Australia: The Future of FoFA

Investment Management Alert
Last Updated: 23 June 2014
Article by Jim Bulling, Gabrielle Palmieri and Daniel Knight

In light of today's announcements from Mathias Cormann, Australia's Minister for Finance, the future of FoFA is becoming clearer.

The Future of Financial Advice (FoFA) legislation has been surrounded by uncertainty since its inception. Originally intended to commence on 1 July 2012, compulsory compliance was deferred by 12 months. With a number of changes to regulations passed only days before compliance became mandatory on 1 July 2013, the industry gratefully embraced the Australian Securities and Investment Commission's (ASIC) 12 month facilitative approach to FoFA. With a change in government shortly after, further uncertainty was created when the new Liberal Government released proposed amendments to FoFA, which still remain unpassed. The suggested amendments are intended to remove some of the red tape created by the FoFA legislation in its current form and to provide certainty in some areas, such as the application of grandfathering provisions in respect of the ban on commissions.

In the wake of significant industry debate around the proposed amendments, the Senate referred the proposed bill to the Senate Economics Legislation Committee (Committee) which provided its report on 16 June 2014. The Committee's overall recommendation was that, subject to some suggested changes to the bill (such as redrafting of the conflicted remuneration provisions), it should be passed by Parliament. The Committee also recommended that the Government utilise the Explanatory Memorandum to provide greater clarity in certain areas, such as spelling out the best interests duty.

Today the Minister for Finance released a statement outlining the Government's response to the Committee's report. Mr. Cormann indicated that the Government intends to press on with its proposed amendments to FoFA, with some minor adjustments. To effect key changes as soon as possible, the Government will implement certain changes via regulations set to commence on 1 July 2014, for those amendments for which this is legally possible. This does not, however, entirely remove the uncertainty surrounding FoFA as regulations may be disallowed by Parliament. Additionally, there are further amendments which Mr. Cormann indicates will only occur via the passage of a bill, which is unlikely before 1 July 2014.

As ASIC's general facilitative approach draws to a close before passage of the bill, the financial services industry is left grappling with a number of uncertainties in relation to the implementation of FoFA. This will continue until the Government's amending bill is passed. There are, however, steps that licensees and authorised representatives (Advice Providers) can take now to ensure they are in the best position possible.

ASIC's No-Action Position

In response to the Government's proposed amendments to FoFA, ASIC announced a no-action position on 20 December 2013. The no-action position covers those existing FoFA provisions that the Government is intending to repeal (such as the requirement for clients in ongoing fee arrangements to opt in every two years, and the requirement to provide fee disclosure statements to clients who entered into an arrangement with the Advice Provider prior to 1 July 2013).

Importantly, it may not cover all of the Government's proposed amendments because any amendment that is introduced as a new provision or a drafting amendment will not expressly fall within the scope of the no-action position. It is not clear how ASIC will approach these issues. The no-action position does not have a specified expiry and we expect it to remain in place until amending legislation and regulations are passed, with appropriate adjustments for any changes made to the drafts previously released by the Government. The Government's response to the Committee's report indicates that, at least in relation to the changes which may be made by regulation, this should occur in the next few weeks.

Many in the industry are likely to be relying on ASIC's no-action position in relation to at least some of the provisions flagged for repeal. As both the likely date for amendments and the end of ASIC's general facilitative approach come closer, there are two things Advice Providers should be considering:

  • the parameters of the no-action position and whether they have relied on it only in relation to those provisions that have been flagged for repeal
  • whether they have the necessary processes and systems in place in the event that the final amendments are different to what the Government has already announced.

Where Advice Providers identify any issues with how they have applied the no-action position or feel they may face difficulties in complying with FoFA requirements in the event that the no-action position is withdrawn, they should prepare solutions which can be implemented on short notice if needed.


The FoFA 'grandfathering' provisions enable Advice Providers to continue to receive or pay conflicted remuneration where it is provided under an arrangement that was entered into prior to 1 July 2013.

The current language of the grandfathering provisions imposes a number of limitations on the circumstances in which Advice Providers are able to rely on grandfathering of benefits that would otherwise be classified as conflicted remuneration. Many of these limitations will have an impact from 1 July 2014.

Advice Providers should ensure they are prepared for this and have considered alternative methods for receiving such benefits.

Benefits provided under employment contracts

Benefits that constitute conflicted remuneration which are paid under employment contracts entered into prior to 1 July 2013 are grandfathered until 30 June 2014. After this date, a benefit paid under an employment contract will cease to be protected by the grandfathering provisions regardless of when the employment contract was entered into. AFSL holders should examine whether any payment that could be considered conflicted remuneration, which is paid pursuant to an employment contract from 1 July 2014, is carved out or exempt from the conflicted remuneration provisions, otherwise than by grandfathering, for example under a balanced scorecard approach or the client paid exemption.

Benefits provided in relation to products acquired from 1 July 2014

The grandfathering provisions that relate to benefits given on the acquisition of a financial product differ depending on whether the person giving the benefit is acting in the capacity of a platform operator or in some other capacity.

In both cases, benefits that constitute conflicted remuneration which are payable pursuant to arrangements entered into since 1 July 2013 have not been permissible since that date. However, from 1 July 2014, even for benefits paid under arrangements entered into prior to 1 July 2013, grandfathering will fall away in certain circumstances.

In the case of platform operators, if the benefit relates to the acquisition of a financial product by a person who opened (or provided instructions to open) an account on the platform after 1 July 2014, it will not be grandfathered.

In the case of a person other than a platform operator, if the benefit relates to the acquisition of a financial product or the provision of a financial service from 1 July 2014, it will also not be grandfathered from this date.

Advice Providers should ensure they have carefully reviewed all benefits to determine whether the grandfathering provisions will continue to apply.

Grandfathered benefits where there is a change in licensee

One important amendment proposed by the Government is a broadening of the grandfathering provisions in relation to authorised representatives who change licensees, or Advice Providers who sell their business.

Under the current draft language of FoFA, the grandfathering of benefits paid under arrangements entered into prior to 1 July 2013 may fall away in circumstances where it will result in a 'new' arrangement being entered into by the new licensee or the purchaser of the business. This has been an issue for financial planning practices, which faced risking their grandfathered commissions if they were to switch dealer group or licensee. The Government's proposed changes will address this by amending the regulations to specify that:

  • in circumstances where an authorised representative changes licensees, a benefit that would otherwise be grandfathered will continue to be so
  • a person who purchases a business has the same rights the seller would have retained had the seller not sold the business.

These proposed amendments were broadly welcomed by the industry but do not fall within the scope of ASIC's no-action position. Mr. Cormann's statement indicates that the Government intends to make these changes via regulations and they will take effect from 1 July 2014. Authorised representatives and persons thinking of purchasing business should take these proposed changes into account and, in particular, consider the timing of any such action. For any period between the time at which they take that action and the time these regulations are passed (for example, if the practice changes licensee before the amendments are passed), certain benefits may not be grandfathered and therefore may not be permissible unless another exemption applies. When relying on these changes to be made by regulation, Advice Providers may wish to consider the period during which regulations may be disallowed.

Best Interests Duty Safe Harbour Steps

The 'best interests duty' simply requires an adviser to act in the best interests of the client in relation to any personal advice the adviser is providing. In order to assist advisers in complying with such a broad duty, the FoFA provisions set out a series of safe harbour steps.

These safe harbour steps require advisers to consider relevant information and personal circumstances, the adviser's expertise and appropriate products. A 'catch-all' step also requires the adviser to take "any other step that...would reasonably be regarded as being in the best interests of the client". If an adviser can demonstrate he or she has complied with each of the safe harbour steps, he or she will be deemed to have complied with the best interests duty. This also means that if an adviser is unable to demonstrate that he or she has complied with one or more of the safe harbour steps, it will be difficult to convince the regulator or any forum in which a complaint is brought that the adviser acted in the client's best interest.

The legislation does not include any requirement to maintain evidence that an adviser has complied with each of the safe harbour steps. However, in the lead up to 1 July 2014 and the end of ASIC's facilitative approach, Advice Providers should carefully consider the processes and systems they have in place to support individual advisers in evidencing each of the actions they have taken to meet the safe harbour steps. This may include updating Statement of Advice templates, improving file note storage and additional training for advisers.

The removal of the very broad catch-all safe harbour step (in section 961B(2)(g) of the Corporations Act 2001) is effected by the proposed amendments and was highlighted by the Government as one of the key amendments to FoFA. This amendment was also supported by the Committee in its report and Mr. Cormann's statement makes it clear that the Government still intends to make this change. Currently the ASIC no-action position will treat the catch-all step as having been repealed, although this will not prevent a person (other than ASIC) in taking action against an Advice Provider for failing to take all steps reasonably required.

In reviewing the methods by which compliance with the safe harbour steps will be evidenced, Advice Providers should take the catch-all step into consideration in the event that this amendment to the legislation is not passed.

Staying Up to Date With the Changes

One of the most important matters for Advice Providers to address in the lead up to 1 July 2014 and beyond is to ensure that they keep up to date with FoFA developments. Mr. Comann's statement provides insight into the Government's intention moving forward, however the final outcome will depend on the Government's support in Parliament for its proposed amendments. Many of the proposed amendments will ease the burden Advice Providers face under the current FoFA legislation and Advice Providers will want to be in a position to take advantage of them if they are passed. For example, if suggested changes to the stamping exemption are passed, Advice Providers may be able to receive stampings fees in relation to Real Estate Investment Trusts (REITs) and Listed Investments Companies (LICs).

In addition to the rolling back of certain aspects of FoFA, some of the proposed amendments are technical changes and Advice Providers should ensure they are across these changes and any impact they may have on the licensee's FoFA solutions. Many of the changes of this nature are intended for clarification purposes and not as substantive changes, but it would be prudent to follow developments related to these issues.

One area of particular interest to many Advice Providers is the general advice exemption from the ban on conflicted remuneration. This exemption has been criticised as allowing non-personalised financial product advice to be remunerated through volume based benefits, including commissions. Mr. Cormann's statement indicates that the exemption is intended to apply more narrowly than this. These comments will be welcomed as this proposed amendment has caused heated debate in the industry, with many stakeholders arguing that it will encourage advisers to give general rather than personal advice and reopen the door for the widespread payment of commissions. The Committee recommended that the Government consider redrafting the provisions governing conflicted remuneration, using the Explanatory Memorandum to clarify the Government's intention. In addition, the Committee recommended that the Government make the distinction between the terms 'information', 'general advice' and 'personal advice' sharper. This could have significant implications beyond FoFA. In any event, the provision of 'information' only is not subject to the ban on conflicted remuneration. Mr. Cormann's statement indicates that there will be further changes to the proposed amendments which the industry has not yet seen. These include restrictions around when commissions can be received, including in relation to general advice. Until the amendments are passed, under the current language of the conflicted remuneration provisions, general advice remains subject to the ban.

Advice Providers should be actively watching for updates and seeking legal

advice where they are unsure of the impact of any changes.


The industry is eagerly awaiting resolution on the proposed amendments to the FoFA legislation, which may depend in large part on how the Government seeks to implement its amendments.

Until then, Advice Providers must do their best to operate within the uncertain environment they face. Doing so means being aware of the existing FoFA law, the potential impact of any changes and staying on top of the movements as they occur.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

K&L Gates has been awarded a 2012 EOWA Employer of Choice for Women citation acknowledging our commitment to workplace diversity.

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