FOFA WATCH - NEW REGULATIONS - SOME WITH IMMEDIATE APPLICATION

Another tranche of the FOFA regime has come into effect, and some parts apply from 27 November 2012.  The new regulations have broad application across a range of financial services, and relate to the best interests obligations, conflicted remuneration, and the required content of Statements of Advice ("SOAs"). 

The following is a broad general summary of the changes brought into effect by these latest regulations:

Simplification of SOAs – incorporation of information by reference

A "providing entity" (AFS licensee or authorised representative) can incorporate by reference to another document certain information required to be included in an SOA.  The new regulations provide that there are two things which cannot be incorporated by reference:

Insurance products – life risk and general insurance – basic banking products – some important changes introduced to existing FOFA provisions

The new regulations provide for some important differences to the earlier instalments of FOFA regarding the ban on conflicted remuneration as they apply to insurance products.  The earlier instalments of FOFA provided that an exemption from conflicted remuneration applied to a benefit that was given "solely" in relation to a class of insurance product to which the conflicted remuneration exemption applies.  It was considered that a strict application of this provision would seem to exclude from the exemption cases of composite, mixed or combined advice. 

The new regulations appear to remove that condition for the exemption, which would mean that the exemption can be combined with other exemptions (and other factors and activities) that are not subject to the ban on conflicted remuneration.  Commonwealth Treasury states, in the Explanatory Statement to the Corporations Amendment Regulation 2012 (No.10), that where a providing entity simultaneously gives advice in relation to both general insurance and life risk insurance the new regulations will provide that this does not breach the conditions of the exemption in relation to the ban on conflicted remuneration.  Treasury states that this would apply, for example, to cases of advice in relation to consumer credit insurance which typically includes elements of both general insurance and life risk insurance.

Regulation 7.7A.12I, provides that any benefit given under one of the conflicted remuneration exemptions will be exempt if the benefit also relates to other activities, but only to the extent that the part of the benefit that relates to the other activities is not itself conflicted remuneration. 

However, it is important to note that these broader liberalising provisions do not apply to the circumstances set out in Regulation 7.7A.12H which cover the provision of basic banking products and general insurance products provided by a person who is an agent, employee or person otherwise acting by arrangement with (and under the name of) an Australian ADI.  Importantly, this means that where the conditions of Regulation 7.7A.12H apply, the Regulation retains the requirement that no advice about any other financial product be given at the same time. 

Understanding and distinguishing the differences between Regulations 7.7A.12H and 7.7A.12I will be an important matter for those operating in the basic insurance and general insurances spaces.

The "stockbrokers' exemption"

An exemption from conflicted remuneration (Regulation 7.7A.12D) applies where the benefit consists of a percentage of no more than 100% of a "brokerage fee" that is given to a provider who is a "trading participant" of a prescribed financial market, and the provider then directly (or indirectly) gives the benefit to a representative of the provider.  This has also been colloquially referred to as the "stockbrokers' exemption". 

The regulation confirms that the exemption is limited to market participants and their representatives.  The exemption does not apply to AFS licensees who are not member participants of a licensed market – i.e. it does not apply to the so-called "indirect participants".   The regulation also confirms that the exemption is limited to "brokerage fees", which is defined as a fee given by a retail client to a provider in relation to a transaction in which the provider, on behalf of the retail client, deals in financial products that are traded on a prescribed financial market, or a prescribed foreign financial market.

There has been a liberalisation of the initial proposed provisions of the "brokerage exemption" in that trading participants no longer need to have approved anti-churning arrangements in place in order to qualify for the exemption.

The "dealing exemption"

This regulation provides an exemption for benefits given by the clients to the "provider" (which is defined in the regulations as the AFS licensee or representative of the AFS licensee) in relation to dealing in financial products on behalf of the client.  The regulation essentially extends the activity of "dealing" to the existing FOFA "client-given-benefits exemption" in section 963B(1)(d) which has been previously limited to benefits given in relation to the issue or sale of a product by the provider, or to financial product advice.

The "stamping fee exemption"

The so-called "stamping fee exemption" relates to the payment of fees or commissions from entities to the providers (AFS licensees or representatives) where those payments relate to capital raising by the entities.  Market participants had expressed their concerns in respect of the ban on conflicted remuneration, which
could have affected both direct and indirect market participants.

The stamping fee exemption could apply to many financial products and includes:

Stapled securities and hybrid securities are included to the extent that they are a combination of the products listed above.

The list is much expanded from the original list proposed by Treasury.

However, the exemption does not apply to "investment entities".  The term investment entity is defined as an entity, when taken together with any subsidiaries or other entities that are the subject of any joint-venture to which the entity is a party, that provides a return to its members or shareholders mainly from:

In other words, the stamping fee exemption will not apply to an entity with the primary purpose of providing a financial investment, rather than the provision of a financial investment being incidental to the operation of a business of providing goods or services.

The stamping fee exemption will apply to so-called "infrastructure entities".  An infrastructure entity is an entity which provides a return to its shareholders or members mainly from owning or operating an infrastructure asset.

Best interests obligations – regulations in relation to basic banking products and general insurance

The Regulations reduce the requirements of the best interests obligation in respect of basic banking products and general insurance products to the first three steps in section 961B(2) of the Corporations Act 2001 – i.e. to identifying the client's circumstances, determining the subject matter of the advice and making enquiries to obtain complete and accurate information.

Required Action

Participants will need to carefully consider whether products are exempt.