With effect from 1 January 2021, grandfathered provisions for conflicted remuneration will be repealed. By removing the grandfathered exemptions, the full effect of FOFA laws would apply and conflicted remuneration would be banned in its entirety.
The Government has announced its acceptance of Recommendation 2.4 from the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
With effect from 1 January 2021, grandfathered provisions for conflicted remuneration will be repealed.
These grandfathered provisions currently allow conflicted remuneration and other banned remuneration to be paid where the benefit is paid under a grandfathered arrangement. Further, effective from the same date, the Government will implement new regulations that impose rebate schemes for affected retail clients where grandfathered conflicted remuneration are still in contracts.
To ensure full implementation by 1 January 2021, the Government has issued a Ministerial Direction to commission ASIC to monitor and report on industry behaviour in the period between 1 July 2019 to 1 January 2021.
What is Conflicted Remuneration?
Broadly speaking, conflicted remuneration are pay structures that accord benefits (monetary or otherwise) to AFS licensees, or representatives, where the nature of the benefits could reasonably be expected to influence the choices of financial products recommended to retail clients (see: section 963A of the Corporations Act and ASIC's RG 246). In 2013, conflicted remuneration schemes for financial advisers were banned under the Future of Financial Advice (FOFA) law reforms. However, exemptions allow for grandfathered arrangements (entered into with clients before the application day or prior to 1 July 2013) to have conflicted remuneration benefits paid to financial advisers.
Effect of Ban on Conflicted Remuneration
The Royal Commission raised concerns that grandfathered provisions for conflicted remuneration produce the "risk of misaligned incentives, which can lead to inappropriate advice" given to clients.
By removing the grandfathered exemptions, the full effect of FOFA laws would apply.
As a consequence, financial advisers will be required to treat all clients (grandfathered and non-grandfathered) under the same fee structures. Most relevantly, grandfathered clients would now receive the same protections under the regime as non-grandfathered clients who pay fees on an ongoing fee arrangement and benefits on a fee-for-service basis. Under RG 245 and Part 7.7A, Division 3 of the Act, financial advisers are obliged to produce annual Fee Disclosure Statements to clients on ongoing fee arrangements so as to provide transparency regarding fees and services relevant to clients.
By contrast, under grandfathered arrangements, fees paid to financial advisers were either on a commissioned or volume-based benefit basis – classifying it as conflicted remuneration given that fees paid to financial advisers would vary from product to product, as well as by volume; thus, financial advisers may be incentivised to advise clients to materially benefit themselves.
While the effects of fees under either scheme (grandfathered or otherwise) do not materially produce any substantive difference; nevertheless, significantly, the protection of disclosure imposed by RG 245 and Part 7.7A, Division 3 of the Act would not extend to grandfathered clients who are not under ongoing fee arrangements. Distinctively, the benefits paid to financial advisers under grandfathered schemes are not determined at the outset, whereas non-grandfathered schemes are. This means that grandfathered clients would not have the advantage of understanding the fees being charged to them given that the fees are classed as commissions. On the other hand, non-grandfathered clients pay benefits to financial advisers on a fee-for-service model, which allows for a clear outline on the relevant fees and services chargeable to them.
Best Interests Duty
Financial advisers are bound by the duty to act in the best interests of their clients when giving personal advice. In banning conflicted remuneration in totality, the Government seeks to align financial advisers more closely to their duty to act in the best interest of clients, to promote industry professionalism, and to improve the quality of advice given to retail clients. In particular, the effect of the full ban on conflicted remuneration seeks to ensure that benefits flow to consumers and not the industry.
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