Financial Services Blog – 09 July 2014

The Future of the Future of Financial Advice

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The Federal Government (Government) has registered regulations, which it previously foreshadowed, changing the law relating to the Future of Financial Advice (FoFA) provisions of the Corporations Act 2001(Cth). In doing so, it has challenged the Senate to disallow the regulations.

We previously wrote about the FoFA saga, noting that the Government had referred the issue to a Senate Committee (see FoFA Semifreddo).

As for the changes – the explanatory memorandum is available on the ComLaw website. It explains the changes that have been made, but until the Senate confirms that it will not disallow the new regulations, you should be wary of spending time and resources on implementing the changes.

These changes are sure to cause cognitive dissonance for many. In essence, the new regulations provide that certain ‘bonuses’ linked to product sales are not ‘commissions’. At a general level, so long as these ‘bonuses’ are ‘low’ compared to the employee’s total remuneration, they will not be prohibited by FoFA.

Like many other legislative changes proposed by the Government, the FoFA changes are attracting controversy and their future is characterised by uncertainty.  The Sydney Morning Herald this week reported that the Palmer United Party, which holds the balance of power in the Senate, had announced it would vote against the regulations.  This was not welcome news for Finance Minister Mathias Cormann who has said that he has no “Plan B” if the regulations are voted down by the Senate.  In light of the recent Commonwealth Bank of Australia (CBA) scandal (see article below) many are questioning the legitimacy of the Government’s changes which aim to reduce administration and ‘red tape’ in the finance industry.

Whatever happens, we can only assume that Australian Securities and Investments Commission (ASIC)’s facilitative approach remains in place, although ASIC has yet to comment on the new regulations. It would not be unreasonable if it, like the rest of the Financial Services industry, is waiting to see if the newly registered regulations survive the Senate.

Until the political parties settle the fate of these regulations, the Financial Services industry will have to continue with the current state of uncertainty.

New financial requirements for Fund Managers with Custodial Authorisations

As FY 2014 is now a distant memory, it is worth reminding AFS Licence (AFSL) holders with custodial/depository authorisations about their obligation to comply with the updated financial requirements in Class Order 13/761 – Financial requirements for custodial or depository service providers (CO 13/761), and the updated ASIC Regulatory Guide 166 Licensing: Financial Requirements (RG 166).

Whilst each licensee may have other financial requirements to meet as part of its AFSL conditions, those licensees who were authorised to provide custodial or depository services on or before 30 June 2013 had until 1 July 2014 to comply with these updated financial requirements.

Perhaps those who are most impacted are trustees of unregistered wholesale trusts who may now have to comply with a new (and possibly quite substantial) Net Tangible Assets (NTA) requirement as well as other obligations which were not previously required under their licence conditions.

Further, existing Responsible Entities (REs) who are also authorised to provide custodial services, even ‘incidentally’ as a trustee of unregistered trusts for example, may think it is business as usual. However, C/O 13/761 and RG 166 still should be reviewed as there could be some important differences between compliance with the RE financial requirements and ensuring that the updated custodial requirements are also met.

Unfortunately there are several variables within C/O 13/761 which each licensee should follow when applying these new requirements. Consultation with compliance managers, finance teams and external auditors is highly recommended but CompliSpace can provide assistance as well to understand a licensee’s particular situation.

Senate publishes its report on the performance of ASIC

The Senate Economic References Committee (Committee) has released its Final Report on the Performance of ASIC (Report). At 552 pages, it is quite a weighty tome.

The most significant recommendation to come from the Committee is the recommendation that a Royal Commission be established to enquire into the CBA over the scandal concerning its Commonwealth Financial Planning Limited (CFPL) arm. The Royal Commission would investigate the fraud, forgery and allegations of a cover-up inside the CFPL. The Government has indicated that it does not support such a Royal Commission, so this is unlikely to happen.

As for the Report itself, the Committee was especially critical of ASIC’s willingness to put faith in the assurances of CBA. It found, among other things, that:

  • both ASIC and the CBA seemed to place reports of fraud in the ‘too hard basket’;
  • CBA’s compliance regime failed; and
  • ASIC was too slow in realising the seriousness of the problems in the CFPL.

ASIC has responded to the Report, admitting that their actions could have been better. CBA has also responded, announcing a wider ‘Open Advice Review’ program for affected clients to gain financial advice and compensation.  As recently as Tuesday, the Labor Party raised the possibility of holding another Senate Inquiry into CBA’s actions.

While this issue is far from over for ASIC and CFPL, we foresee ASIC taking a more strenuous policing role with the financial services industry, so the start of new financial year could be a good time to ensure your compliance processes are up-to-date and operating properly.

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This blog is a guide to keep readers updated with the latest information. It is not intended as legal advice or as advice that should be relied on by readers. The information contained in this blog may have been updated since its posting, or it may not apply in all circumstances. If you require specific or legal advice, please contact us on 1300 132 90 and we will be happy to assist.

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