Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon J. B. Hockey MP)

Chapter 3 Conflicted remuneration and other banned remuneration

Outline of chapter

3.1 Schedule 1 to the Bill amends Part 7.7A of the Corporations Act 2001 (Corporations Act) to amend the current conflicted remuneration provisions.

Context of amendments

3.2 The Government has committed to provide certainty and reduce compliance costs for small business and financial advisers, whilst maintaining the quality of advice for consumers who access financial advice. See Outline for further information.

General advice provision

3.3 Under the current law, remuneration (both monetary and non-monetary) received in relation to both personal advice (financial product advice that takes into account the client's objectives, financial situation and needs) and general advice (financial product advice that does not take into account the client's objectives, financial situation and needs) is captured by the ban on conflicted remuneration.

3.4 The Government considers that the current application of the ban on conflicted remuneration imposes unnecessary burdens on industry by capturing individuals not directly involved in providing advice to clients. However, it is important to note that it was never the Government's intention to allow the payment of commissions on general advice.

3.5 To this end, the Government intends to introduce a targeted 'general advice provision' that specifies that monetary benefits paid in relation to general advice are not conflicted remuneration as long as certain conditions are met. Importantly, the provision clarifies that payments commonly known as commissions are not permitted.

3.6 The provision is targeted and is comprised of five limbs; all five limbs must be satisfied for the benefit to not be considered conflicted remuneration.

Execution-only provision

3.7 Under the current law, the 'execution-only provision' provides that benefits paid for execution-only services (such as the issue or sale of a financial product) are not conflicted remuneration. However, the provision does not apply in instances where a person within the licensee group (of the person receiving the benefit) has provided advice to the client on the product, or class of product, in the previous 12 months.

3.8 The Government has committed to broaden the provision to reduce unnecessary administrative complexity and ensure that legitimate execution-only services can be provided.

Education and training provision

3.9 Under the current law, the 'education and training provision' specifies that benefits in relation to education and training relating to the provision of financial product advice are not conflicted remuneration.

3.10 In order to facilitate industry attempts to up-skill, the Government has committed to broaden the provision to include training that relates to conducting a financial services business.

Basic banking provision

3.11 Under the current law, a 'basic banking provision' is provided that deems benefits in relation to basic banking products as not conflicted remuneration. To access the provision, the benefit must: be received by an agent or employee of an ADI; relate to a basic banking or general insurance product; and the agent or employee of an ADI-at the time of providing advice on the basic banking product-must not provide financial product advice on any other financial product except for general insurance.

3.12 The Government has committed to broaden the existing basic banking provision to include all simple, 'Tier 2' products-Tier 2 products are generally considered simple in nature, and include basic banking products, general insurance products, and consumer credit insurance products.

Ban on volume-based shelf-space fees

3.13 Under the current law, a platform operator is prohibited from receiving 'volume-based shelf-space fees' from a fund's manager where the fee is for 'purchasing' shelf space or to receive preferential treatment by the platform operator.

3.14 In order to clarify the scope of the ban and provide certainty to industry, the Government has committed to amend the ban on volume-based shelf-space fees to clearly identify the payments the ban intends to capture.

Client-pays provision

3.15 Under the current law, the 'client-pays provision' provides that certain benefits paid by a client to a licensee or representative are not conflicted remuneration.

3.16 The Government has committed to clarify that the provision also applies in circumstances where a benefit is paid by another party as long as the payment is made out of the client's funds, and the benefit is given at the direction of the client and with the client's clear consent.

'Mixed' benefits

3.17 The current provisions of the Corporations Act do not explicitly permit 'mixing' of benefits in relation to products or circumstances that are deemed to not be conflicted remuneration. The Corporations Regulations has addressed this problem; however, these changes have not been reflected in the Corporations Act.

3.18 The Government has committed to amend the Corporations Act to reflect the changes in the Corporations Regulation.

Regulation-making powers

3.19 Under the current law, regulation-making powers exist that permit certain benefits to be excluded from the definition of conflicted remuneration in prescribed circumstances. However, there are no regulation-making powers to clarify the operation of these provisions; neither are there regulation-making powers that could specify that, notwithstanding these provisions, a benefit is conflicted remuneration.

3.20 Given the complexity of payment arrangements within the financial advice industry, there is a possibility that future remuneration structures may be developed that are inadvertently captured by the ban on conflicted remuneration. Regulation-making powers that clarify the operation of the existing provisions provide a way to address any future unintended consequences.

3.21 Similarly, if a future remuneration structure is developed that, prima facie, is not captured by the ban on conflicted remuneration-but is clearly contrary to the spirit or intent of the ban-regulation-making powers that proscribe such payments provide a way to address this problem.

Summary of new law

3.22 The Bill amends the Corporations Act to broaden and clarify provisions that deem benefits to not be conflicted remuneration. Specifically, the amendments:

•

provide a targeted general advice provision that deems benefits on general advice to not be conflicted remuneration provided certain conditions are met;

•

broaden the execution-only provision so that it applies where no advice on that product, or the class of products of which the product is one, has been provided to the client by the individual performing the execution service in the previous 12 months;

•

expand the execution and training provision to include training relevant to a financial services business;

•

broaden the basic banking provision so that it can be accessed when advice on other simple ('Tier 2') financial products is provided at the same time as advice on a basic banking product and/or a general insurance product;

•

clearly define volume-based shelf-space fees and the payments the ban on volume-based shelf-space fees intends to capture;

•

clarify the operation of the client-pays provision;

•

clarify that 'mixing' benefits that are deemed not conflicted remuneration does not make the benefits conflicted remuneration; and

•

introduce regulation-making powers to address future remuneration structures that may be inadvertently captured by-or try to inappropriately avoid-the ban on conflicted remuneration.

Comparison of key features of new law and current law

Detailed explanation of new law

General advice provision

3.23 The Bill provides a targeted 'general advice provision' that deems monetary benefits that relate to general advice to not be conflicted remuneration in certain circumstances. The provision does not allow the payment of commissions on general advice.

3.24 This provision addresses concerns that the current law has unintentionally captured parties that do not provide personal advice. However, it is important to note that it was never the Government's intention to allow the payment of commissions on general advice. To this end, the general advice provision is targeted, and is comprised of five limbs; all five limbs must be satisfied for the benefit to not be considered conflicted remuneration. Importantly, there is a specific limb that clarifies-beyond a doubt-that payments known as commissions cannot be paid. [Schedule 1, item 29, subsections 963B(6) and (9)]

3.25 Currently, section 963A of the Corporations Act defines 'conflicted remuneration' as a benefit given to a licensee or representative that could reasonably be expected to influence the choice of financial product recommended or the financial product advice provided to a client. 'Financial product advice' is defined in section 766B of the Corporations Act to include both personal and general advice.

3.26 The five limbs to the general advice provision are:

1) The 'employee' limb (paragraph (a))

3.27 This limb ensures that only employees or persons in 'employee-like' situations are eligible to utilise the provision. The limb identifies three employee scenarios that are permitted:

•

an employee of the licensee, or a related body corporate of the licensee;

•

an employee of an authorised representative of the licensee; or

•

an individual who has been sub-authorised under section 961B of the Corporations Act by an authorised representative of the licensee to give general advice on behalf of the licensee of the kind given.

[Schedule 1, item 29, paragraph 963B(6)(a)]

2) The 'name of the licensee' limb (paragraph (b))

3.28 This limb restricts the employee limb by requiring the employee to provide general advice under the name of the licensee, a trade mark of the licensee, or a business name of the licensee. The term trade mark of a licensee means a trade mark of which the licensee is the registered owner under the Trade Marks Act 1995, and the business name of a licensee means a business name that is registered to the licensee under the Business Names Registration Act 2011. [Schedule 1, item 29, paragraph 963B(6)(b)]

3.29 Both the employee and name of the licensee limbs ensure that it is clear that the general advice is provided by an employee working for the licensee under the licensee's name, trade mark or business name.

3) The 'no commissions' limb (paragraph (c))

3.30 This limb clearly indicates that the general advice provision does not permit payments commonly known as commissions. This limb indicates that two types of payment are not permitted:

•

a recurring payment made because the person has given the general advice, and

•

a payment made solely because a financial product of a class in relation to which the general advice was given has been issued or sold to the client.

[Schedule 1, item 29, paragraph 963B(6)(c)]

3.31 The two payments are-respectively-broadly consistent with what are commonly referred to as a trail commission and an upfront commission.

3.32 It is important to note that neither the no commissions limb, nor the general advice provision, prevents the payment of a salary or a performance benefit (such as a performance bonus paid subject to a balanced scorecard).

3.33 The reference to 'solely' means that 'per product' payments-such as a benefit of $1 for each product issued-or-sold as a result of general advice given-are not permitted. However, if an employee were required to meet a reasonable performance target-such as selling 1,000 products-as well as a customer satisfaction target for the incentive payment to be paid, the payment would not be made solely because of the general advice: the performance and customer satisfaction targets would also have been satisfied; consequently, such a payment would be permitted.

3.34 It should be noted that a payment structured in a manner that, prima facie, is not solely because of the general advice may-still-not be permitted. For example, if the payment were in relation to a performance target that would not be seen as reasonable, the payment may be seen to have been made solely because of the general advice and thus would not be permitted.

3.35 The reference to 'financial products of a class' prevents benefits on general advice given on a class of products where that general advice results in a product of that class being issued or sold to the client. As such, regardless of whether general advice were provided on an entire class of financial product, three financial products of the same class, or a single financial product, as long as the payment is made solely because a financial product of a class in relation to which the general advice was given is issued or sold to the client, the payment is not permitted.

4) The 'no personal advice' limb (paragraph (d))

3.36 This limb restricts the advice that can be provided in the preceding 12 months. The limb specifies that, during the 12 months immediately before the benefit was given, the employee must not have given financial product advice to a retail client other than:

•

general advice;

•

personal advice in relation to basic banking products, general insurance products, and consumer credit insurance products; or

•

a combination of the advice mentioned above.

[Schedule 1, item 29, paragraph 963B(6)(d)]

3.37 The general advice provision operates seamlessly with the existing provision that allows benefits to be paid in relation to basic banking products, general insurance products, and consumer credit insurance products (the 'basic banking provision').

3.38 The no personal advice limb precludes persons who provide personal advice across classes of financial products-commonly referred to as financial planners or financial advisers-from utilising the general advice provision.

5) The 'allowable products' limb (paragraph (e))

3.39 This limb ensures that the general advice provided by an employee is in relation to a financial product issued or sold by the licensee. To utilise the general advice provision, the financial product in relation to which the general advice is given must either be:

•

a product issued or sold by the licensee or a related body corporate of the licensee; or

•

a product issued or sold by another entity under the name of the licensee, a trade mark of the licensee or a business name of the licensee.

[Schedule 1, item 29, paragraph 963B(6)(e)]

3.40 The general advice provision applies to benefits given on or after the day after the Royal Assent that are not otherwise grandfathered.

Execution-only provision

3.41 The Bill amends the existing 'execution-only provision' in paragraph 963B(1)(c) to provide a closer nexus between the party receiving the benefit and any advice that might have been provided in relation to the benefit.

3.42 The current law deems benefits given in relation to the issue or sale of a financial product as not conflicted remuneration as long as the licensee or representative has not provided financial product advice to the client in relation to the product-or products of that class-in the previous 12 months.

3.43 Under the Bill, the execution-only provision will apply if a monetary benefit is given in relation to the issue or sale of a financial product and the licensee or representative receiving the benefit has not provided financial product advice to the client in relation to the product that is to be issued or sold-or advice on a class of financial products, of which the product is one-in the previous 12 months. [Schedule 1, items 27 and 29, subsections 963B(4) and (5) and paragraph 963B(1)(c)]

Training provision

3.44 The Bill broadens the existing 'education and training provision' in paragraph 963C(c) to include education and training that relates to the carrying on of a financial services business.

3.45 The current law deems a non-monetary benefit that is in relation to genuine education or training relating to the provision of financial product advice to retail clients as not conflicted remuneration provided the benefit complies with regulations made for the purposes of the provision.

3.46 The Bill provides that a licensee or representative may receive a benefit of education or training that relates to the carrying on of a financial services business (for example, training in relation to client administrative services). The term 'carrying on of a financial services business' includes the provision of financial product advice. [Schedule 1, item 33, subparagraph 963C(c)(ii)]

Basic banking provision

3.47 The Bill broadens the existing 'basic banking provision' to include all simple, 'Tier 2' products.

3.48 ASIC, in its training guidelines, makes a distinction between 'Tier 1' and 'Tier 2' products: Tier 2 products are generally considered simple in nature and therefore require less onerous training when providing advice than Tier 1 products. Tier 2 products include basic banking products, general insurance products, and consumer credit insurance products. Tier 1 products include all other financial products not listed in Tier 2 (for example, managed investment schemes and superannuation).

3.49 Section 963D currently deems benefits that relate to a basic banking product as not conflicted remuneration as long as the agent or employee of an ADI-at the time of providing advice on the basic banking product-does not provide financial product advice on any other financial product. Regulation 7.7A.12H of the Corporations Regulations allows access to the provision where the benefit also relates to a general insurance product and the agent or employee does not provide financial product advice on any other financial product except a general insurance product.

3.50 The Bill enables the benefit that is given to also relate to a consumer credit insurance product. Further, the Bill allows the agent or employee to provide personal advice on a consumer credit insurance product at the same time as providing advice on a basic banking and/or general insurance product. [Schedule 1, item 35, subsections 963D(1) and 963D(2)]

3.51 A definition of 'consumer credit insurance' is inserted into section 960, and is defined as having the same meaning as in the Insurance Contracts Act 1984. [Schedule 1, item 1, section 960]

Employees

3.52 In accordance with ASIC's Regulatory Guide 175: Licensing: Financial product advisers - Conduct and disclosure, references to an agent or employee, or otherwise acting by arrangement with an Australian ADI under the name of an Australian ADI includes: contractors; employees of employment agencies who may be temporarily working for the Australian ADI/employer; employees of a body corporate related to the Australian ADI/employer; and employees of another company who work exclusively for the Australian ADI/employer.

Ban on volume-based shelf-space fees

3.53 The Bill clarifies the definition of 'volume-based shelf-space fee' and the payments the ban on volume-based shelf-space fees intends to capture.

3.54 Currently, section 964 of the Corporations Act provides that a platform operator must not accept volume-based shelf-space fees. However, the term volume-based shelf-space fee is not clearly defined. Consequently, concerns have been raised that the current provisions capture legitimate payments between fund managers and platform operators.

3.55 The Bill amends section 964A to clearly define a volume-based shelf-space fee. The Bill also clarifies the types of payments that are not considered volume-based shelf-space fees; platform operators are still required to not accept benefits that are volume-based shelf-space fees. [Schedule 1, items 6 and 38, section 960 and section 964A]

3.56 Concerns have also been expressed that the current definition of 'funds manager'-which is used in the definition of volume-based shelf-space fee-is too broad, and captures many entities who are not actually funds mangers.

3.57 The Bill amends subsection 964(2) to provide a clear definition of a fund's manager that better describes the entities the ban on volume-based shelf-space fees intends to capture. [Schedule 1, items 36 and 37, subsections 964(1) and (2)]

Client-pays provision

3.58 The Bill provides clarity on the operation of the 'client-pays provision'.

3.59 Under the current law, paragraph 963B(1)(d) provides that benefits given by a retail client to a licensee or representative in relation to the issue or sale of a financial product or financial product advice are not conflicted remuneration.

3.60 In addition, section 52 of the Corporations Act provides that: 'a reference to doing an act or thing includes a reference to causing or authorising the act or thing to be done'. As Paragraph 963B(1)(d) deems a benefit to not be conflicted remuneration if it is 'given' to a licensee or representative, applying section 52 would mean that in giving a benefit to a licensee or representative, a retail client is also causing or authorising the benefit to be given.

3.61 The Bill inserts a note at the end of section 963A to clarify that section 52 also operates in relation to the conflicted remuneration provisions of sections 963A, 963B, 963C and 963D. [Schedule 1, item 23, section 963A (note)]

3.62 The note clarifies that a benefit may be given either directly by a client or given by another party at the direction of the client; as long as the benefit is given using the client's own monies, or funds the client is beneficially entitled to, the client-pays provision applies.

3.63 Concerns have been raised over whether the client-pays provision can be used to permit payments made from a superannuation fund member's balance. The Bill clarifies that such payments can occur.

3.64 The Bill inserts a note at the end of subsection 963B(1) that specifically indicates that the client-pays provision operates with respect to advice paid from a superannuation fund member's fund balance. This principle also applies to other investments of the client, such as a platform or a managed investment scheme. [Schedule 1, item 28, note in subsection 963B(1)]

3.65 The trustee of the superannuation fund must still consider whether payments out of the client's superannuation fund is appropriate given the trustee's other obligations, such as the sole purpose test under section 62 of the SIS Act.

3.66 It is important to note that, where the benefit is given by another party, it must be given with the client's clear consent. A client would not be considered to have given clear consent if the consent was not clearly and expressly sought; for example, where consent has been sought as part of a broad range of terms and conditions agreed by the client in aggregate, clear consent would not have been provided. Rather, a client's consent could be expressly sought in a separate and distinct section of the terms and conditions agreed by the client.

3.67 Benefits given by another party at a client's direction are not given by the client if the benefits are borne out of the other party's funds.

'Mixed' benefits

3.68 The Bill allows a benefit to relate to more than one of the conflicted remuneration provisions.

3.69 Under the current law, the provisions relating to general insurance, life risk insurance and basic banking products under Division 4 of Part 7.7A of the Corporations Act provide that the benefit must 'solely' relate to one of these products. This means that a benefit cannot be given if it relates to one or more provisions in Division 4-that is, a 'mixed' benefit in relation to more than one provision cannot be provided. This outcome was unintentional, and was rectified through the Corporations Regulations. However, the change to the Corporations Regulations have not been reflected in the Corporations Act.

3.70 The Bill permits mixed benefits by providing that a benefit is not conflicted remuneration 'to the extent' that it relates to one or more of the products or circumstances described in sections 963B, 963C and 963D. This allows a benefit to relate to one or more provision, and also allows for circumstances that fall outside the definition of conflicted remuneration. [Schedule 1, items 24, 25, 26, 31, and 32, section 963C, subsection 963B(1), paragraphs 963B(1)(a), 963B(1)(b) and 963C(a)]

3.71 The Bill also confirms that the mere payment of two non-conflicted remuneration benefits does not, in and of itself, make the combined payment conflicted. The Bill inserts an example at the end of subsection 963B(1) that illustrates this point. [Schedule 1, item 28, subsection 963B(1) (example)]

Regulation-making powers

3.72 Under the current law, sections 963B, 963C and 963D contain a regulation-making power that allows certain benefits to be deemed not conflicted remuneration in certain circumstances. However, the regulation-making power does not extend to clarifying the operation of existing provisions; neither are there regulation-making powers that could specify that, notwithstanding these provisions, a benefit is conflicted remuneration.

3.73 The Bill introduces regulation-making powers under sections 963B, 963C and 963D. The regulation-making powers allow a regulation to be created to prescribe:

•

circumstances in which all or part of a benefit is not considered to be conflicted remuneration;

•

the extent to which, or a method for working out the extent to which, a benefit is not considered conflicted remuneration; and

•

circumstances in which all or part of a benefit is to be treated as conflicted remuneration.

[Schedule 1, items 29, 34 and 35, subsections 963B(7) and (8), 963C(2) and (3) and 963D(3) and (4)]

3.74 Given the complexity of payment arrangements within the financial advice industry, there is a possibility that future remuneration structures may be developed that are inadvertently captured by the ban on conflicted remuneration. Regulation-making powers that clarify the operation of the existing exemptions provide a way to address any future unintended consequences.

3.75 Similarly, if a future remuneration structure is developed that, prima facie, is not captured by the ban on conflicted remuneration-but is clearly contrary to the spirit or intent of the ban-regulation-making powers that proscribe such payments provide a way to address this problem.

Application and transitional provisions

3.76 These provisions commence the day after receiving Royal Assent.

Ban on conflicted remuneration

3.77 The amendments made in relation to the ban on conflicted remuneration apply to a benefit if:

•

the benefit is one to which Division 4 of Part 7.7A applies under section 1528, that is, the benefit is not grandfathered; and

•

the benefit is given on or after the commencement day.

[Schedule 1, item 43, sections 1531A and 1531E]

3.78 Certain benefits given under an arrangement entered into prior to the application day of the ban on conflicted remuneration, as defined in subsection 1528(4), are not be subject to the ban as a result of subsection 1528(1) and regulations made for subsection 1528(2). These benefits are not affected by this Bill.

3.79 Benefits given under an arrangement entered into after the application day of the ban on conflicted remuneration and certain benefits given under arrangements entered into prior to the application day are subject to the ban. Under the current law, such a benefit could not be given or received if it is conflicted remuneration. The Bill serves to permit certain benefits that are subject to the current law. As such, the amendments are not likely to give rise to the risk of acquisition of property (within the meaning of paragraph 51(xxxi) of the Australian Constitution). In any case, subsection 1528(3) provides that Division 4 of Part 7.7A of the Corporations Act will not apply to the extent it would result in an acquisition of property from a person otherwise than on just terms (within the meaning of paragraph 51(xxxi) of the Australian Constitution).

3.80 The current requirements continue to apply until the Bill receives the Royal Assent or new regulations are made.

Ban on volume-based shelf-space fees

3.81 The amendments made in relation to the ban on volume-based shelf-space fees apply to a benefit if:

•

the benefit is one to which Subdivision A of Division 5 of Part 7.7A applies under section 1529, that is, the benefit is not grandfathered; and

•

the benefit is given on or after the commencement day.

[Schedule 1, item 43, sections 1531A and 1531F]

3.82 Under subsection 1529(1), the ban on volume-based shelf-space fees applies where the benefit is given under an arrangement entered into prior to the application day, as defined in subsection 1529(3).

3.83 The current requirements continue to apply until the Bill receives the Royal Assent or new regulations are made.

Consequential amendments

3.84 The new law also contains a range of consequential amendments to address matters such as headings, notes and definitions. [Schedule 1, items 2, 30, 41 and 42]