An options-stage regulatory impact statement (RIS) on the government's amendments to FOFA, released by Treasury this week, provided financial institutions with further clarity about what kind of incentive schemes will be exempt from being considered 'conflicted remuneration'.
The RIS confirmed, as has been hinted by ASIC in Regulatory Guide 246, that benefits provided under a 'balanced scorecard' approach (ie, with reference to both volume-based and non-volume-based factors) will be exempt.
Speaking to InvestorDaily, Minter Ellison partner Richard Batten said that to qualify for such an exemption, an incentive scheme would have to have a sufficiently 'small' percentage of directly conflicted remuneration (such as a sales target) – but it is unclear what that percentage will be.
“There has definitely been a lot of lobbying to get more certainty around when certain types of benefits would not fall within the [conflicted remuneration] regime,” he said.
Mr Batten conceded that the lobbying had mostly been undertaken by large institutions that want to be able to continue to incentivise their representatives to sell products – but he pointed out that firms will be required to have sufficient 'counter-balancing factors' in place “to stop any actual bias occurring”.
For example, a firm should not be in a position to grant a bonus to a representative who has failed to comply with the best interests duty, he said.
“It’s a balancing act about selling products versus being motivated to do your job. And to have a target that reflects that motivation,” said Mr Batten.
“It is an area where [financial services providers] are unsure about how far they can go, so the purposes of this exemption would be to provide some sort of clarity and some thresholds,” he said.
The challenge for the government will be to legislate a set proportion of volume-based remuneration that will be permitted under the balanced scorecard exemption, said Mr Batten.
While Minter Ellison is comfortable advising financial institutions on a case-by-case basis on the issue, it will be an “interesting exercise” for the government to come up with a percentage that is simultaneously in the spirit of the FOFA reforms and unlikely to hamper incentive schemes, he said.
