The release of ASIC Consultation Paper ("CP") 189 (which deals with ASIC's preliminary views related to conflicted remuneration) should be an important catalyst for AFS licensees to commence serious consideration as to how they will remunerate their representatives. Remuneration of representatives often requires sensitive handling, and often cannot be adjusted overnight.
An example from CP 189 shows why careful consideration will be required. ASIC gives the following example as conflicted remuneration: A financial planner receives a base salary of $80,000. If the planner's salary is adjusted each year to reflect any increase in the asset-based fees paid by the clients of the AFS licensee they advise, then ASIC expresses the view that this will be a volume based benefit and presumed to be conflicted remuneration. ASIC further says that in order to rebut the presumption that this is conflicted remuneration, the employer would need to prove that the future salary increases could not reasonably be expected to influence the financial product advice provided by the planner.
Perhaps the combination of circumstances such as the absence of a formal ASIC Regulatory Guide on the topic until March 2013, the anticipation of significant "grandfathering" provisions relating to conflicted remuneration and the fact that most licensees will not be subject to FOFA until the mandatory start date of 1 July 2013 may mean that many licensees are not yet focussed on the issue.
Licensees should start considering this issue. In its current form, this aspect of the FOFA reforms has the potential to have a significant impact on licensee's business models, and their contractual relationships with their representatives.
Some articles and commentary in the financial services media seem to suggest that the proposed post-FOFA implementation of conflicted remuneration measures, as published by ASIC, is largely of no concern or is "business-as-usual". Our view is that such a position does not fully appreciate some of the ASIC commentary.
The Christmas to new year break will provide an ideal opportunity for busy licensee management to reflect on the documents and initiatives driving changes in the financial services market, and to consider their position on key topics.
This period, and the upcoming changes brought by FOFA, provides an ideal opportunity for licensees to consider and revise their contractual relationships with their representatives. It is our experience that many standard representative agreements used by licensees were drafted at the time of the introduction of FSR – some 11 years ago. There have been considerable changes in legislation, regulation and case law since then (e.g. changes in post-termination restraints and "client ownership" issues), that should be reflected in representative agreements. The requirement to amend agreements to incorporate FOFA related issues should be seen as an opportunity to conduct a more comprehensive and holistic review of the representatives' contracts.
Licensees should consider their agreements with representatives. Once the Regulatory Guide is issued in March 2013, you should obtain advice as to whether these agreements will be appropriate under FOFA.