By Senior Regulatory Counsel Michael Mathieson and Partner Michelle Levy
For most people working in the financial services industry, it would be unwise to let 1 July come and go without asking, 'what will change?' In 2014, as in 2012 and 2013, 1 July is a very significant date under FoFA (the 'Future of Financial Advice').
Conflicted remuneration grandfathering limitations
There is grandfathering relief from the ban on conflicted remuneration. There are also limitations on that relief. The limitations operate by reference to 1 July 2014. This is all easy enough to say but the limitations can be very difficult to apply and applying them can produce very unexpected results.
Two alternative limitations
There are two alternative limitations. To work out which one is potentially relevant in any given situation, you have to ask whether the benefit in question is given by someone 'in the capacity as a platform operator'.
To answer this, the first step is to work out whether the benefit-giver is a 'platform operator'. Doing so can be tricky. The answer turns on whether they provide 'custodial arrangements' under section 1012IA of the Corporations Act 2001 (Cth). Section 1012IA is not a simple section.
If the benefit-giver is a platform operator, there is a further question: are they giving the benefit in their capacity as such? Again, answering this question can be tricky.
It is possible for a platform operator to give one benefit in their capacity as such and another benefit not in that capacity. This can be so, even though both benefits relate to the same 'product' or 'service' and even though the same parties are paying and receiving each benefit.
This can lead to benefit A being grandfathered but benefit B being banned. Sound complex? It is. Here's an example.
Example 1: IDPS
A company is the operator of an investor-directed portfolio service (IDPS). Under a pre-1 July 2013 distribution agreement, the operator pays a dealer group a share of the management fee charged to the investor, being a flat percentage of the value of each investment held under the service for the investor. It also pays the dealer group a share of the transaction fee charged whenever investments are bought or sold at the investor's direction. The investor joined the IDPS before 1 July 2014.
In this example, the share of the transaction fee is likely to be given by the platform operator in its capacity as such. If that is so, the first of the two limitations is potentially relevant. Under that limitation, the transaction fee can probably continue to be grandfathered - even if the transaction involves the acquisition of an investment post-1 July 2014.
By contrast, the share of the management fee may not be given by the platform operator in its capacity as such. If that is so, the second of the two limitations is potentially relevant. Under that limitation, to the extent the management fee relates to investments acquired before 1 July 2014, it may well continue to be grandfathered. However, to the extent it relates to investments acquired after that date, it may well not.
The policy rationale for this potential difference in outcome is absent.
Example 2: IDPS-like scheme
But the plot thickens. If we swap the IDPS operator in our example with the responsible entity of an IDPS-like scheme, we get the same grandfathering outcome in relation to the transaction fee. However, in this case, the share of the management fee can continue to be grandfathered - even to the extent that it relates to investments acquired after 1 July (provided the investor joined the IDPS-like scheme before 1 July 2014). Again, the policy rationale for this difference in outcome is absent.
Example 3: not a platform operator
To compound the absurdity, if we swap the IDPS operator and responsible entity in the above two examples for someone who is not a platform operator, the transaction fee probably would not be grandfathered where the transaction involves the acquisition of an investment post-1 July 2014 (even if the investor joined the relevant service or product before 1 July 2014). Again, the policy rationale for this difference is ... .
The difficulties identified above are heightened by the fact that reasonable minds can reach different conclusions in carrying out the task of benefit identification. The term 'benefit' is not defined in the law. In a given circumstance, it can be difficult to say whether there is one over-arching benefit or multiple subsidiary benefits. For example, a fee calculated as a flat percentage can be consistent with a multiple benefit analysis being correct while a fee calculated as a tiered percentage can be consistent with a single benefit analysis being correct.
Finally, if the benefit in question is, unlike the management fee and transaction fee discussed above, not a client-specific benefit, the grandfathering outcome is likely to be different yet again. It is very difficult to see how the limitations can apply where the benefit in question does not relate to a particular client.
So much for the superficial simplicity of the proposition that the 'limitations operate by reference to 1 July 2014'.
This is a special grandfathering relief regime for benefits paid under a remuneration arrangement between an employer and an employee.
Except where the remuneration arrangement is an industrial instrument of a specified kind, this grandfathering ceases to be available from 1 July 2014.
The imminent cessation of grandfathering for many employment benefits assumes even greater significance in light of the following facts:
- the proposed exception to the definition of conflicted remuneration in relation to general advice is very narrow; and
- the proposed exception is in a Bill that is with a Senate committee for review and the report is not expected to be issued until next month.
It would be a brave (if not foolhardy) soul who thought 1 July 2014 will be the last significant 1 July in this area. In a recent speech, Financial System Inquiry Chair David Murray identified 'concerns about ... financial advice and investment' as a key theme in the submissions made to the Financial System Inquiry. The FoFA show rolls on.