Sales and volume based pay incentives for all employees will also be allowed to continue until 1 July 2014, essentially giving the financial services industry an extra year to comply with most of the conflicted remuneration ban.
Several forms of remuneration potentially viewed as conflicted have also been formally removed from the ban, including buyer of last resort (BOLR) arrangements for financial planning practice sales.
Outgoing Minister for Financial Services and Superannuation Bill Shorten’s final piece of FOFA legislation was released late Friday 28 June – after close of business on the last business day before the reforms took effect – but has belatedly granted the industry some breathing space with concessions to the 10 submissions that responded to the March 2013 discussion paper.
Specifically, for benefits paid by platform operators, the ban will apply in relation to new clients from 1 July 2014, meaning a new client coming onto platform under an existing licensee/platform arrangement will be exempt from the conflicted remuneration ban until 1 July 2014.
However, “arrangements between financial services licensees and platform operators entered into from 1 July 2013 will not be grandfathered and must not include the provision of conflicted remuneration,” the legislation states. This means any new platform deals agreed to by licensees from now on will be subject to the ban for all clients coming onto the platform.
For non-platform providers, the ban will apply in relation to new clients and investments in new products by existing clients from 1 July 2014.
Arrangements may continue where a party to the arrangement changes or where an end to the grandfathering would otherwise bring about an acquisition of property otherwise than on just terms, however restructuring simply to continue or increase grandfathered payments may attract the operation of anti avoidance provisions.
Astrid Raetze, a partner at law firm Baker & McKenzie who specialises in financial products and markets, said the most significant change in the short term was the ban on asset based fees for geared investments.
"Those are mainly grandfathered if the client borrowed the money for the product before 1 July 2013, but for a new product after today you can't charge asset-based fees [on geared investments]," Ms Raetze told InvestorDaily.
For benefits paid to employees under an enterprise agreement in force immediately prior to 1 July 2013, the ban will only apply from six months after the nominal expiry date of the agreement – unless that date falls prior to 1 July 2014, in which case the ban applies from 1 July 2014. For benefits paid to employees under non-enterprise agreements, the ban will apply from 1 July 2014.
Essentially this means incentives such as bonuses, pay rises and reward-focused travel based on sales or volume incentives can continue until 1 July 2014.
Ms Raetze said employee remuneration was set to be one of the biggest sticking points of FOFA.
"My personal theory is no-one is ready for FOFA [in terms of employee remuneration]," she said.
"They're all scrambling, especially the large global corporations. All your company regimes have to go up to regional and global approval."
While even smaller companies are struggling, bigger corporations have had particular problems because there are so many layers of approval to go through, which takes time, Ms Raetze said.
"It's been a mammoth undertaking, they've all been hoping like crazy to get it changed." She added some smaller companies have been planning on "winging it" and hoping by the time they got to the attention of the regulator they'd have any issues sorted out.
The new legislation also moves to exclude several benefits from the conflicted remuneration ban altogether, including BOLR arrangements which were flagged as potentially conflicted in the March draft regulations, because BOLR arrangement alone “would not influence the advice to recommend products issued by the licensee or a related party”.
Also excluded from the ban are benefits that are passed on to other parties who were not part of the original agreement, provided that agreement was formed prior to 1 July 2013, for example where a licensee is receiving a grandfathered benefit from a product issuer but passing the full benefit onto the employee. The legislation specifies the benefits must be passed on “in a manner consistent with the original benefit”.
However if the licensee passes the benefit onto an employee for a different purpose, for example under a post-application day arrangement or as a broader performance bonus, the benefit would not be exempt from the ban on conflicted remuneration, the legislation stated.
In response to submissions, the legislation also included a change to the treatment of managed investment schemes and multi-product offerings whereby investors who have an interest in the product prior to 1 July 2014 can increase their stake after that date without being deemed to have acquired a new financial product.
“This means that non-platform operators can continue to pay conflicted remuneration in relation to clients who increase their exposure to a scheme or multi-product offering that the client had an interest in before 1 July 2014,” the legislation states.
