FINANCIAL ADVISORY SERVICES
FoFA – Conflicted Remuneration
Guidance for CPA Australia public practitioners
July 2013
Introduction
Conflicted remuneration is any benefit given to an Australian Financial Services licensee (AFSL), or its
representative that due to the nature of the benefit or the circumstances in which it is given, could reasonably
be expected to influence the choice of financial product that is recommended or the financial product advice
given.
The following is a summary of the main elements of the new rules.
What is the prohibition?
The legislation imposes civil penalties and administration sanctions:
•
for an AFSL holder or a representative to accept conflicted remuneration, and
•
for an employer or a product issuer to give conflicted remuneration.
It also provides a ban on platform operators accepting volume based shelf fees from a fund manager.
What is conflicted remuneration?
Remuneration is conflicted where the following elements are present:
•
a benefit
•
given to an AFSL holder or representative
•
in relation to financial product advice (but not dealing)
•
provided to a retail client, and
•
could reasonably be expected to influence the choice of financial product or the financial product
advice.
A benefit is presumed to be conflicted if it is volume based – so that it is then up to the recipient to prove that
it was not conflicted. That said, there is no general prohibition on the receipt of volume or asset based fees
being charged by advisers (except to the extent that the investment uses borrowed funds).
What is a benefit?
The concept of a benefit is very wide. It includes both monetary and non-monetary benefits.
Typical benefits that come within the rules include:
•
commissions paid by product issuers
•
volume based rebates paid by product issuers
•
volume based bonus or profit sharing schemes for advisers
•
reward focussed entertainment or travel for advisers, and
•
equity participation schemes for advisers.
However it can also include indirect payments to an adviser's relatives or the payment of an adviser's
expenses (such as school fees).
Are there any exceptions?
There are a number of exceptions to the general prohibition. These include:
•
where the product is a basic banking product, a general insurance product or a life insurance product
(other than certain superannuation policies)
•
a benefit given in relation to an execution only issue or sale of a financial product (and at least 12
months after advice was provided)
•
a benefit given or authorised by the client
•
'stamping fees' in relation to securities
•
the passing on of brokerage fees received from a participant on a listed exchange, or
•
a benefit that is non-monetary and less than $300, relates to genuine education and training or is
appropriate software and IT support.
When does this come into force?
The legislation provides for the ‘grandfathering’ of arrangements that were in place before 30 June 2013.
Under the grandfathering regulations such arrangements can continue in operation for existing clients and
persons becoming clients before 1 July 2014. Grandfathering will not apply to persons becoming clients after
1 July 2014.
What does this mean for me?
You may have already noticed that some product issuers have either changed the way they provide
remuneration or are proposing to do so.
You should review the types of remuneration you receive and any benefits you provide to employees. You
may also need to review the way you provide performance benefits for your employees. ASIC has produced
some guidance and examples about what remuneration and/or benefits are considered conflicted
remuneration in Regulatory Guide 246 Conflicted remuneration.
Conflicted Remuneration Checklist
Question
1.
2.
Do I (and our representatives) understand
what conflicted remuneration means?
Have I reviewed our AFSL related
remuneration sources in light of the ban on
conflicted remuneration?
Do I comply?
Yes / No
What do I need to get FoFA ready?
The following references / tips are relevant to
each obligation.
•
Read RG 246: Conflicted remuneration
•
Watch out for developments in relation to
“grandfathering” arrangements which are
expected to be finalised in May/June 2013.
•
Provide practical training to advising
representatives and administration staff.
•
List all sources of remuneration received by the
licensee, authorised representatives and
employees of either.
•
Review each to decide whether they are
banned or not.
3.
Have I considered what impact this has on
my business model?
•
Consider various alternative remuneration
structures which will not be conflicted
remuneration.
4.
If yes to 2, do I need to bring in a new
compliance procedures? What will they
look like?
•
You will need to amend your compliance
manual/ procedures and HR processes to take
the new steps into account.
•
Review your approach as to how you will meet
both the interests duty and conflicted
remuneration obligations (particularly in
relation to conflicted remuneration which is
“protected” by grandfathering).
•
Read RG 246.59-66
•
Review acknowledgements and consents
currently used.
•
Review monitoring and supervision procedures,
including checklists.
•
Ensure compliance manuals include conflicted
remuneration explanations and advisers have
access to compliance support to ask questions.
5.
6.
7.
8.
If no to question 2, make sure you do this!
Have I considered how the conflicted
remuneration and bests interests duty
obligations will intersect in our business?
Do I need to amend our client
acknowledgements/consents if our clients
will be asked to authorise/direct the receipt
of certain benefits that might otherwise be
considered conflicted remuneration (e.g.
payments from product providers?
Do our monitoring and supervision
arrangements check that me and our
representatives have complied with the
ban on conflicted remuneration?
Do I and our representatives know what to
do if they are not sure they are complying
with the ban on conflicted remuneration?
Copyright © CPA Australia Ltd 2013
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