Treasury has released two new exposure drafts on the government’s Future of Financial Advice (FOFA) reforms focusing on product fees, a delayed application date for risk insurance remuneration and regulations on grandfathering.
The exposure drafts ‘FoFA regulations on grandfathering’ and ‘First package of FOFA regulations’ were released by Treasury late yesterday.
The first package of amendments to the FOFA bill is the Corporations Amendment Regulation 2012 which is in respect to the provisions relating to charging ongoing fees to clients and conflicted remuneration as proposed by the bills.
Specifically, the amendments centre on excluding product fees from the definition of an ‘ongoing fee arrangement’; and excluding benefits given for advice relating to interests in time-sharing schemes from the ban on conflicted remuneration.
The amendments also include the introduction of a delayed application date of 1 July 2013 for the ban on conflicted remuneration with respect to group life risk insurance inside choice superannuation funds and all life risk insurance policies in default superannuation funds.
It also calls for the provision of further details to the exemptions from the ban on conflicted remuneration for certain non-monetary (‘soft-dollar’) benefits and for the introduction of record keeping requirements in relation to those benefits.
Treasury’s grandfathering exposure draft proposes the introduction of a new regulation that moves for greater clarification.
“Regulation 7.7A.4.16 clarifies the circumstances in which a benefit will not be ‘grandfathered’ with respect to the ban on conflicted remuneration. That is, it identifies a situation in which Division 4 of Part 7.7A of the Act applies to a benefit given by someone other than a platform operator,” the draft paper said.
“A particular focus of the ban on conflicted remuneration in Division 4 of Part 7.7A is commissions paid under an arrangement between a product issuer and a financial adviser with respect to a retail client’s investment in the issuer’s financial product.
Treasury said the intention of the grandfathering arrangements is to preserve any existing contractual rights to receive ongoing product commissions, but not to allow commissions on ‘new’ financial products acquired on or after the application day.
“A contractual right to a commission is not typically created until the party receiving the commission (the licensed financial adviser) does what is necessary to become entitled to it. That is, there can be no existing contractual right to commissions based on financial products that may be acquired in the future,” it said.
“Any such commissions are not intended to be excluded from the application of Division 4 by the operation of section 1528.”
“To clarify this, subregulation 7.7A.4.16(2) explicitly applies the ban on conflicted remuneration to a benefit given by someone other than a platform operator, under an arrangement that was entered into before the application day, in relation to an investment in a new financial product.”
Treasury said a ‘new financial product’ is defined by subregulation 7.7A.4.16(3) as a financial product acquired on or after the application day.
The deadline for industry consultation for both the ‘FOFA regulations on grandfathering’ and ‘First package of FOFAregulations’ are 5 June.
