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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
SUPPLEMENTARY EXPLANATORY MEMORANDUM
Amendments to be moved on behalf of the Government
(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 Amendments to the Corporations Amendment
(Streamlining of Future of Financial Advice) Bill
2014 ............................................................................... 5
Glossary
The following abbreviations and acronyms are used throughout this
supplementary explanatory memorandum.
Abbreviation Definition
ASIC Australian Securities and Investments
Commission
Corporations Act Corporations Act 2001
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
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
SOA Statement of Advice
Bill Corporations Amendment (Streamlining of
Future of Financial Advice) Bill 2014
1
General outline and financial impact
Amendments
On 19 March 2014, the Government introduced the Corporations
Amendment (Streamlining of Future of Financial Advice) Bill 2014 (Bill)
as part of the Government's Autumn Repeal Day. 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).
The Bill was referred to the Senate Economics Legislation Committee
(Committee) on 20 March 2014. In line with the referral, the Acting
Assistant Treasurer, Senator the Hon Mathias Cormann, announced on
24 March 2014 that the accompanying FOFA amendments would be put
on hold while the Committee considered the Bill and to enable the
Government to consult further in good faith with all relevant stakeholders.
Since March, the Government has undertaken additional targeted
consultation with: the Association of Financial Advisers; the Australian
Bankers' Association; CHOICE; the Council of the Ageing; the Financial
Planning Association of Australia; the Financial Services Council and a
number of its members; Industry Super Australia; and National Seniors
Australia.
Based on these consultations a number of refinements to better target
certain FOFA provisions have been made.
The Senate Committee released its report on the Bill on 16 June 2014.
Overall, the Senate Committee found that the proposed amendments
achieve a proper balance between providing adequate consumer protection
and sound professional and affordable financial advice. The Senate
Committee recommended that the Bill be passed after the Government
give consideration to two recommendations.
The Government agrees with these recommendations and has responded
by introducing parliamentary amendments to the Bill.
Further, the Government announced on 15 July 2014 a number of changes
to the Statement of Advice requirements in Part 7.7 of the
Corporations Act to ensure clients are aware of their rights and their
adviser's obligations in providing advice in their best interests.
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Amendments: Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
The amendments to the Bill seek to:
· amend the Statement of Advice requirements;
· amend the definition of basic banking product;
· extend the time for fee disclosure statements from 30 to
60 days after the client's anniversary date;
· provide a more targeted execution-only provision;
· provide a more targeted general advice provision; and
· include enhanced regulation-making powers that permit
regulations to prescribe when a benefit is or is not conflicted
remuneration.
Date of effect: The amendments in item 1 commence on or after the later
of the day after this Bill receives the Royal Assent and 1 January 2015.
The amendments in items 2 to 6 commence at the same time as the
remainder of the Bill; the day after this Bill receives the Royal Assent.
Proposal announced: These amendments to the Bill were announced by
the Minister for Finance and Acting Assistant Treasurer, Senator the
Hon Mathias Cormann, in Media Release tiled `The way forward on
financial advice laws' of 20 June 2014 and in Media Release titled `Senate
support for financial advice law improvements' of 15 July 2014.
Financial impact: The amendments have no significant financial impact
on Commonwealth expenditure or revenue.
Human rights implications: The amendments to the Bill are compatible
with human rights as they do not raise any human rights issues. See
paragraphs 1.52 to 1.60.
Compliance cost impact: A regulation impact statement was not required
for the amendments. The amendments to the Bill will not have a
significant cost impact to business.
4
Chapter 1
Amendments to the Corporations
Amendment (Streamlining of Future of
Financial Advice) Bill 2014
Outline of chapter
1.1 This chapter explains the amendments to the Corporations
Amendment (Streamlining of Future of Financial Advice) Bill 2014 (Bill).
Amendment 1
1.2 Amendment 1 inserts new item 1A to modify the Statement of
Advice (SOA) requirements in Division 3 of Part 7.7 of the Corporations
Act. The objective of the amendment is to ensure that clients clearly
understand their rights in relation to the advice they receive and the
obligations their advice provider must adhere to.
1.3 Under the current law, section 946A requires a providing entity
to give a SOA when personal advice is given to a retail client (except in
certain circumstances). Subdivision D of Division 3 provides
requirements in relation to the content of the SOA.
1.4 Amendment 1 makes three key amendments to the SOA
requirements:
· requiring that the SOA be signed by the providing entity, or
an individual acting on behalf of the providing entity, and
acknowledged by the client;
· providing clarity that the client may seek further or varied
advice; the client's instructions for further or varied advice
must be confirmed in writing, signed by the client and
acknowledged by the adviser to be valid instructions; and
· amending the content requirements of the SOA.
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Amendments: Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
Signing and acknowledgement of the SOA
1.5 Amendment 1 inserts new item 1A to provide that:
· the SOA must be signed by the providing entity, or an
individual acting on behalf of the providing entity; and
· the client must acknowledge receipt of the SOA by signing
the SOA as soon as practicable after receiving the SOA.
[Schedule 1, item 1A, subsections 946A(2A) and (2B)]
1.6 The client does not commit an offence if he or she does not
provide acknowledgement of the SOA. Further, the providing entity does
not fail to give the SOA to the client in accordance with Subdivision D of
Division 3 of Part 7.7 merely because the client does not acknowledge the
SOA. [Schedule 1, item 1A, subsection 946A(2C)]
1.7 The significance of the client's signature on the SOA is to
acknowledge receipt of the SOA. In signing the SOA, the client is not
agreeing or accepting the SOA, and the client is not signing that they wish
the advice in the SOA to be executed.
Seeking further or varied advice
1.8 Amendment 1 provides that, to avoid doubt, a retail client who is
given the SOA may seek further or varied advice from the providing
entity; such further or varied advice may be required if, for example, the
client's relevant circumstances change. [Schedule 1, item 1A,
subsection 946A(2D)]
1.9 If further or varied advice is sought, the providing entity must
ensure that instructions from the client are: documented in writing; signed
by the client; and acknowledged by the providing entity, or an individual
acting on behalf of the providing entity. [Schedule 1, item 1A,
subsections 946A(2E) and (2G)]
1.10 The instructions for further or varied advice can be documented
in writing and signed by the client either before or after the advice is
given. This allows flexibility in time-critical situations. For example, if
the stock market crashes and a client seeks time-critical further advice that
they subsequently want actioned immediately, the instructions for further
or varied advice can be documented in writing and signed by the client
after the advice has been given.
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Amendments to the Corporations Amendment (Streamlining of Future of
Financial Advice) Bill 2014
1.11 The providing entity does not commit an offence if the client
does not sign a written copy of the instructions for that further or varied
advice. Also, the fact that the client does not sign a written copy of the
instructions for that further or varied advice is not evidence that the
instructions have not been given. As such, the providing entity is able to
proceed with providing further or varied advice--particularly time-critical
advice--even if the client has not yet signed. [Schedule 1, item 1A,
subsection 946A(2F)]
Content requirements of the SOA
1.12 Amendment 1 inserts new items 1B to 1J provide that the
following statements must be included in a SOA given to a client:
· the provider of the advice is required to provide the advice in
accordance with the best interests duty (section 961B);
· the provider of the advice genuinely believes that the advice
given is in the best interests of the client, given the client's
relevant circumstances; the term `relevant circumstances' is
given meaning by section 961B of the Act;
· the provider of the advice is required in circumstances
specified under section 961J to give priority to the client's
interests when giving the advice;
· information on fees that have been, or may be, charged to the
client in relation to the advice;
- This includes fees by the providing entity; a related body
corporate of the providing entity; a director or employee
of the providing entity or a related body corporate; an
associate of any of the above; or any other person in
relation to whom the regulations require the information
to be provided.
· if the client enters into an ongoing fee arrangement with the
providing entity to which Division 3 of Part 7.7A applies,
that the providing entity must give the client a fee disclosure
statement each year in relation to the ongoing fee
arrangement;
· if the providing entity recommends that the client acquire a
financial product, a statement advising the client that they
may have the right to return the product under Division 5 of
part 7.9 within a cooling-off period; and
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Amendments: Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
· that the client may seek further or varied advice from the
providing entity at any time.
[Schedule 1, items 1B, 1C, 1D, 1E, 1F, 1G, 1H and 1J, paragraphs 947B(2)(ca), (cb),
(cc), (cd), (ce), (fa), (fb) and (h), 947C(2)(da), (db), (dc), (dd), (de), (ga), (gb) and (i), and
notes at the end of subsections 947B(2) and 947C(2)]
1.13 Fees to be included in the SOA are those in relation to providing
the advice; product fees are not intended to be included in the SOA.
Amendment 2
1.14 Amendment 2 inserts new item 14A to modify the definition of
a basic banking product.
1.15 Under the current law, section 961F defines a `basic banking
product' as, amongst other things, a non-cash payment facility linked to a
basic deposit product.
1.16 This definition was first established in late 2011 when the FOFA
legislation was first introduced into Parliament. Since this time, the
banking industry has developed, and consumers have demanded,
alternative products that are functionally equivalent or may not always be
related to a basic banking product. For example:
· pre-paid travel cards instead of traveller's cheques; and
· pre-paid debit cards instead of a debit card that is linked to a
bank account.
1.17 Amendment 2 removes the requirement that non-cash payment
facilities must be related to a basic deposit product so as to include
products that are functionally equivalent to those already listed in the
definition, or products that may not always be related to a basic banking
product. [Schedule 1, item 14A, paragraph 961F(b)]
Amendment 3
1.18 Amendment 3 inserts new items 20A and 20B to modify the
time period in which fee disclosure statements need to be provided to a
retail client.
1.19 This amendment will provide additional time for licensees and
representatives to collate the necessary information to prepare the fee
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Amendments to the Corporations Amendment (Streamlining of Future of
Financial Advice) Bill 2014
disclosure statements and avoid inadvertent breaches if data is not
available in time.
1.20 Under the current law, where an ongoing financial advice
relationship exists between a licensee or representative (the `fee
recipient') and a retail client that 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 that 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.
1.21 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.
1.22 The statement must relate to the period of 12 months that ends
on the day no more than 30 days before when the statement must be
given.
1.23 Amendment 3 extends the time in which a fee disclosure
statement must be provided to the client; the fee disclosure statement will
need to be sent within 60 days of the client's anniversary date. The
statement must also relate to the period of 12 months that ends on the day
no more than 60 days before when the statement must be given.
[Schedule 1, items 20A and 20B, subsection 962G(1) and subparagraph 962H(1)(b)(i)]
Amendment 4
1.24 Amendment 4 replaces item 29 of the Bill and amends the
execution-only provision; general advice provision; and provides
additional regulation-making powers.
Execution-only provision
1.25 Item 29 of the Bill amends paragraph 963B(1)(c) of the
Corporations Act and inserts new subsections 963B(4) and (5), the
`execution-only provision', so that a monetary benefit given to a licensee
or a representative of a licensee is not conflicted remuneration if the
benefit is given in relation to:
· the issue or sale of a financial product; and
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Amendments: Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
· if personal advice in relation to the product, or a class of
products of which the product is one, has not been given to
the person as a retail client in the 12 months immediately
before the benefit is given.
1.26 Consistent with providing a targeted general advice provision,
amendment 4 modifies the execution-only provision in item 29 so that
financial product advice -- rather than personal advice -- must not be
given to the retail client in the 12 months immediately before the benefit
is given. [Schedule 1, item 29, subsections 963B(4) and (5)]
General advice provision
1.27 The Bill currently deems benefits paid in relation to general
advice as not conflicted remuneration provided certain conditions are met.
1.28 Amendment 4 modifies the new subsection 963B(6) which is
inserted by item 29 of the Bill, the `general advice provision', by
providing a more comprehensive list of conditions to be met for a benefit
to be considered not conflicted remuneration. [Schedule 1, item 29,
subsection 963B(6)]
1.29 It is important to note that it was never the Government's
intention to allow the payment of commissions on general advice. To this
end, the general advice provision is targeted, and is comprised of five
limbs; all five limbs must be satisfied for the benefit to not be considered
conflicted remuneration. Importantly, there is a specific limb that clarifies
-- beyond a doubt -- that payments known as commissions cannot be
paid. The five limbs to the general advice provision are:
The `employee' limb (paragraph (a))
1.30 This limb ensures that only employees or persons in
`employee-like' situations are eligible to utilise the provision. The limb
identifies three employee scenarios that are permitted:
· an employee of the licensee, or a related body corporate of
the licensee;
· an employee of an authorised representative of the licensee;
or
· an individual who has been sub-authorised under
section 961B of the Corporations Act by an authorised
representative of the licensee to give general advice on behalf
of the licensee of the kind given.
[Schedule 1, item 29, paragraph 963B(6)(a)]
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Amendments to the Corporations Amendment (Streamlining of Future of
Financial Advice) Bill 2014
The `name of the licensee' limb (paragraph (b))
1.31 This limb restricts the employee limb by requiring the employee
to provide general advice under the name of the licensee, a trade mark of
the licensee, or a business name of the licensee. The term trade mark of a
licensee means a trade mark of which the licensee is the registered owner
under the Trade Marks Act 1995, and the business name of a licensee
means a business name that is registered to the licensee under the Business
Names Registration Act 2011. [Schedule 1, item 29, paragraph 963B(6)(b) and
section 963B(9)]
1.32 Both the employee and name of the licensee limbs ensure that it
is clear that the general advice is provided by an employee working for
the licensee under the licensee's name, trade mark or business name.
The `no commissions' limb (paragraph (c))
1.33 This limb clearly indicates that the general advice provision does
not permit payments commonly known as commissions. This limb
indicates that two types of payment are not permitted:
· a recurring payment made because the person has given the
general advice, and
· a payment made solely because a financial product of a class
in relation to which the general advice was given has been
issued or sold to the client.
[Schedule 1, item 29, paragraph 963B(6)(c)]
1.34 The two payments are -- respectively -- broadly consistent with
what are commonly referred to as a trail commission and an upfront
commission.
1.35 It is important to note that neither the `no commissions' limb,
nor the general advice provision, prevents the payment of a salary or a
performance benefit (such as a performance bonus paid subject to a
balanced scorecard).
1.36 The reference to `solely' means that `per product' payments --
such as a benefit of $1 for each product issued-or-sold as a result of
general advice given -- are not permitted. However, if an employee were
required to meet a reasonable performance target -- such as selling 1,000
products -- as well as a customer satisfaction target for the incentive
payment to be paid, the payment would not be made solely because of the
general advice: the performance and compliance targets would also have
been satisfied; consequently, such a payment would be permitted.
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Amendments: Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
1.37 It should be noted that a payment structured in a
manner that, prima facie, is not solely because of the general advice
may -- still -- not be permitted. For example, if the payment were in
relation to a performance target that would not be seen as reasonable, the
payment may be seen to have been made solely because of the general
advice and thus would not be permitted.
1.38 The reference to `financial products of a class' prevents benefits
on general advice given on a class of products where that general advice
results in a product of that class being issued or sold to the client. As such,
regardless of whether general advice were provided on an entire class of
financial product, three financial products of the same class, or a single
financial product, as long as the payment is made solely because a
financial product of a class in relation to which the general advice was
given is issued or sold to the client, the payment is not permitted.
The `no personal advice' limb (paragraph (d))
1.39 This limb restricts the advice that can be provided in the
preceding 12 months. The limb specifies that, during the 12 months
immediately before the benefit was given, the employee must not have
given financial product advice to a retail client other than:
· general advice;
· personal advice in relation to basic banking products, general
insurance products, and consumer credit insurance products;
or
· a combination of the advice mentioned above.
[Schedule 1, item 29, paragraph 963B(6)(d)]
1.40 The general advice provision operates seamlessly with the
existing provision that allows benefits to be paid in relation to basic
banking products, general insurance products, and consumer credit
insurance products (the `basic banking provision').
1.41 The no personal advice limb precludes persons who provide
personal advice across classes of financial products -- commonly referred
to as financial planners or financial advisers -- from utilising the general
advice provision.
The `allowable products' limb (paragraph (e))
1.42 This limb ensures that the general advice provided by an
employee is in relation to a financial product issued or sold by the
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Amendments to the Corporations Amendment (Streamlining of Future of
Financial Advice) Bill 2014
licensee. To utilise the general advice provision, the financial product in
relation to which the general advice is given must either be:
· a product issued or sold by the licensee or a related body
corporate of the licensee; or
· a product issued or sold by another entity under the name of
the licensee, a trade mark of the licensee or a business name
of the licensee.
[Schedule 1, item 29, paragraph 963B(6)(e)]
Regulation-making powers
1.43 Amendment 4 modifies the new subsection 963B(7) which is
inserted by item 29 of the Bill. Item 29 provides that regulations may
prescribe either or both of the following:
· circumstances in which all or part of a benefit is taken to
satisfy subsection 963B(1); and/or
· the extent to which, or a method for working out the extent to
which, a benefit satisfies subsection 963B(1).
1.44 Amendment 4 extends the above regulation-making powers to
all subsections in 963B, for example the general advice provision in the
new subsection 963B(6). [Schedule 1, item 29, subsection 963B(7)]
1.45 However, these regulation-making powers allow regulations to
prescribe that, notwithstanding section 963B, a benefit is conflicted
remuneration. An additional regulation-making power is provided to
allow regulations to prescribe circumstances in which all or part of a
benefit is to be treated as conflicted remuneration. [Schedule 1, item 29,
subsection 963B(8)]
Amendment 5
1.46 Amendment 5 amends item 34 of the Bill to provide an
additional regulation-making power to prescribe circumstances in which
all or part of a benefit prescribed in subsection 963C(1) is to be treated as
conflicted remuneration. This amendment is consistent with
amendment 4. [Schedule 1, item 34, subsections 963C(2) and (3)]
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Amendments: Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
Amendment 6
1.47 Amendment 6 amends item 35 of the Bill to provide an
additional regulation-making power to prescribe circumstances in which
all or part of a benefit prescribed in subsection 963D(1) is to be treated as
conflicted remuneration. This amendment is consistent with
amendments 4 and 5. [Schedule 1, item 35, subsection 963D(4)]
Amendment 7
1.48 Amendment 7 provides that the items in amendment 1 apply as
follows:
· Item 1A in amendment 1, to the extent that it relates to
instructions for further or varied advice, applies in relation to
instructions given on or after the later of the commencement
day of the Bill and 1 January 2015.
· All other matters in amendment 1 apply in relation to
Statements of Advice given on or after the later of the
commencement day of the Bill and 1 January 2015.
[Schedule 1, item 43, section 1531AA]
STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS
Prepared in accordance with Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011
Amendments to the Corporations Amendment (Streamlining of Future of
Financial Advice) Bill 2014
1.49 The amendments to the Bill are 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
1.50 The Government believes that the FOFA legislation went too far
and imposed unnecessary red tape and costs onto industry, which has
14
Amendments to the Corporations Amendment (Streamlining of Future of
Financial Advice) Bill 2014
pushed up the price of financial advice for consumers; this 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. The 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.
1.51 The amendments to the Bill seek to:
· amend the Statement of Advice requirements;
· amend the definition of basic banking product;
· extend the time for fee disclosure statements from 30 to
60 days after the client's anniversary date;
· provide a more targeted execution-only provision;
· provide a more targeted general advice provision; and
· include enhanced regulation-making powers that permit
regulations to prescribe when a benefit is or is not conflicted
remuneration.
Human rights implications
The right to freedom of opinion and expression
1.52 The right to freedom of opinion and expression is contained in
articles 19 and 20 of the International Covenant on Civil and Political
Rights.
1.53 The amendments to the Bill extend the time for fee disclosure
statements from 30 to 60 days after the client's anniversary date. These
statements contain information about fees charged to the client and the
services they received in the previous 12 months. 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, albeit 30 days later.
1.54 In addition, the changes to the Statement of Advice requirements
increase access to information for consumers by providing additional
disclosure on a consumer's rights and an advice provider's obligations.
1.55 On balance, the Bill does not engage the right to privacy and
reputation.
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Amendments: Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014
The right to work and rights in work
1.56 The right to work and rights in work is contained in
paragraph 6(1), article 7 and subparagraph 8(1)(a) of the International
Covenant on Economic, Social and Cultural Rights.
1.57 The following amendments may engage the right to work and
rights in work:
· provide a more targeted general advice provision;
· provide a more targeted execution-only provision; and
· amend the definition of basic banking product.
1.58 The first two amendments above narrow the circumstances in
which participants in the financial services industry may access
remuneration, whilst the third broadens the circumstances. These
amendments to the Bill are being made to better realise the Government's
intention. However, the combination of the provisions in the Bill and
these amendments still provide a broader scope of circumstances in which
participants may earn remuneration.
1.59 On balance, the Bill does not engage the right to privacy and
reputation.
Conclusion
1.60 The amendments to the Bill are compatible with human rights as
they do not raise any human rights issues, including the amendments not
discussed under `Human rights implications'.
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