of opt-in provisions, and exempting general
advice from the definition of conflicted remuneration, will leave
consumers vulnerable to poor quality advice by reducing the standard of
advice provided. Furthermore, it is suggested that the amendments could
reduce the level of trust and confidence in the financial advice industry,
all of which runs contrary to the recommendations of both FOFA--as
introduced by the former Government--and the Ripoll Inquiry.
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Regulation impact statement
5.64 A more detailed analysis of the benefits and costs of each of the
amendments is presented below.
Cost savings
Estimates
5.65 Treasury's estimates of the ongoing cost savings are
approximately $190 million per year, with one-off implementation
savings of approximately $90 million; these estimates represent just over
half of the estimated $375 million ongoing costs of complying with
FOFA.48 A breakdown of the estimates is presented in Table 3.
Table 5.3: Breakdown of FOFA amendment savings estimates
Proposed change Estimated average Estimated
ongoing cost saving implementation cost
per year ($Million)* saving ($Million)*
Remove opt-in requirements $45.1 $76.9
Limit the annual fee disclosure requirements to be for $40.8 $0.8
prospective clients only
Removal of the `catch all' provision in the best interests $33.3 Nil
duty
Explicit provision of scaled advice $34.1 Nil
Limit the banning of commissions on life (risk) Nil Nil
insurance provided under superannuation
Exempt `general advice' from `conflicted remuneration' $36.349 $10.0
under certain circumstances
Clarify the exemption from the ban for execution-only Nil Nil
services
That the training exemption permits training expenses Nil Nil
related to conducting a financial services business, rather
than just the provision of advice
Amendments to volume-based shelf-space fees Nil Nil
Clarify the definition of intra-fund advice Nil Nil
Grandfather existing remuneration from the ban on Nil Nil
conflicted remuneration
48 Ibid, note 36.
49 The cost savings for this amendment differ from the savings published in the options-stage
RIS as the general advice exemption has been modified (see detailed analysis for further
explanation). It is estimated that the modifications will affect some of the firms in the small
and medium firm segments but none of the large firms.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
Proposed change Estimated average Estimated
ongoing cost saving implementation cost
per year ($Million)* saving ($Million)*
Explicitly recognise that a `balanced' remuneration Nil Nil
structure is not conflicted remuneration
Allow bonuses to be paid in relation to revenue that is Nil Nil
permissible under FOFA
Include consumer credit insurance in the basic banking Nil Nil
carve-out
Amendments to the FOFA stockbroking exemptions Nil Nil
Other minor technical changes Nil Nil
Total $189.7 $87.7
*These estimated cost savings refer only to direct cost savings.
Methodology
5.66 Given the size and disparity of the financial advice sector, and
differences in operational aspects and cost structures within the industry,
it is difficult to reliably estimate costs and cost savings. Notwithstanding
this fact, the Australian Government's Business Cost Calculator was used
to produce an estimate of the cost savings from the proposed amendments
to FOFA (in accordance with OBPR guidelines).50
5.67 For the purposes of calculating the cost savings figures, the
financial services industry was split into three segments based on firm
size. Adviser groups with more than 1000 advisers were classified as
`large' firms. All adviser groups with less than 60 advisers were
classified as `small' firms, and the remaining adviser groups were deemed
to be `medium' firms.
5.68 Industry data was obtained from all three industry segments
through consultations with key industry bodies--these bodies in turn
liaised with their membership base--and large industry participants.
Industry participants were asked to provide accurate data indicating the
cost savings for each of the amendments.
5.69 Firms were asked to identify their cost savings as either `labour
cost savings', which are calculated by reference to the amount of time
saved per firm multiplied by a cost of labour, or `purchase cost savings',
which are purchases that the firm would no longer be required to make as
a result of the amendments to FOFA. For each amendment, firms
50 Business Cost Calculator, the Office of Best Practice Regulation in the Department of the
Prime Minister and Cabinet, available from: https://bcc.obpr.gov.au/.
64
Regulation impact statement
provided labour cost savings data on: the number of employees affected, if
any; the amount of time that would be saved per employee; and the cost of
labour for the affected employee(s). For purchase cost savings, firms
provided an estimate of the cost savings that would arise under each of the
proposed amendments.
5.70 A bottom-up approach was used to estimate industry savings.
The inputs provided from each industry segment were averaged--on a per
firm basis--then multiplied by the number of firms in the industry to
generate a cost savings estimate for that segment. These segment
estimates were added to arrive at a total industry cost savings estimate.
5.71 A detailed breakdown of the cost estimate inputs cannot be
publicly released as some of the data was provided on an in-confidence
basis. That said, a summary table of average inputs is provided in Table
4. As shown, the majority of cost savings are derived from labour cost
savings, with relatively small savings from purchase costs.
5.72 As an example, the removal of the `catch-all' provision within
the best interests duty is estimated to save $33.3 million per year. This
calculation is based on an average labour cost per person of approximately
$62 per hour, and an estimated average time saving of just over 14 hours
per firm, per week.
5.73 The average labour cost varies across amendments due to the
different wage rates of employees performing different functions. For
example, the scaled advice provision has the highest labour cost because
this amendment directly affects the time of financial advisers, who are
typically on higher wage rates than other staff members in the
organisation. By contrast, the opt-in amendment has the lowest labour
cost because this function is able to be performed by staff on lower wages:
mainly administrative or clerical staff.
5.74 The estimated cost savings, which were calculated using data
provided by industry, are based on the assumptions and methodology set
out above. It should be noted that industry cannot perfectly foresee the
impact of the amendments on their cost structures; therefore, actual cost
savings may differ from those estimated in this document: these figures
are estimates only.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
Table 5.4: Summary of cost savings inputs
FOFA amendment51 Number of Average Total Total Total cost
hours per labour labour purchase savings
firm (per cost ($ per cost cost ($M per
week)52 hour)53 savings savings year)56
($M per ($M per
year)54 year)55
Fee disclosure statement 20.0 $60.5 $46.1M $0.3M $46.4M
requirements
Removal of opt-in 18.4 $54.1 $37.9M $2.3M $40.2M
Removal of the catch all 14.2 $61.9 $33.3M Nil $33.3M
provision
Explicit provision of 14.3 $63.2 $34.1M Nil $34.1M
scaled advice
Exempt `general advice' 17.9 $59.5 $36.3M Nil $36.3M
from `conflicted
remuneration' under
certain circumstances
Limitations
5.75 Whilst it is anticipated that some of the cost savings to industry
will be passed through to consumers, it is difficult to quantify the extent to
which this will occur. Cost savings could flow through to consumers either
through a reduction in the cost of advice, or through the avoidance of (an
otherwise necessary) price increase. It is anticipated that, in any case, the
cost of advice under the proposed amendments will be lower than if the
amendments were not implemented.
51 The total cost savings figures for the fee disclosure statement and opt-in amendments differ
from the cost savings estimates provided in Table 3 of the RIS. The figures presented in this
table represent the savings achieved in the first year of the amendments, whereas the figures
presented in Table 3 are average cost savings over ten years (presented as an average to
comply with OBPR guidelines).
The savings from the fee disclosure amendment is expected to decrease over time whereas
the saving in relation to the opt-in amendment is expected to increase over time.
Cost savings for the remaining three amendments are not expected to change over time, so
are identical to the figures in Table 3.
52 Number of hours per firm (per week) have been rounded to one decimal point.
53 Average labour cost (per hour) have been rounded to one decimal point.
54 Total labour cost savings have been rounded to the nearest $100,000.
55 Total purchase cost savings have been rounded to the nearest $100,000.
56 Total cost savings have been rounded to the nearest $100,000.
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Regulation impact statement
5.76 It is important to note that the Business Cost Calculator
only calculates the direct cost savings of the proposed amendments,
and does not consider indirect or `second-round' savings or
opportunity cost savings. Whilst some of the amendments, such as
those designed to provide clarity to industry, may not result in direct
and quantifiable cost savings, second-round or indirect cost savings
are likely to arise.
5.77 For example, if an adviser attends a training course to
increase their understating of the best interests duty, the cost of that
training course would be included in the Business Cost Calculator
as it represents a direct cost related to compliance. By contrast, if
the adviser were to forego giving advice for a few hours in order to
research their best interests duty obligations (that is, at no external
cost), the foregone revenue from the advice that could otherwise
have been earned is not included as it is an opportunity cost.
5.78 Similarly, the cost savings to consumers is not included in the
calculations, as it is a `second-round' saving; the `first-round' saving
occurs to firms. The impact of the amendments on consumers is
discussed in more detail throughout this section.
Stakeholder feedback on estimates
5.79 Treasury's initial impact analysis and cost savings estimates
were published in the options-stage RIS, and provided an opportunity for
stakeholders to engage with the Government on the impact of the
proposed changes. Stakeholders were also provided an opportunity to
comment on the RIS during consultations on the draft amendments; these
consultations were conducted during February 2014.
5.80 Key industry bodies broadly agreed with the qualitative impact
analysis presented in the options-stage RIS. They reiterated their belief
that the proposed amendments will reduce the regulatory burden on
industry and increase the affordability of financial advice for consumers,
whilst also ensuring appropriate protections are in place for investors.
They consider that the amendments are necessary to provide certainty to
all stakeholders and reduce the unnecessary complexity and burden that is
inhibiting their ability to provide cost-effective advice to consumers.
5.81 Industry bodies also agreed with the quantitative analysis of the
cost savings presented in the options-stage RIS. No key industry bodies
or industry participants brought forward new data or amended their
previously provided data for the details-stage RIS.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
5.82 Whilst some industry stakeholders indicated that the published
numbers appeared conservative, there was insufficient substantive new
information to warrant increasing the cost savings estimates for the
details-stage RIS.
5.83 Consumer groups did not raise any specific concerns with cost
savings estimates calculated except to indicate that the cost savings to
consumers should be considered in addition to the cost savings to
industry.
5.84 As noted above, whilst this RIS quantifies the direct cost
impacts to the industry, there are not expected to be any direct or
`first round' compliance cost impacts for consumers. Instead, a
qualitative explanation of the costs to consumers will be provided in the
measure-by-measure analysis below.
5.85 Following feedback from industry and consumer groups, no
changes were made to the cost savings as calculated in the options-stage
RIS. However, an adjustment has been made to the cost saving estimate
for the general advice exemption; this adjustment reflects the revised
exemption (see detailed analysis below for further details).
Detailed analysis on Dissenting Report amendments
5.86 As mentioned above, feedback was received on the options-
stage RIS as part of the consultations on the proposed FOFA amendments.
The primary theme that emerged was that the options-stage discussion of
the impacts of each of the proposed amendments was overly technical,
and primarily focused on the benefits to industry; many stakeholders felt
that the options-stage RIS contained insufficient consideration of the costs
to consumers, or that the impact of some of the amendments on
consumers was understated.
5.87 This details-stage RIS has attempted to address these concerns.
For the purposes of this RIS, the proceeding section presents, for each of
the proposed amendments: a technical description of the change; a
description of the industry impacts; a description of the consumer impacts;
a critical analysis of these impacts and conclusion as to the net impact for
each amendment. Any conclusion as to the net impact of the proposed
amendments is an `on balance' assessment.
Remove opt-in requirements
5.88 This amendment removes the requirement for advisers to obtain
their client's approval, at least every two years, to continue an ongoing fee
arrangement; the opt-in provisions only relate to clients who enter into an
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Regulation impact statement
ongoing fee arrangement from 1 July 2013. Whilst FOFA became
mandatory on 1 July 2013, the effective start date for opt-in is 1 July 2015
as clients only need to opt-in every two years.
5.89 The opt-in requirement was introduced to enable customers to
assess the quality of service they receive for the fees they pay. Currently,
if a client does not opt-in within 30 days of receiving an opt-in notice,
their ongoing arrangement is terminated (termination occurs 60 days after
receiving the opt-in notice). Under the proposed amendment, clients will
no longer be required to opt-in, and will maintain their existing right to
opt-out of their ongoing fee arrangements.
5.90 Industry stakeholders have been largely supportive of this
proposed change, although the reasons have varied. Many stakeholders
have cited the high implementation and ongoing costs of the opt-in
system, which are likely to be passed through to the consumer, as a strong
motivation for removing the requirement. These costs relate to
implementing and maintaining systems, additional staff involvement,
other administrative overheads, and are closely linked to the number of
customers; as such, these costs are anticipated to increase over time as
client numbers increase.
5.91 Other industry stakeholders have argued that firms in the
financial services industry, particularly those who are members of a
professional industry association, should be actively promoting client
engagement independent of statutory requirements. The argument is that
these firms should be engaging with their clients to earn their trust and
prove their `value add'. These stakeholders, therefore, argue that opt-in,
of some form or another, is already occurring in many instances, and that
the driver of this consumer engagement should come from industry rather
than be mandated by government.
5.92 One final, albeit related, argument is that the opt-in provisions
impose too high a standard on financial advisers. Whilst these
stakeholders laud government attempts to improve consumer engagement,
they argue that the provisions that apply to financial advisers are out-of-
sync with the rest of the financial services industry: nowhere else is an
opt-in requirement mandated. As such, the argument is that the opt-in
provisions should be removed and only reinstated as part of a much
broader, systemic attempt to ensure greater consumer engagement.
5.93 Consumer groups have argued that opt-in is important to
promote client engagement and transparency of fees charged. An ASIC
report found that only 33 per cent of clients serviced by the top 20
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
licensees were considered active,57 which suggests that the majority of
clients are inactive or disengaged. For such consumers, the opt-in
requirement provides an opportunity to assess whether they wish to
continue their arrangement(s) with their adviser, a decision that is aided
by the fee disclosure statement--see discussion on fee disclosure
statements below.
5.94 Client engagement is considered important in ensuring that
clients actively monitor their financial position and are aware of any
changes to their account(s). Consumer groups have argued that removing
the opt-in requirement will drive up the cost of advice, as advisers will
earn revenue from disengaged or `passive' clients without providing any
advice to them. It is argued that if these clients were more engaged, they
would be in a better position to weigh up their options and consider
switching into a lower cost (possibly fee-for-service) product.
5.95 Some stakeholders have argued that the opt-in requirements are
necessary as FOFA has allowed ongoing percentage-based fees to
continue to be charged: under FOFA, asset-based fees--which are
calculated based on the value of the assets invested with the adviser--are
able to be deducted from a client's account on a regular basis, and for an
indefinite period of time, as long as the client initially consents to the
charges. These stakeholders have argued that these asset-based fees have
exactly the same effect as sales commissions, and that, with the removal
of opt-in, there will be no mechanism to ensure that ongoing fees are only
being charged where ongoing advice, or at least ongoing communication,
is being received.
5.96 According to these stakeholders, removing the opt-in
requirements will be at a heavy cost to consumers. One submission
argued that a 0.5 per cent ongoing fee would equate to a $46,000
reduction in the super balance of an average superannuation member over
their working life. Given that, according to these stakeholders, around
two million super fund members were paying ongoing fees but were not
receiving any financial advice, the removal of opt-in has far reaching
consequences.
5.97 The consumer benefits of the opt-in requirements cannot be
denied. The opt-in requirements were, and are, a paradigm shift in the
battle to increase client engagement. By requiring advisers to seek client
approval to continue arrangements, opt-in nudges clients into actively
considering whether they are receiving service commensurate to the fees
that they have paid and thereby raises the service levels of the industry.
57 Ibid, note 20.
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Regulation impact statement
5.98 That said, the opt-in requirement places a disproportionately
large burden on financial advisers; a burden not replicated in other areas
of, or even outside of, the financial services industry. Whilst there is no
doubt that the removal of the opt-in requirement is likely to reduce client
engagement, there are a range of other measures within the legislation that
are intended to promote client engagement; for example: statements from
superannuation trustees, product manufacturers, and fee disclosure
statements will provide consumers with information on the fees and
charges they are incurring. Furthermore, consumers will continue to be
able to opt-out at any time.
5.99 The opt-in requirement was not recommended by the Ripoll
Inquiry. The Dissenting Report comments:
The Ripoll Inquiry, having comprehensively considered the
state of Australian financial products and services back in
2009, made no recommendation to force Australians to re-
sign contracts with their financial advisers on a regular
basis.58
...
There is no precedent for this sort of government red tape in
the context of financial services and advice relationships
anywhere in the world.59
5.100 Notwithstanding the consumer benefits that arise from opt-in,
the disproportionate treatment of financial advisers relative to the rest of
the financial services industry, and the significant ongoing and
implementation costs to achieve these measures, indicate that the cost
savings to industry outweigh the consumer benefits from the removal of
the opt-in provisions.
Limit the annual fee disclosure requirements to be for prospective
clients only
5.101 This amendment removes the requirement for advisers to
provide a fee disclosure statement to clients who entered into their advice
arrangement prior to 1 July 2013. Advisers will still need to provide an
annual fee disclosure statement to post-1 July 2013 clients. Fee disclosure
statements provide customers with a single statement that shows, for the
previous 12 months, the fees paid by the client, the services the client
received, and the services the client was entitled to receive.
58 Ibid, note 34, p160-161.
59 Ibid.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
5.102 Industry has strongly supported the removal of the fee disclosure
statement requirements for pre-1 July 2013 clients. Industry stakeholders
have argued that it costs significantly more to produce a fee disclosure
statement for a pre-1 July 2013 client than for a post-1 July 2013 client.60
These stakeholders have indicated that these costs will be passed onto the
client and will reduce the accessibility and affordability of financial
advice. They have also argued that collecting the information for fee
disclosure statements can be a convoluted process, as the information
needs to flow from (often multiple) product manufacturers to licensees,
and are then passed onto the relevant adviser(s) before the statement can
be created and sent to the client. It is argued that this process can involve
a significant investment of time and resources, especially for pre-1 July
2013 clients.
5.103 Consultations have suggested that the higher costs for old clients
are primarily driven by the age of systems, which struggle to provide
accurate fee information for pre-1 July 2013 clients. As a result, to ensure
that fee disclosure statements to pre-1 July 2013 clients are accurate, a
significant amount of adviser time is required to quality assure the
disclosure statements. The annual cost saving for this proposed
amendment is estimated to decrease over time as a greater portion of
clients receive fee disclosure statements.
5.104 Consumer groups have argued that the fee disclosure statement
is an important source of information, particularly for consumers who
may not have the time or skills to collate and fully understand the fees
they are paying. It is argued that this amendment adversely affects pre-1
July 2013 clients, who may continue to be placed in ongoing, expensive
fee arrangements--even if there are better alternatives available--as they
will not have a simple source of information to prompt them to compare
their arrangements to others. It is therefore argued that, due to
information asymmetry, this amendment would affect the bargaining
power of clients when negotiating fee arrangements with their adviser.
5.105 In the absence of fee disclosure statements, pre-1 July 2013
clients will be required to piece together the fee details from multiple
statements, often with different cut-off dates, to calculate an annual fee;
such an exercise would be beyond the capabilities of many advice clients.
Whilst advisers may help their clients complete such a task, it would most
likely be at a substantial cost to the client.
5.106 Notwithstanding the benefits to pre-1 July 2013 clients from
receiving a single statement outlining the fees they have paid, most of
60 Ibid, p165.
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Regulation impact statement
these clients are currently paying conflicted remuneration (in the form of
grandfathered commissions) to their advisers rather than a `fee for service'
charge. Conflicted remuneration is not included in the fee disclosure
statements, so there may be little additional information obtained by the
statements for the pre-1 July 2013 clients. Both pre- and post-1 July 2013
clients will continue to receive other reports that identify the fees paid to
an adviser; for example: superannuation and product statements. This, in
conjunction with the other client engagement mechanisms, both in the
legislation and through the professional conduct standards promoted
through professional bodies, should ensure that clients remain engaged
and are able to monitor and change their investments when necessary.
5.107 Fee disclosure statements were not included as part of the
recommendations from the Ripoll Inquiry. The Dissenting Report
comments:
The Ripoll Inquiry made no recommendation to introduce an
additional annual fee disclosure statement over and above the
current regular statements provided by financial service
product providers to their clients already.61
5.108 In addition, when the requirement to provide fee disclosure
statements was first announced, it was only intended to apply
prospectively, that is, to post-1 July 2013 clients. The Dissenting Report
comments:
...the Committee received strong evidence that based on the
various FOFA consultations sessions, it was the industry's
clear understanding that the government's proposal to impose
an additional annual fee disclosure statement would be
prospective--that is, only apply to new and not existing
clients.62
5.109 The rationale was that any `new', post-1 July 2013 clients,
would come under the FOFA compliant products and systems; these
products and systems would be specifically designed to facilitate the
provision of the fee disclosure statements.
5.110 However, and as indicated by many industry stakeholders, the
retrospective application of fee disclosure statements appears overly
onerous. When considered in conjunction with the questionable value of
the fee disclosure statements for pre-1 July 2013 clients, which do not
61 Ibid, p163.
62 Ibid, p163.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
report conflicted remuneration, it would appear--on balance--that the
cost savings to industry outweigh the consumer benefits.
Removal of the `catch all' provision in the best interests duty
5.111 This amendment removes paragraph 961B(2)(g), which is
known as the `catch all' provision, from the best interests duty.
Subsection 961B(1) imposes a requirement on advisers to act in the best
interests of the client in relation to the advice provided. Subsection
961B(2) then provides a series of steps that an adviser can follow to prove
that they have discharged their duty to their client. Paragraph 961B(2)(g)
is the last of the steps and states that an adviser must prove that they have
`taken any other step [in addition to the six preceding ones] that ... would
reasonably be regarded as being in the best interest of the client'. The
intention behind the catch all provision was to make the best interests duty
flexible and principles-based, thereby avoiding legislation becoming
overly prescriptive. Subsection 961B(2) is often called a `safe harbour' as
it provides protection for advisers looking for certainty in satisfying their
duty.
5.112 The proposed removal of paragraph (g) has been supported by
industry, which has expressed concerns that the current provision is
unclear due to its open-ended nature and has created significant legal
uncertainty on how advisers can actually satisfy the best interests duty.
Industry has noted that the current drafting of the best interests duty has
led to advisers spending more time than otherwise necessary documenting
the advice they have provided to their clients to demonstrate compliance
with the best interests duty. As such, industry stakeholders claim that the
catch all provision renders the safe harbour protection of subsection
961B(2) unworkable. They believe that removing paragraph 961B(2)(g)
will ensure that section 961B(2) functions as a true safe harbour, as the
remaining six steps are more objective.
5.113 By contrast, some stakeholders have likened removing
paragraph (g) to a repeal of the best interests duty. Consumer groups have
argued that the catch all provision is the most important part of the best
interests duty, as it makes the duty flexible and principles-based. They
argue that removing the catch all provision could lead to consumers
receiving lower quality advice as it weakens the best interests duty by
reducing it to a `tick-a-box' exercise for advisers. Consumer groups have
argued that, under a modified best interests duty, an adviser could satisfy
the remaining six steps of the best interests duty but still not provide
advice that is in the best interests of their client.
5.114 Some stakeholders have also raised concerns that this
amendment, which they argue is likely to lead to an increase in the
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Regulation impact statement
prevalence of poor advice, will result in an increased risk of financial
scandals resulting in consumer losses.
5.115 At the time the original FOFA legislation was being drafted,
many stakeholders indicated that, in introducing a best interests duty, only
subsection 961B(1) was required. However, concerns were expressed
that, without any additional guidance, subsection 961B(1) alone would
cause confusion, and it would be left to the courts to provide guidance on
how advisers could satisfy their best interests duty.
5.116 In response to this uncertainty, subsection 961B(2) was inserted.
This subsection was never intended to be a safe harbour; rather, it was
included to provide the guidance advisers were seeking on how they could
satisfy their best interests duty. Because this subsection was not intended
to be an exhaustive list, paragraph (g) was inserted to ensure the
subsection remained flexible. However, over time, perception of this
provision has changed, and it is now commonly accepted to be a safe
harbour; even ASIC, in its regulatory guides, refers to subsection 961B(2)
as a safe harbour.63
5.117 The proposal to remove the catch-all provision is intended to
properly implement the recommendations from the Ripoll Inquiry. The
original Ripoll recommendation was to include a fiduciary duty for
financial advisers to place their client's interests ahead of their own; there
was no requirement that this duty be open ended. As such, subsection
961B(2) without paragraph (g) achieves this aim. The Dissenting Report
comments:
The best interests duty is an important and central part of the
FOFA changes. Coalition Committee members support the
introduction of a statutory best interests duty for financial
advisers into the Corporations Act.64
...
However, we are concerned that the `catch all' provision
contained in section 961B(2)(g) would create uncertainty for
both clients and their advisers and leave the legislation
63 ASIC Regulatory Guide 175: Licensing: Financial product advisers-conduct and
disclosure, October 2013, available from:
http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/rg175-published-3-October-
2013.pdf/$file/rg175-published-3-October-2013.pdf, RG 175.238-175.249.
64 Ibid, note 34, p166.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
subject to potentially protracted legal arguments. We
therefore recommend that this clause be removed.65
5.118 Whilst a best interests duty without paragraph (g) will lower the
standard required of advisers, the concerns expressed by consumer groups
appears to be disproportionate to the change. The remaining steps in
subsection 961B(2) still set a high standard, it just does not require an
unending set of actions. When considered in conjunction with other
measures--the requirement that advice be appropriate for the client, that
advisers must place their client's interests ahead of their own, and the duty
to warn clients if information is based on incomplete or inaccurate
information--the amended best interests duty will still ensure that clients
continue to receive advice that is in their best interests.
5.119 As such, the cost savings to industry appear to outweigh the
consumer impacts.
Explicit provision of scaled advice
5.120 This amendment allows clients and advisers to explicitly agree
on the scope of any scaled advice provided, whilst still ensuring the
advice is appropriate for the client.
5.121 Whilst scaled advice is not specifically defined in the
Corporations Act, it is usually referred to in the industry as a targeted
form of personal advice; personal advice is advice that considers the
financial objectives, situation, and needs of a person. All personal advice
is `scaled' or `limited in scope' to some extent: advice is either less or
more comprehensive in scope along a continuous spectrum. For example,
scaled advice may cover a specific area of a client's needs such as
insurance or superannuation, and can be contrasted to holistic advice that
usually considers all of the client's financial needs.
5.122 The limited scope of scaled advice usually makes it much
cheaper than more fulsome personal advice. This is due to the fact that an
adviser needs to consider fewer of the client's circumstances, needs and
objectives to provide the advice. As holistic personal advice can often be
expensive, scaled advice is an affordable avenue for many consumers
seeking personal advice.
65 Ibid, p168.
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Regulation impact statement
5.123 This amendment has been welcomed by industry, which has
argued that the best interests duty does not give them confidence that
scaled advice can be provided. This uncertainty has led to advisers
performing more work than necessary to ensure compliance with the best
interests duty. In particular, it has resulted in advisers considering all of
their client's circumstances when providing scaled advice, rather than
only considering their relevant circumstances; this has had the effect of
making scaled advice more expensive than otherwise necessary. Industry
has indicated that advisers, in some instances, have not been providing
scaled advice at all.
5.124 Consumer groups have raised concerns that this amendment
could allow advisers to avoid certain obligations imposed by the best
interests duty thereby affecting the quality of advice provided to
consumers. These stakeholders are particularly concerned that customers
could be left vulnerable to poor quality advice, as the amendment could
allow an adviser to agree a scope of the advice that may not be in the best
interests of their client. This concern is particularly salient for clients
who: have low levels of financial literacy, place a great deal of trust in the
knowledge and experience of an adviser, and are likely to agree to
suggestions from an adviser on the scope of the advice they are to receive
without appreciating the implications of what they have agreed to.
5.125 For example, a client may go to an adviser seeking information
about their finances. Due to the prohibitive cost of a holistic financial
plan, a client may agree--perhaps at the advisers suggestion--to limit the
scope of the advice to a particular area, and only consider the products
offered by the adviser's employer.
5.126 The concern some stakeholders have with the example above is
that the client may need urgent advice on one particular area, but may not
actually receive this advice as it has been scoped out. If the client is not
told about this other advice area, then the client may not fully appreciate
that they are missing out on advice that may be better for them.
Furthermore, by limiting the advice to products offered by the adviser's
employer, the client may not be informed about alternate investments that
may actually be more suitable for their particular circumstances.
5.127 Concerns have also been expressed that this amendment could
reduce the number of products offered in the industry, as advisers become
incentivised to offer scaled advice on more costly, and hence lucrative,
financial products.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
5.128 As with the changes to the best interests duty, the proposal to
allow clients and advisers to explicitly agree on the scope of scaled advice
is intended to properly implement the recommendations from the Ripoll
Inquiry, and is closely linked to change to the best interests duty. The
Dissenting Report comments:
· One way of ensuring that clients are able to access affordable
and appropriate financial advice would be to allow advisers
and their clients to limit the scope of the advice to a series of
discreet areas identified by the client rather than to mandate a
full financial plan in every case.
· This concept of focusing advice to areas specifically
identified by a client has become widely known as `scalable
advice'.
· Numerous submissions to the Committee expressed concern
that the wording of the best interests provisions in the
proposed legislation does not allow for scaled advice to be
provided.66
5.129 There is some debate within industry as to whether the current
legislation actually permits scaled advice to be provided. Whilst there is
currently no explicit provision that allows the client and adviser to agree a
scope of advice, a number of advisers are already providing scaled advice
and have not incurred the problems expressed by industry stakeholders.
As such, whilst the concerns raised about advisers inappropriately
agreeing a scope of advice is possible under the proposed amendment, it
may already be possible under the current arrangements.
5.130 It is doubtful whether the dire outcomes indicated by consumer
groups will eventuate. The FOFA provisions relating to the
appropriateness of advice, and requiring an adviser to place their client's
interests ahead of their own, will ensure that, even if the adviser agrees a
scope that is inappropriate to the client, they will not be able to provide
advice that is inappropriate.
5.131 As such, the cost savings to industry outweigh the consumer
benefits.
66 Ibid, p168.
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Regulation impact statement
Commissions on life (risk) insurance provided within superannuation
5.132 The Government originally proposed amendments to expand the
range of circumstances under which commissions may be paid on life
(risk) insurance products provided within superannuation to include
circumstances where personal advice has been provided on these products.
5.133 Through consultation on the proposed amendments and broader
industry engagement, the Government has become aware that, whilst the
life insurance industry as a whole remains well capitalised and profitable,
in relation to certain business lines there are grounds for concern
regarding the long term sustainability of some current industry practices,
including in relation to remuneration.
5.134 In light of these concerns, the Government intends to undertake
a separate process to engage with the life insurance industry on these
issues. In order to ensure that the industry's regulatory environment is not
subject to further change while this process is underway, the Government
does not propose to progress amendments to the treatment of life (risk)
insurance at this time.
Exempt `general advice' from `conflicted remuneration'
5.135 This amendment exempts general advice from conflicted
remuneration under certain circumstances. Currently, the conflicted
remuneration provisions capture both general and personal advice;
conflicted remuneration cannot be paid on either type of advice. This
amendment will allow conflicted remuneration to be paid on general
advice under certain circumstances; conflicted remuneration on personal
advice will continue to be banned.
5.136 The Government originally proposed to exempt all general
advice from the definition of conflicted remuneration. This approach was
outlined in the options-stage RIS published by the OBPR in January 2014.
Feedback on this proposal was received as part of consultation on the draft
amendments.
5.137 Many industry stakeholders support the originally proposed
amendment as they believe the current ban on conflicted remuneration
captures activities that were not the primary focus of FOFA--the ban
currently captures employees such as website designers or general
information seminar providers who are not in product sales related areas.
Industry argue that they are currently required to maintain complex
systems when providing general advice to ensure compliance with the
existing conflicted remuneration provisions. These systems are costly to
implement and maintain.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
5.138 Industry stakeholders have also argued that allowing benefits to
be paid on general advice will ensure the provision of more general
advice. These stakeholders believe this is a positive outcome for society
as general advice often serves to inform and educate, and is a way for
consumers to receive financial advice they might otherwise not have
access to.
5.139 By contrast, consumer groups believe that exempting general
advice from the definition of conflicted remuneration may have a
significant negative impact on consumers, and the financial advice
industry as a whole.
5.140 These stakeholders agree that excluding general advice from the
definition of conflicted remuneration will ensure the provision of more
general advice. However, they suggest that it will also result in the
industry moving towards general advice models, and may lead to an
overprovision of general advice relative to personal advice as advisers
would be incentivised to earn conflicted remuneration through general
advice based sales.
5.141 These stakeholders argue that there is a significant consumer
detriment involved as many consumers do not understand the distinction
between personal and general advice. As a result, they may make
financial decisions that are not appropriate for them if they mistakenly
rely and act on general advice thinking it to be personal advice.
5.142 Stakeholders also argue that the amendments may adversely
affect the reputation of the industry by effectively allowing commissions
to be re-introduced and could lead to doubt in the minds of consumers as
to whether the advice they have received--whether personal or general--
is conflicted.
5.143 General advice is one of two forms of financial product advice;
the other is personal advice. Financial product advice is defined as a:
`recommendation or opinion that influences a person into making a
decision on a financial product'67 (emphasis added). Whilst general
advice, unlike personal advice, does not consider the financial objectives,
situation and needs of a person, it still influences a person's decisions. It
was for this reason that both general and personal advice were included in
the ban of conflicted remuneration.
5.144 The argument that general advice is provided to inform and
educate, rather than to persuade and influence, is problematic for two
reasons. Firstly, as defined, general advice does influence (or could
reasonably be expected to influence) a person's choice. If the advice were
67 Section 766B of the Corporations Act 2001 (Cth).
80
Regulation impact statement
truly factual, and couldn't reasonably influence a person's choice, then it
wouldn't be financial product advice and thus payments in relation to it
would not be conflicted remuneration. However, all general advice, no
matter how informative, is--at some level--designed to influence a
decision, usually to acquire a product or service from the provider of the
general advice; if not, there would be no incentive for the provision of the
general advice.
5.145 Secondly, there are many instances where general advice, and
only general advice, is used to market and influence sales. Evidence
suggests that complex products, such as exchange-traded options
strategies--which have high returns but also high risks--are exclusively
sold through general advice channels.
5.146 Further, general advice is often misunderstood and confused
with personal advice. Whilst general advice does not consider the
personal circumstances of the client, and whilst a general advice warning
is required to be provided--which states that the advice given does not
consider the personal circumstances of the client--many people ignore the
warning and mistake general advice for personal advice. This is
particularly the case where face-to-face contact is involved. A person
attending a seminar who speaks to the presenter and tells them about their
financial position could easily be confused into thinking that any answer
to questions may have taken into account the personal circumstances
disclosed when it has not.
5.147 In response to consumer and stakeholder concerns that the
original amendment was too broad, the government has decided to restrict
the operation of the carve-out. The revised general advice exemption will
exempt benefits from the definition of conflicted remuneration if the
following conditions are satisfied:
· general advice is provided by an employee;
· the employee has not given personal advice to the person
receiving the general advice in the past 12 months; and
· general advice is in relation to a product issued or sold by the
employer.
5.148 The imposed conditions will restrict the general advice
exemption to employees who have not provided personal advice to the
person receiving the general advice in the past 12 months.
5.149 This amendment alleviates the unintended consequences of
the original general advice ban without providing too broad an
exemption. Website designers, people giving seminars, and other
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
employees who are involved in the preparation of general advice,
but who do not provide personal advice, will now be able to utilise
the general advice exemption. However, advisers who provide
personal advice as well as general advice will not be able to utilise
the exemption. As such, this amendment removes the unintended
consequences whilst still allowing consumers who receive personal
advice to remain confident that their advice is in no way influenced
by conflicted remuneration.
5.150 Further, this amendment discourages a move into a general
advice model. Given that the exemption does not apply if both general
and personal advice has been provided, and given the significant upfront
and ongoing training costs advisers incur to skill themselves to provide
personal advice, it is unlikely that advisers who currently provide personal
advice would move to a general-advice-only model.
5.151 To address concerns over sales of complex products, the
Government has asked ASIC to monitor the use of the conflicted
remuneration provisions as they relate to general advice on complex
products. ASIC will provide a report to the Government in the next
12-18 months.
5.152 The revised general advice exemption is more restricted than
originally proposed; accordingly, the consumer impacts are reduced,
although not entirely mitigated. Given the narrower application of the
exemption, and given the ongoing monitoring of the use of the provisions
in relation to complex products, it would appear--on balance--that the
cost savings to industry outweigh the consumer impacts.
5.153 A note on the cost impacts: consultations with stakeholders
indicate that the restrictions on the general advice exemption will affect
some of the firms in the small and medium segments but none of the large
firms. Estimates of the extent to which the small and medium segments
would be affected varied; as such, a conservative approach has been
adopted when calculating the adjustment to the cost savings.
5.154 The restrictions in the exemption means that, where employees
provide general advice only, separate systems no longer need to be
maintained to ensure compliance with the conflicted remuneration
provisions. As large firms separate advice streams -- that is, employees
who provide personal advice do not concurrently provide general advice
-- these large firms will be able to realise all of the cost savings estimated
from the originally proposed amendments.
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Regulation impact statement
5.155 Whilst many of the small and medium firms have, similarly,
separated their advice streams, not all of these firms have done so.
Consequently, some of these firms will not qualify for the general advice
exemption with the new restrictions. As such, these firms will be required
to maintain systems to ensure compliance with the ban on general advice;
these firms have been excluded from the cost savings estimates. The cost
savings estimates in Table 3 have been updated accordingly.
5.156 The restriction on the general advice exemption has resulted in a
reduction in the ongoing cost savings estimates of approximately $1.6
million per year; the consumer protections achieved by the restrictions
are, therefore, large relative to the reduction in cost savings. The design
of the restrictions, which addresses the unintended consequences created
by the current conflicted remuneration provisions but avoids the pitfalls
from providing too broad an exemption, means that most businesses do
not need to incur additional compliance costs. As such, the consumer
consequences of the original proposal can be minimised at negligible
incremental cost to business.
Clarify the exemption from the ban for execution-only services
5.157 This amendment broadens the existing execution-only
exemption from conflicted remuneration. The current exemption permits
conflicted remuneration on execution-only services where no advice has
been provided to a client by a licensee, or representative of that licensee,
in the previous 12 months. This amendment will permit conflicted
remuneration if no advice has been provided by the individual receiving
the benefit for the execution service (as opposed to the licensee or
representative employing the individual). Linking the provision of advice
to an individual rather than a licensee or representative (usually a group
entity) provides a more direct link between the provision of advice and the
execution service.
5.158 Industry has supported this amendment as it enables benefits to
be earned on legitimate execution-only services. Industry groups have
argued that the drafting of the provision makes it complex and difficult
and costly to comply with. They believe that execution-only transactions
are not accompanied by any advice, and hence are typically at the request
of the client. As such, they believe that there are benefits associated with
allowing conflicted remuneration on these transactions. This amendment
provides clarity to advisers; the current legislation has had the unintended
consequence of rendering advisers unable to receive conflicted
remuneration despite there being no conflict of interest.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
5.159 Some stakeholders have expressed concerns that financial advice
firms will be able to give advice in one part of the business, and then
execute the transaction in another part of the business so that conflicted
remuneration can be earned. They have argued that this would result in
extra charges for clients, whose investment returns would suffer as a
result.
5.160 This situation is unlikely to occur given the anti-avoidance
provisions within the Corporations Act 2001, which prohibit firms from
restructuring their business models purely to circumvent the application of
certain parts of the legislation. As such, the benefits to industry outweigh
the consumer impact.
Training exemption
5.161 This amendment broadens the training exemption in relation to
non-monetary benefits to cover all training relevant to conducting a
financial services business. Currently, the exemption states that only
training relevant to the provision of financial product advice is excluded
from conflicted remuneration.
5.162 Industry has supported this amendment, as it allows them to use
the training exemption for a wider range of activities, including
administrative, dealing or trading activities. It is argued that the
amendment will assist businesses in improving their productivity, and
should raise the standard of advice being provided to consumers.
5.163 This amendment is not expected to have any material impact on
consumers.
Amendments to volume-based shelf-space fees
5.164 This amendment clarifies the drafting of the ban on volume-
based shelf-space fees to clearly define the benefits the ban intends to
capture. In particular, it clarifies that incentive payments between fund
managers and platform operators to give preferential treatment to certain
products on the platform `shelf'--which could potentially influence
advice provided to the client--are prohibited.
5.165 Industry has supported this amendment. They have argued that
the current drafting of the legislation has unintended consequences that
adversely affect firms in the industry, and that the amendment would
clarify the operation of the law.
5.166 Consumer groups have argued that this amendment could result
in advisers being influenced in their provision of advice. For example,
advisers could place their clients in more costly products in order to earn a
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Regulation impact statement
volume-based bonus through the platform. They believe that this would
reduce the quality of advice provided to consumers and also be
detrimental to their investment returns, as the volume-based fees are `built
in' to the cost of their financial product(s).
5.167 This amendment simply clarifies the benefits the ban intends to
capture. It does not change the existing law, other than to make it clearer
to understand. As such, this amendment is not expected to have any
material impact on consumers.
Clarify the definition of intra-fund advice
5.168 Intra-fund advice is defined in the Superannuation Industry
(Supervision) Act 1993 (SIS Act) but is not specifically mentioned in
FOFA. This amendment cross-references the definition of intra-fund
advice from the SIS Act in the FOFA legislation. Intra-fund advice is a
type of scaled advice provided by both retail and industry superannuation
funds to their members. The advice is simple in nature and solely related
to the member's superannuation products.
5.169 This amendment clarifies the operation of the law and does not
have any direct impact on consumers.
Other changes
Grandfathering existing remuneration from the ban on conflicted
remuneration
5.170 This amendment broadens the circumstances under which
conflicted remuneration can continue to be paid (that is, grandfathered).
As long as a client maintains their interest in a financial product, the
proposed amendment will allow advisers to move licensees and continue
to access grandfathered benefits; currently, any move after 1 July 2013
causes grandfathering to cease.
5.171 Industry has supported this amendment. It is argued that the
amendment promotes greater competition between licensees and allows
advisers to move between firms more freely. Most industry stakeholders
argue that the current grandfathering provisions have reduced adviser
movements in the industry and have effectively `frozen' the market; few
advisers are willing to move licensees at all due to the loss of
grandfathered benefits. Whilst the amendments allows grandfathered
benefits to continue for a longer period of time, it is anticipated that
industry will transition to a fee-for-service model as advisers cannot
receive conflicted remuneration on arrangements entered into with new
clients, and existing clients are likely to be transferred into new
products/arrangements over time.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
5.172 Some stakeholders are concerned that the grandfathering
provisions will lock clients indefinitely into products that pay conflicted
remuneration. They say that advisers will have no incentive to move their
clients out of these products, because they would lose their benefit
payments if they did so. These stakeholders believe that these clients will
be adversely affected as conflicted benefits erode their investment returns
over time, whereas these clients would have the opportunity to consider
better alternatives if the grandfathering arrangements were not in place.
5.173 Despite these concerns, advisers will still be bound by the best
interests duty, which will force them to consider whether their client's
investment options are best suited to their financial needs, objectives and
circumstances. The amendments to grandfathering will help the industry
transition to a fee-for-service model and relieve the problems associated
with the labour market `freeze' which is currently discouraging advisers
from moving between licensees.
5.174 There are also technical amendments to clarify that:
· when a financial planning business or client book is sold, the
rights to the grandfathered benefits can be transferred to the
purchaser, who will then receive the ongoing benefit;
· when an employed adviser becomes a self-employed
authorised representative within the same licensing group,
the adviser can continue to receive grandfathered benefits;
and
· when a client switches from a superannuation product to a
pension product, and both are offered under a multi-product
offering, grandfathering will not cease in relation to that
client's investment.
5.175 These minor technical amendments provide certainty and clarity
to industry.
Explicitly recognise that a `balanced' remuneration structure is not
conflicted
5.176 This amendment clarifies that benefits paid under a `balanced
scorecard' arrangement are not conflicted remuneration. Balanced
scorecard benefits are calculated by reference to both volume-based and
non-volume-based factors. When FOFA was introduced, it was envisaged
that payments made under a balanced scorecard approach would be able
to rebut the presumption that volume-based benefits were conflicted.
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Regulation impact statement
5.177 Some industry groups have supported this amendment as it
provides certainty for employers when paying bonuses under these
arrangements. They argue that allowing a `low' benefit to be paid to
employees is consistent with the intent of the legislation, as it will not
influence advice in a way which is detrimental to consumers.
5.178 Some consumer groups do not support this arrangement, as they
believe that the bonus payments will influence the advice provided by
advisers. It has also been argued that this amendment will favour larger
firms, providing an incentive for employees to work for large firms, and
that this will drive further consolidation in the industry.
5.179 This amendment clarifies that benefits that are already being
paid--benefits that are currently allowed under FOFA--are permitted. As
such, this amendment is not expected to have any material impacts on
consumers.
Include consumer credit insurance in the basic banking carve-out
5.180 This amendment broadens the existing basic banking exemption
to include consumer credit insurance. The exemption covers front-line
bank employees who typically provide advice on basic banking and
general insurance products; these employees were not the target of FOFA.
5.181 Consumer groups believe there to be a risk that conflicted basic
products will be packaged with exempt products in a way that maximises
the benefits being paid to the adviser.
5.182 This minor amendment clarifies the operation of FOFA.
Consumers generally understand that these are basic financial products, so
this amendment is not expected to have a material impact on consumers.
Allow bonuses to be paid in relation to revenue that is permissible under
FOFA
5.183 This amendment permits payment of performance bonuses that
are calculated by reference to remuneration that is exempt from the ban on
conflicted remuneration. For example, an employer will be allowed to
pay an adviser a bonus calculated by reference to the fee-for-service
revenue the adviser generates in a given period. Currently, such a bonus
may be banned as it is volume-based, even though the fee-for-service
revenue it is based upon is not banned.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
5.184 Industry has supported this amendment. It is argued that this
amendment will assist industry in shifting to a fee-for-service model--one
of the objectives of FOFA--and removes an inconsistency between
earning permissible revenue and receiving a bonus on permissible
revenue.
5.185 Consumer groups have argued that any bonus payments paid in
relation to permissible revenue would like to influence the advice
provided by advisers.
5.186 Whilst there is a likelihood that prices may rise as a result of
bonus payments, the fact that this amendment will assist industry in
shifting to a fee for service model outweighs any consumer concerns.
Amendments to the FOFA stockbroking exemptions
5.187 This amendment clarifies the existing stockbroking-related
carve-outs under FOFA, including providing for the application of the
brokerage fee exemption to products traded on the ASX24 (the ASX24 is
a 24-hour platform for derivatives trading run by the ASX) and the
broadening of the stamping fee exemption for initial public offering (IPO)
arrangements.
5.188 These amendments are minor and clarify the operation of the
legislation - stockbroking was not the intended target of FOFA and
stockbroking-related activities have been largely carved-out of the
reforms.
5.189 Consumers will not be materially impacted by this change.
Other minor technical amendments
5.190 The other minor amendments are:
· amendments to ensure that the wholesale and retail client
distinction that currently exists in other parts of the Act also
applies to the FOFA provisions; and
· amendments to clarify that the client-pays exemption
operates to allow clients to direct product issuers--such as
superannuation trustees or responsible entities of managed
investment schemes--to deduct payments from the client's
funds, or funds the client is beneficially entitled to.
5.191 These proposed changes are purely consequential and provide
clarity to the operation of the law.
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Regulation impact statement
Specific impact on small businesses
5.192 As a result of these deregulatory amendments, small businesses
are likely to be able to spend more time on their core business of
providing financial advice to consumers and less time on
compliance-related activities. This should result in both cost savings and
revenue growth opportunities, both of which should increase the
competitiveness of small businesses in the industry.
5.193 As noted earlier, the market is broken into small, medium and
large firms. Small businesses, for the purposes of this analysis, are
considered to employ fewer than 60 advisers. For the smallest firms,
compliance requirements typically come with significant opportunity
costs: small businesses have fewer staff available to dedicate to
administration and compliance, and any time spent on compliance is time
not spent providing advice, and hence earning fees.
Impact on Government
5.194 The impact on Government will be relatively small and
non-ongoing. In the short-term, implementation costs will be incurred to
draft the legislation for the proposed amendments, and to make changes to
the regulations. ASIC's role as the industry regulator will continue, albeit
under the new rules and regulations.
Consultation
5.195 Since the Ripoll Inquiry was initially commissioned in February
2009, extensive consultation has occurred with key stakeholders through
submissions, consultation groups, public information sessions,
consultation papers and meetings with stakeholders. Further consultations
occurred in 2012 when the FOFA Bills were referred to the Parliamentary
Joint Committee for Corporations and Financial Services (PJC) for
inquiry and report.
5.196 In developing the proposed package of amendments, the
Government conducted targeted consultations with a number of
stakeholders, including the Association of Financial Advisers, the
Association of Independently Owned Financial Professionals, the
Australian Bankers' Association, Choice, the Financial Planning
Association, Financial Services Council, Industry Super Australia, the
Property Council of Australia and the major wealth management
companies.
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Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
5.197 On 29 January 2014, the Government released, for a three-week
consultation period, draft regulations and legislation to enact its proposed
reforms to FOFA. Around 50 submissions were received as part of this
process, from a range of stakeholders including industry associations,
consumer groups, financial planning practices, consultants and
individuals. A wide range of views were expressed in the submissions,
which provided comment on the amendments, the options-stage RIS and
other related issues outside the scope of the amendments. For the large
industry associations and consumer groups, submissions were consistent
with previously expressed views. The submissions also yielded a number
of technical suggestions to ensure that the legislation and regulations
achieve the desired policy outcome.
5.198 Treasury also conducted additional stakeholder consultations as
part of the consultation period on the draft amendments. Many of the
concerns and comments canvassed throughout the consultation period
have been considered and incorporated into the final amendments. In
particular, this consultation drove the decision not to proceed with the
proposed amendments to commissions for life (risk) insurance and the
changes to the exemption for general advice from the definition of
conflicted remuneration. The information received through these
consultations has also been considered in the preparation of this
document.
5.199 With regard to the options-stage RIS, Treasury has fully
complied with the RIS requirements.
Conclusion
5.200 The proposed amendments to FOFA are deregulatory and are
anticipated to result in savings of approximately $90 million in
implementation costs and an average of approximately $190 million in
ongoing costs per year. These savings are expected to flow through to
consumers and increase the affordability of financial advice.
5.201 As discussed in this document, there are risks involved with
these amendments. In particular, some stakeholders consider that the
amendments compromise consumer protections, and will undermine the
goals of FOFA. The Government, however, is committed to maintaining
the important consumer protections introduced by FOFA, and these
amendments reflect that commitment. The amendments will result in
substantial cost savings and increased certainty for industry whilst
maintaining the high standards expected by financial advisers, so that
consumers of financial products and services remain protected against
poor quality advice. On balance, the amendments will be beneficial for
stakeholders of the financial services industry and promote the facilitation
of high quality and affordable financial advice.
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Regulation impact statement
Implementation and review
5.202 The package of amendments will be implemented through
legislation as well as regulations. To ensure the amendments are
processed as soon as practicable, interim regulations will be made where
legally possible; these interim regulations will be subsequently amended
through legislation, and will be repealed once the legislative amendments
have been passed. Those amendments best addressed through regulations
will remain in place.
5.203 The Government anticipates that the legislation will be
introduced into Parliament in the 2014 autumn sitting period, for passage
in the winter sitting period.
5.204 Regulations are anticipated to be made by the end of March
2014. As with all regulations, there is a risk that the regulations will be
disallowed. If this were to occur, the law would revert to the existing
requirements and may cause regulatory uncertainty for industry.
5.205 A post-implementation review will commence within five years
of these amendments being implemented.
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Appendix A: Regulatory Burden and Cost Offset Estimate Table
Average Annual Change in Compliance Costs (from BAU)
Sector/Cost Categories Business Not-for-profit Individuals Total by cost category
68
Administrative Costs ($198,442,592.58) $0 $0 ($198,442,592.58)
Substantive $0 $0 $0 $0
Compliance Costs
Delay Costs $0 $0 $0 $0
Total by Sector ($189,668,692.58) $0 $0 ($189,668,692.58)
Average Annual Change in Compliance Costs (from BAU)
Sector/Cost Categories Business Not-for-profit Individuals Total by cost category
Administrative Costs ($198,442,592.58) $0 $0 ($198,442,592.58)
Substantive $0 $0 $0 $0
Compliance Costs
Delay Costs $0 $0 $0 $0
Total by Sector ($198,442,592.58) $0 $0 ($198,442,592.58)
Annual Cost Offset
Agency Within portfolio Outside portfolio Total
Business $0 $0 $0 $0
Not-for-profit $0 $0 $0 $0
Individuals $0 $0 $0 $0
Total $0 $0 $0 $0
Proposal is cost neutral? No
Proposal is deregulatory Yes
Balance of cost offsets = ($198,442,592.58)
68 In accordance with OBPR methodology, this figure includes both the average annual
ongoing cost savings (of 189.7m) as well as the one-off implementation cost savings (of
$87.7m). For this purpose, the implementation costs savings have been annualised over a
ten year period. As such, the $198.4m reported in this table is the sum of $189.7m (average
ongoing cost savings) and $8.8m (annualised one-off implementation cost savings).
92