The introduction of FOFA could be potentially financially detrimental to some aspects of financial advisers' businesses – particularly the commercial value of the client registers which typically tend to be valued on either a multiple of revenue or EBIT. That is why the "grandfathering" of pre-FOFA arrangements and commercial rights is critical to the value of many financial advice businesses.
The legislation, and subsequent regulations, have made it clear that conflicted remuneration provisions do not apply to a benefit given to an AFS licensee or representative if the benefit is given under an arrangement entered into before the Application Day. The Application Day is the mandatory FOFA start day of 1 July 2013, or an earlier date if the relevant AFS licensee voluntarily chooses to opt-into FOFA earlier. These provisions are obviously good news for financial services practitioners in terms of the continuity of their existing business. However, if these grandfathering provisions cannot be extended to a prospective future purchaser of a client register, there would potentially be a significant decrease in the value of the client registers where those registers include conflicted remuneration revenue. Since conflicted remuneration includes trail commissions, this would impact upon many registers, potentially decimating the value of many registers.
Some comfort to the owners of such client registers has come in the form of ASIC Consultation Paper CP 189, where ASIC states:
A benefit under an arrangement entered into before the application day may be transferred to another AFS licensee or representative on or after the application day without attracting the conflicted remuneration provisions, depending on the form of the arrangement and how the transfer is made.
In other words, ASIC suggests that the grandfathered status of remuneration in relation to the client register is capable of transfer or sale to another AFS licensee or representative.
Having said that, there are a number of caveats. Firstly, the ASIC statement is made in a consultation paper rather than a formal regulatory guide. Secondly, the ability to sell or transfer the grandfathered-status of the client register is expressed as being subject to the "form of the arrangement" and "how the transfer is made". ASIC has not clarified what is meant by these two expressions.
We continue to watch this space.
If you are considering the sale or acquisition of a register, you should obtain advice from us.