conflicted remuneration standard
TRANSCRIPT
Contains Confidential Information ANZ.800.431.0012
Conflicted Remuneration Standard Version 4 December 2017
Descri ption:
Key Principles:
Tools and References:
Further assistance:
Requirements and guidance for complying with "Conflicted Remuneration" and
other banned remuneration introduced in the Corporations Act 2001 (the Act)
through the FoFA reforms. Additional guidance with respect to the Corporations
Amendment (Life Insurance Remuneration Arrangements) Act 2017 and related regulations and ASIC instrument.
• Conflicted Remuneration is any benefit (monetary or non-monetary) given to a licensee or adviser that could reasonably be expected to influence the
financial product advice given to a retail client.
• Conflicted Remuneration Adviser Guides
• Conflict of Interest Standard
• Best Interests Standard
• Global Advisory Policy
• Corporations Amendment (Life Insurance Remuneration Arrangements)
Act 2017 ("L1F Act")
• Corporations Amendment (Life Insurance Remuneration Arrangements) Regulations 2017 ("L1F Regulations")
• ASIC Corporations (Life Insurance Commissions) Instrument 2017/510 ("ASIC Instrument")
• Explanatory Statement 'Issued by authority of the Minister for Revenue and Financial Services (Authorised Version Explanatory Statement
registered 14/03/2017 to F2017L00212)
Professional Standards Team
Confidential
Appendix 2AA
Version control
Version Released Owner Approved by Summary of changes Next review
1 April 2014 Professional
Standards
Risk & Compliance
Board Committee
New adviser standard April 2014
2 November
2015
Professional
Standards
Professional
Standards Manager
No material changes November
2016
3 March 2016 Professional
Standards
Professional
Standards Manager
& Wealth Legal
Expanding the reach of the
education & training exemption to
conflicted remuneration
March 2017
4 December
2017
Professional
Standards
Professional
Standards Manager
Additional guidance with respect to the Corporations Amendment (Life Insurance Remuneration Arrangements) Act 2017, Corporations Amendment (Life Insurance Remuneration Arrangements) Regulations 2017 and the ASIC Corporations (Life Insurance Commissions) Instrument 2017/510
December
2018
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Table of Contents
Conflicted Remuneration: .......................................................................................................... 4
What is Conflicted Remuneration? ............................................................................................ 4
What is Non-Conflicted Remuneration? .................................................................................... 6
Life Insurance Framework (LIF) .................................................................................................. 6
Asset-based fees on borrowed amounts ................................................................................... 9
Grandfathering provisions ....................................................................................................... 10
Non-monetary benefits............................................................................................................ 12
Performance benefits .............................................................................................................. 14
Anti-avoidance Measures ........................................................................................................ 15
Appendix 1 ............................................................................................................................... 16
Example scenarios – Monetary benefits ........................................................................................... 16
Example scenarios – Grandfathered benefits ................................................................................... 17
Example scenarios – Non-monetary benefits ................................................................................... 18
Appendix 2 ............................................................................................................................... 19
Issues to consider when evaluating performance benefits .............................................................. 19
1. Benefits paid under Employment Arrangements ..................................................................... 19
2. Benefits paid under Enterprise or Collective Agreements ....................................................... 19
3. Other employment agreements ............................................................................................... 20
Appendix 3 ............................................................................................................................... 21
Grandfathering and transferring existing benefits ........................................................................... 21
The “pass through” rule .................................................................................................................... 22
Appendix 4 ............................................................................................................................... 23
Conflicted Remuneration decision tree ............................................................................................ 23
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Conflicted Remuneration:
Conflicted remuneration obligations in the Corporations Act (the Act) prohibits financial advisers from accepting any payments or non-monetary benefits if the payment or benefit could reasonably be expected to influence a financial product recommendation or financial product advice provided to retail clients.
What is Conflicted Remuneration?
Conflicted Remuneration is:
Any benefit, whether monetary or non-monetary, given to an AFS licensee or its representative who provides financial product advice to retail clients that, because of the nature of the benefit or the circumstances in which it is given, could reasonably be expected to influence: o the choice of financial products you recommend to your clients; or o the financial product advice you provide.
There is no conflicted remuneration in the advice process when merely providing your clients with factual information or non-product advice. For example, budgeting or debt management.
The provisions apply to benefits given under arrangements entered into on or after 1 July 2013in relation to Personal Advice and General Advice, and whether provided verbally, paper based or online. As of 1 January 2018 the conflicted remuneration provisions also apply in relation to life risk insurance products.
There are a number of exemptions to these provisions, including “grandfathered” payments and certain “soft dollar” arrangements. This Standard provides further detail regarding these exemptions.
In order to assess whether a benefit is conflicted the following questions need to be considered:
Is the benefit designed, intended or reasonably capable of influencing the advice given?
Is the benefit specifically exempt from the definition of conflicted remuneration?
If the benefit is conflicted, has the benefit been grandfathered?
If the benefit may be accepted, how must it be disclosed?
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Examples of conflicted remuneration Benefits given that could reasonably be expected to influence financial product advice will be classified as conflicted remuneration, unless otherwise excluded. These benefits or payments can be made by a licensee, a platform operator, non-platform operator or product issuer and be of a monetary or non-monetary nature.
The following benefits may be classified as conflicted remuneration.
Upfront and trailing commissions on superannuation, investments and platforms, annuities and pensions, paid by a product issuer to a licensee.
This includes payments made directly or through some other arrangement, such as a non-cash payment facility, from a product issuer to an AFS licensee.
Upfront and trail commissions on certain risk insurance products namely:
Payments of commissions above a certain cap or certain benefits with respect to life risk insurance products as prescribed under LIF.
Soft-Dollar Benefits, now known as “non-monetary benefits”, from fund managers, platform providers and life companies.
A discount on fees paid by a licensee based on the volume of client funds held in a particular financial product.
Equity arrangements involving giving shares or other interests in the licensees’ business. This may include the receipt of volume-based payments in the form of shares and may also include the payment of dividends.
Example: An adviser, operating as an authorised representative under a licensee, produces $500,000 in life insurance sales per year. The licensee offers to pay the adviser (in the form of equity in a new corporate entity) as a reward for their efforts, the equivalent of 10% of additional sales made. This is a conflicted remuneration payment in the form of an equity arrangement.
Volume-based payments, including:
payments from a platform operator paid based on the total number or value of financial products.
bonuses and other payments. These include commissions or one-off payments, paid to you, which refer to the number or volume of financial products the clients acquire, based on the advice you provided.
shelf-space fees paid by a fund manager to a platform operator.
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! While not classified as conflicted remuneration, there is a general ban on asset-based fees charged on investments purchased with borrowed funds from 1 July 2013. Where financial product advice is provided you are generally prohibited from charging asset-based fees on borrowed amounts that are to be used to acquire financial products by or on behalf of a client (Refer to the section on Asset Based Fees for more information).
Life Insurance Framework (LIF) The Corporations Amendment (Life Insurance Remuneration Arrangements) Act 2017 along with the accompanying Corporations Amendment (Life Insurance Remuneration Arrangements) Regulations 2017 and the ASIC Corporations (Life Insurance Commissions) Instrument 2017/510 has come to be known as the Life Insurance Framework (LIF), and addresses adviser remuneration issues, and introduces clawback provisions to deal with churning. The reforms apply to both personal and general financial advice as well as direct sales.
The main elements of the LIF reforms include:
1. Caps on Upfront & Ongoing Commissions
Upfront Commissions (excluding GST)
o 80 per cent from 1 January 2018;
o 70 per cent from 1 January 2019; and
o 60 per cent from 1 January 2020
Ongoing Commissions (excluding GST)
o Capped at 20 per cent;
o Note: Conflicted remuneration introduced under the reforms dos not apply to Level commissions (that is, commissions that are a consistent amount each year;) and fee-for-service remuneration remain and are uncapped. Level commissions will change to 30% (including GST).
2. Clawback
o A two year upfront commission ‘clawback’ period will be introduced for upfront commissions:
100 per cent of the upfront commission will be clawed back in the first year.
60 per cent of the upfront commission will be clawed back in the second year, should a policy lapse
3. A ban on volume‐based payments such as the incentive for reaching or exceeding a certain volume of sales.
The LIF regulations support the industry reform package by:
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prescribing circumstances where commissions paid in relation to life insurance products and dealings with life risk insurance products are considered to be conflicted remuneration (Regulation 7.7A.11B), and also circumstances when they are not considered to be conflicted remuneration (Regulation 7.7A.11C and 7.7A.11D);
grandfathering benefits paid in relation to life risk insurance products issued before the commencement of the reforms but substantially related to existing products (Regulation 7.7A.16H); and
prescribing circumstances where clawback does not apply (Regulation 7.7A.12EB and 7.7A.12EC). As an example of a Onecare policy, clawback arrangements will not apply where the policy cost of the product is reduced within the first 2 years of the issue of the policy as a result of:
1. The product issuer and customer agreeing that there is a reduction in risk in relation to the person insured. For e.g.
o Health/medical loading removed. For e.g. client has reduced their BMI, blood pressure etc.;
o Pasttime loading has been removed. For e.g. client no longer sky dives; o Occupation status has changed. For e.g. miner changed to office worker. o Smoker status has changed from smoker to non-smoker.
2. The product issuer reduces the premium for the life risk insured product without changing the risks covered, or the benefits available. For e.g. re-price the book and the premiums decrease.
3. A rebate or discount is applied to the policy for retention purposes for e.g. it is reasonable to conclude in the circumstances that the rebate or discount was applied to induce the customer to acquire or continue to hold, the life risk insured product.
4. The person insured under the risk insured product has or is being paid under a claim; 5. The person insured dies, commits an act of self-harm, or reaches the policy expiry
age. 6. An administrative error has been made. For e.g.
o Where a policy is cancelled and subsequently reissued to fix a genuine error. It does not cover situations such as where an administrative error has been made but the policy is cancelled for another reason.
What is Non-Conflicted Remuneration?
Remuneration which does not meet the definition of “conflicted” or is otherwise specifically exempt.
Examples of non-conflicted remuneration
Payments or benefits given by the client. For example, the fees a client pays you for
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financial advice for which the client has given its “clear, genuine, express and specific” consent.
Please note:
Mere knowledge of the benefit or agreement to proceed through a disclosure is not clear consent given by the client; and
this exception does not apply to asset-based fees on borrowed amounts.
Commissions paid to you for advice on general insurance products only. NOTE: No General Insurance products are available on the Approved Product List.
Benefits provided by a licensee to you to cover business expenses incurred in providing financial product advice.
Example: reimbursement of expenses incurred travelling to and from a client’s premises or client’s home; or the provision of business equipment such as telephones, desks and chairs.
The base salary given to an employee adviser who provides advice to retail clients. There are three elements:
the level of the base salary
components of base salary
salary increases or chance of promotion which do not rely on the number or volume of financial products recommended to a client or acquired by clients.
(Refer to the Performance Benefits section for further details as to employment agreements.)
Buyer of last resort arrangements (BOLR). Where the following two factors occur:
a licensee acquires a representative’s financial advice business for a purchase price based on a specific formula, which is based on the number or value of financial products held by the adviser’s clients, and
the weighting attributed to the financial products issued by the licensee is the same weighting attributed to other financial products of the same class and type.
Note: The BOLR arrangements described above would not be considered to influence the advice you provide because a favourable weighting is not being given to the licensee’s products. (Refer to page 12 ‘Non-monetary benefits’ for an example of conflicted BOLR arrangements.)
Payments received for recommending basic banking products: for example, when a bank employee recommends basic banking products to a client. Basic banking products include deposit accounts, facilities for making non-cash payments that are related to the deposit accounts, First Home Saver accounts and facilities for providing traveller’s cheques.
Payment for execution only services where the benefit is given in relation to the issue
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or sale of a financial product, and you have not given the client product advice in the 12 months before the “execution only’ benefit was paid.
Payment for advice on an interest in a time-share scheme. NOTE: No time share schemes are currently on the APL and therefore cannot be recommended.
Grandfathered benefits (Refer to the section on Grandfathered Benefits for further information).
! Stating that a benefit is not intended to influence product advice, or renaming the conflicted remuneration as a form of remuneration that is not prohibited, will not change the fact that a benefit is conflicted remuneration. For example, renaming a commission payment an “asset-based fee” is still conflicted remuneration.
Asset-based fees on borrowed amounts
There is a general ban on asset-based fees charged on borrowed amounts on or after 1 July 2013 where the borrowed funds are to be used to acquire financial products by or on behalf of a client.
This ban, coupled with the Best Interests duty, requires reasonable investigations into client information when discussing current and proposed investments and borrowed funds. This means Advisers need to find out how client’s funds were sourced.
Further:
If a fee for providing advice to a client is dependent on the amount of funds borrowed to acquire financial products, it is an asset-based fee. (Note: Application fees and the interest charged on a loan taken out by a client are not asset-based fees.)
There is no restriction on how this amount is borrowed for the ban to apply. It could be borrowed through secured or unsecured means, a credit facility or margin loan.
The ban also applies to any geared component of instalment warrants.
The ban will not apply if it is “not reasonably apparent” that the funds in question have been borrowed. This is an objective standard based on whether something would be apparent to a person with a “reasonable level of expertise in the subject matter” of the advice sought by the client.
The ban does not apply to asset-based fees charged on or after 1 July 2013 where funds were borrowed and used to acquire financial products before 1 July 2013. These fees are grandfathered.
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Mixed portfolios: products purchased with borrowed & non-borrowed funds
Asset-based fees may be charged only on portfolios where financial products are purchased with a combination of borrowed and non-borrowed amounts if it is possible to separately identify the financial products purchased with borrowed amounts from those purchased with non-borrowed amounts.
Note that:
Asset-based fees can be charged only on that portion of the portfolio purchased with non-borrowed amounts;
If separate identification of products cannot be undertaken (i.e. you cannot determine which products were purchased with non-borrowed or borrowed funds), then asset-based fees cannot be charged over the whole portfolio. This is because it is not clear which financial products the borrowed amounts have been used to acquire.
Grandfathering provisions
In several situations you may continue to receive conflicted remuneration which is provided under arrangements entered into before 1 July 2013 with a product provider or before 1 January 2018 in respect of life risk insurance.
These arrangements are grandfathered and include contracts, agreements, schemes, understandings or other arrangements and whether they are written or verbal. The arrangement needs to be enforceable (or intended to be enforceable at law). Consequently, any benefit given by either platform operators or non-platform operators to your licensee under a pre-1 July 2013 arrangement or pre-1 January 2018 (in respect of life risk insurance products) is not subject to the ban on conflicted remuneration.
Various regulations provide extensive exemptions or additional conditions in relation to new retail client business or new investments.
Where a pre-1 July 2013 or pre-1 January 2018 (in respect of life risk insurance products) arrangement exists between you and your licensee, your licensee can pass on any or all grandfathered conflicted remuneration to you without being subject to the ban on conflicted remuneration.
Conflicted remuneration paid under pre 1 July 2013 or pre-1 January 2018 (in respect of life risk insurance products) agreements may continue to be paid to, and received by, advisers indefinitely in respect to clients who were in existing arrangements as at 1 July 2014 or pre-1 January 2018 (in respect of life risk insurance products) .
Clients in existing products as at 1 July 2014 or 1 January 2018 (in respect of life risk insurance products)
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Where clients are in existing platforms and products as at 1 July 2014 or 1 January 2018 (in respect of life risk insurance products), advisers can continue to receive:
volume rebates,
upfront commissions, and
ongoing commissions.
Existing clients can add new monies and switch between options on existing platforms and products. These investments will also be grandfathered.
After 1 July 2014 new clients can enter these platforms but, any rebates and commissions will not be payable. In respect of life risk insurance products, commissions are capped from 1 January 2018 as outlined earlier in this Standard.
Clients move into a new product or platform
If your client moves into a new product or platform that was not an existing arrangement as at 1 July 2013 or pre-1 January 2018 (in respect of life risk insurance products), grandfathering does not apply. This may include moving from accumulation to pension phase as the client will have moved into a new product. There are exceptions. It will depend on the legal structure of the fund.
Grandfathering (Personal & General Advice – explanatory diagram
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Clients in existing products pre-1 January 2018 (in respect of life risk insurance products)
Please refer to appendix 3.
When an existing arrangement is changed
If a pre-1 July 2013 or pre-1 January 2018 (in respect of life risk insurance products) arrangement is materially changed it will no longer be considered to be a grandfathered arrangement. As a result the payments made from it become conflicted remuneration and therefore banned.
Minor changes to an arrangement can be made without impacting the grandfather status.
! Incremental changes to a grandfathered arrangement may, when viewed as a whole, result in a new arrangement being created. Some arrangements may terminate as a result of a material alteration of the rights and obligations of the parties to the agreement. Refer to Appendix 3 for further examples regarding grandfathering and transfer of existing benefits.
Non-monetary benefits
Non-monetary or “soft dollar” benefits are benefits you receive that do not involve money being paid to you. They can include gifts, entertainment, free or subsidised business equipment and attendance at conferences. These benefits are banned if they could reasonably be expected to influence the financial product advice given to retail clients. There are a number of specific exemptions to this ban on receiving conflicted non-monetary benefits.
Conflicted non-monetary or “soft dollar” benefits
Examples of these benefits are:
Free or subsidised business equipment (Computers and other hardware, software, IT support (e.g. accounting and anti-virus software) and stationery)
Hospitality (Tickets to sporting events or concerts and subsidised travel)
Lunches and dinners provided, possibly with entertainment
Free use of conference facilities and training rooms
Arranging of loans to licensees or representatives
Attendance at networking events or conferences domestically and overseas.
Provision of marketing services (brochures, newsletters, promotional documents)
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Promotions or other ways of recognising an employee based on product recommendations
Education or training events Education and training will not be considered conflicted if the training is relevant to a financial services business and the following elements are complied with:
the dominant purpose is for education or training;
the education or training activities must take up the lesser of 6 hours per day or 75% of the time spent on the course/education/training; and
either you as the participant, your employer or your licensee must pay for your travel, accommodation and any events and functions relating to the course.
IT software or support
IT software or support provided by a manufacturer may not be conflicted if it relates to financial products issued or sold by the benefit provider and it is relevant to the provision of financial advice.
For example, software which enables the performance of a product to be monitored.
Small value exemption
While non-monetary benefits are deemed to be conflicted remuneration, a small value exemption applies to benefits where the total value is less than $300. Advisers may accept a non-monetary benefit where the value does not exceed $300 in value.
Where the benefits have been provided on more than one occasion, are similar in nature and from the one provider, they may be treated as related. In this case the total value will apply. They will be banned if, in the aggregate, they exceed $300.
The annual limit of $300 is applied per benefit type. This applies to both benefits given from life insurance providers and non-life insurance providers.
When calculating the value of non-monetary benefits you receive, the amount must include the total value of the benefit, including any amount a spouse or partner and, or practice staff receive.
! You may not receive any non-monetary, conflicted benefit where the value exceeds $300.
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Alternative Remuneration Register
All advisers must maintain an Alternative Remuneration Register.
The register must contain records of:
All non-monetary (soft-dollar) benefits received with a value between $100 and $300
Genuine training and education benefits
IT software and support
ASIC requires these records to be maintained for at least seven years (i.e. from the date the last identified benefit was provided.
The licensee and any product provider must also keep records of the benefits received and given to advisers to ensure these benefits can be tested for compliance.
Particulars must be recorded for any benefits you receive which have a value between $100 and $300. Those particulars are:
A description of the benefit;
the value of the benefit or, if the value is not known, the estimated value (as a dollar amount);
The date on which the benefit was given;
The name of the person who provided the benefit and the number of the person’s AFSL licence number (where relevant);
Whether the benefit was given to the licensee or a representative;
If the benefit was given to an adviser, the name and contact details of the adviser; and
If the benefit was given to another representative of the licensee, the name and contact details of the other representative.
The requirements also provide that these records must be made available, on request, for the last financial year. A reasonable fee may be charged based on the cost incurred in providing the particulars.
Performance benefits
Performance benefits may be paid to you based on an employment arrangement, an “enterprise” or “collective agreement”, or via some other form of arrangement. The benefits may include (but are not limited to): bonuses, pay rises, attendance at networking events, promotion, reward-focused conferences and shares or options in their employer.
These benefits will be conflicted remuneration if they are likely to, or can be reasonably expected to, influence the financial product advice you give.
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ASIC has provided “Performance Benefit Guidelines”. These guidelines state the following factors may be relevant when determining whether or not you should qualify for a performance benefit:
Complying with the law
Meeting employer compliance policies – an “outstanding compliance rating”
High levels of client satisfaction and loyalty
The number of new clients you bring to the business
Developing referral networks with other professional services firms.
Relevant training you have undertaken
Not all performance benefits given amount to conflicted remuneration. Rather, it is how the performance benefit arrangements are structured that determines whether the payment is conflicted remuneration. Currently, many performance benefits are calculated with reference to revenues generated, based upon the level of commission or other remuneration payable to the licensee.
For further details as to benefit categories and eligibility criteria see Appendix 2.
Anti-avoidance Measures
A person must not enter into or carry out a scheme to avoid the application of any provision in Part 7.7A of the Corporations Act (entitled Best interests obligations and remuneration).
The anti-avoidance provisions are retrospective in that from 1 July 2012, a person must not enter into or carry out a scheme if it can be concluded this was done for the sole or non-incidental purpose of avoiding the application of Part 7.7A, or that the scheme (partially or fully) has achieved that purpose already.
A person may be liable for a civil penalty if they are found to have breached this section.
An arrangement may be determined to be an avoidance scheme if it could be concluded that a person structured the arrangement for the sole or non-incidental purpose of avoiding the application of the Conflicted Remuneration provisions. This includes:
o schemes utilising an entity related to a person to whom the provisions apply, or
o a platform operator accepts a fee that would otherwise be a prohibited volume-based fee; or
a client is charged an asset-based fee on borrowed funds. Commercial transactions conducted in the ordinary course of business are unlikely to be scrutinised.
Regulatory References: Corporations Act, sections s761, s961, 963, s964, s965; Reg 7.7A 12, Reg 7.8.11A and ASIC RG 36, RG 175, RG 245, RG 246.
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Appendix 1
Example scenarios – Monetary benefits
Benefit
From To Conflicted Comments
You recommend OneCare Income
Protection to a client after 1 January
2018 and receive 100% upfront
commission.
Product
Manufacturer
via Licensee
Adviser
Conflicted 100% commission exceeds
the cap allowable under LIF.
You have a client with an AMP Super
Account (not in a default investment
choice) who has been active with you
as their Adviser since 2008. You
receive a monthly commission
payment of 0.6%pa.
Product
Manufacturer
via Licensee
Adviser
Grandfathered Grandfathering will apply to
existing pre 1 July 2013
arrangements
You purchase a client book with 100
clients who were with an adviser for
many years as at 1 July 2013. The
book was bought on 10 July 2013. The
previous Adviser was receiving
ongoing commission of 0.8% on super
and investments.
Product
Manufacturer
via Licensee
Adviser
Grandfathered The existing client
arrangements as at 1 July
2013 can be assigned /
transferred to a new adviser
without placing
grandfathering at risk.
However you should seek
legal advice on how the sale
contracts are structured.
You have a large Corporate Super
account as a client. You currently
receive a trail commission which has
been in place for the past 5 years.
Product
Manufacturer
via Licensee
Adviser
Grandfathered This is grandfathered.
This can be accepted and is
disclosed in the SOA / ROA.
You agree with a client to charge a
one-off ASF of $1,100 for the cost of
your advice commencing July 2013.
Client Adviser
Not conflicted Client payments to advisers
align your interests with the
client. This is what the
legislation is intended to do.
This can be accepted and is
disclosed in the SOA / ROA.
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Example scenarios – Grandfathered benefits
Benefit
Conflicted Comments
Commission on super or investments
In January 2014 you recommend a client purchase
an account-based pension for $300,000. You disclose
in your SoA that the ongoing fee will be 1.1% of the
balance with an implementation fee of $2,200.
This payment is
conflicted and
may not be
received.
At this time you can continue to
receive commissions on
investments that were in place
prior to 1 July 2013.
Commission on insurance
You recommend Life, TPD and Trauma insurance to a
client. On the application form you nominate a level
commission structure. This is disclosed to the client
in the SOA and verbally.
This payment is
not conflicted
and can be
received as it is
a level
commission
structure.
Accurate disclosure of any
commissions received is
required. Receipt of level
commissions are not considered
conflicted remuneration
provided that it is not in respect
of a group life policy for
members of a
superannuation or a life
policy for a member of a
default superannuation fund.
Asset based fees
You provide advice to a client to invest $100,000 in
shares. The funds are drawn from the available
equity in their home loan. You agree to charge the
client a 5% fee to provide ongoing service.
This payment is
conflicted and
may not be
received.
All asset based fees where the
investment is sourced from
borrowings are specifically
banned since 1 July 2013.
Fee for service
You have provided advice and agreed with the client
to an ongoing service package of $2,200. To
implement the recommendation, there is also a fee
to be charged of $1,100.
This payment is
not conflicted
and can be
received.
The fee paid by the client aligns
your interests with those of the
client. This is what the
legislation is intended to do.
This can be accepted and is
disclosed in the SOA or ROA.
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Example scenarios – Non-monetary benefits
Benefit
Conflicted Comments
Social event
You are invited to a barefoot bowls afternoon
by ABC Insurer. The day consists of lunch,
drinks and the bowls game. The total cost of
the day is valued at $150.
As the total benefit is less
than $300, you are permitted
to accept the benefit as the
small value benefit exemption
will apply.
All non-monetary benefits with
a value that exceeds $100 in
value must be recorded by the
Adviser in their Alternative
remuneration register.
You would not be permitted to
receive a similar benefit from
the same provider in the same
year if the total value of the
benefit exceeded $300.
Sporting event
You and your partner have been invited by
XYZ Insurer to sit in the corporate box for a
State of Origin game with dinner provided
beforehand. The total cost of the night is
$600 per person.
As the total benefit is greater
than $300, you are not
permitted to accept the
invitation and it should be
declined.
Corporate marketing
Superannuation provider, DEF Super,
contributions $1,500 towards the printing of
client letters for you to inform your clients
about the introduction of new features to
their superannuation fund.
As the total benefit is greater
than $300, you are not
permitted to receive the
benefit and it should be
declined.
Training
You are invited by a fund manager to attend
their Meet the Manager Day in another
capital city. The day consists of a 3 hour
presentation commencing at 10am by the
product team on their services and process
requirements. The afternoon is a 2 hour
session from a leading fund manager. The day
will conclude at 4pm. Lunch and drinks are
provided.
The fund manager pays for your flights and
taxi fares to their office.
The benefit cost of the training day is $180
with the travel costs being an additional
$400.
You are not permitted to
receive the benefit as the
travel costs must be paid for
by the participant, their
employer or the Licensee.
If you were to pay you own
travel costs, you would be able
to accept the invitation as the
education or training activities
take up at least 75% of the time
spent on the course or 6 hours
a day, whichever is the lesser.
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Appendix 2
Issues to consider when evaluating performance benefits
Purpose of the Performance Benefit Consider the behaviour the payer is trying to encourage through the
benefit. For example is the benefit criteria designed to encourage
best interests’ advice.
Example: You receive a $5,000 bonus from your AFS licensee. The bonus was paid in recognition of client satisfaction, an increase in client referrals, outstanding compliance rating and developing referral networks. This is unlikely to be conflicted remuneration because it would not reasonably be expected to influence the financial product advice given.
Link between the benefit & financial
product advice
How direct is the link between the benefit and the value/number of
financial products recommended to clients? It is likely to be
conflicted if based on the volume of product sales compared to one
based on the profitability of an employee’s business unit.
Example: Remuneration based on total employer profitability (e.g. $100,000), as opposed to employee individual sales ($100,000 commission), would not be considered conflicted remuneration if it could not be reasonably expected to influence the advice give.
Involvement of the recipient in the
advice giving process
How directly involved is the recipient? If the recipient helps prepare
the advice but does not provide input into the recommendations
made to the client, the performance benefit is less likely to be
conflicted.
Environment in which the benefit is
given
Is the benefit given in an environment that encourages good
financial advice that is in the client’s best interest? Consider
including compliance with internal processes and legal
requirements, your adviser training undertaken etc.
Weighting of the benefit in relation
to total remuneration
What is the relative proportion of the benefit to the overall
remuneration of the employee, which includes the benefit and
salary?
1. Benefits paid under Employment Arrangements The Regulations provide that benefits or remuneration paid to employees under existing employment arrangements are grandfathered. This allows, for a limited time, the payment of benefits that would otherwise be conflicted remuneration. Volume related incentive payments, for example, may continue to be paid until 1 July 2014, depending on your circumstances. With respect to LIF, benefits payable prior to 1 Jan 2018 are still payable, but any benefit purportedly payable in respect of life insurance products after that date is not permitted.
2. Benefits paid under Enterprise or Collective Agreements If you pay or are paid under a pre-1 July 2013 enterprise agreement or collective agreement, grandfathered benefits or remuneration can continue to be paid as follows:
if the nominal expiry date of your agreement did not pass before 1 July 2013, grandfathering can continue for up to 6 months after the nominal expiry date of the
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agreement. The conflicted remuneration ban will take effect from six months after the nominal expiry date of the agreement, or 1 July 2014, generally whichever is the later.
where the nominal expiry date of your agreement had passed before 1 July 2013, grandfathering can continue in relation to payments made up to 1 July 2014 (with no 6 month limitation).
With respect to LIF, benefits payable prior to 1 Jan 2018 are still payable, but any benefit purportedly payable in respect of life insurance products after that date is not permitted.
3. Other employment agreements If you employ or are employed under an employment arrangement, other than those detailed above, any benefit payable under that arrangement before 1 July 2014 is grandfathered and can be paid.
With respect to LIF, benefits payable prior to 1 Jan 2018 are still payable, but any benefit purportedly payable in respect of life insurance products after that date is not permitted.
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Appendix 3 Grandfathering and transferring existing benefits (Non-LIF)
The grandfathering provisions generally allow any existing contractual rights to commissions or benefits (as at 1 July 2013) to be sold or transferred. However, the rules of transfer are complex.
1. Generally, benefits paid by a platform operator (for example an IDPS or super fund offering a custodial arrangement) to a licensee can continue to be paid under an existing (pre 1 July 2013) arrangement in relation to investments made via the platform by pre 1 July 2014 platform account holding clients, including new investments and switches. This includes new contributions or rollovers or transfers from accumulation to pension phase.
However, benefits given by the platform operator under an existing arrangement will generally not be grandfathered if they:
relate to an acquisition or retention of a financial product by a retail client who had not opened an account (or given instructions to do so) on the platform before 1 July 2014; or
do not relate to a person who opened an account on the platform (for example a sponsorship payment from a platform operator to a licensee that is designed to provide an incentive to the licensee to recommend the platform to its clients).
Note: If a party to the pre-1 July 2013 arrangement changes the arrangement is generally taken to continue for grandfathering purposes, although restructuring simply in order to continue or increase grandfathered payments may attract the relevant anti-avoidance provisions. For example, if the parties restructure or one party assigns their right under the arrangement to another party, resulting in a change of parties, the arrangement may still be grandfathered.
2. Where fund manager benefits to licensees are concerned, the rules generally provide that benefits paid under an existing arrangement in relation to the retention of an investment made by a client before 1 July 2014 are grandfathered. The benefit given will not be grandfathered if it relates to the acquisition of a financial product on or after 1 July 2014 for the benefit of a retail client who did not have an interest in the product before 1 July 2014.
It will be grandfathered if it relates to a financial service provided before 1 July 2014 to a retail client, such as marketing or sponsorship payments from a platform operator to a licensee that is designed to provide an incentive to the licensee to recommend the platform to its clients.
Note: If a client switches an investment held via an IDPS or super fund before 1 July 2014 to one which they had not been invested in before that time, grandfathering will generally not apply to a benefit paid by a fund manager of the new investment to the licensee. However, if after 1 July 2014 a client increases an existing pre 1-July 2014 interest they will not be taken to have acquired a new financial product, so the relevant fund manager can continue to pay conflicted remuneration under an existing arrangement in relation to these clients.
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3. With benefits paid by a licensee to non-employed advisers, the rules generally provide that when paid under a pre-1 July arrangement in relation to an investment made by the client before 1 July 2014, such payments are grandfathered. The benefit will not be grandfathered if it relates to the acquisition of a financial product on or after 1 July 2014 for the benefit of a retail client who did not have an interest in the product before 1 July 2014.
The benefit will be grandfathered if it relates to a financial service provided before 1 July 2014 to a retail client, such as promotional payments from a licensee to an adviser that is designed to provide an incentive to the adviser to recommend a particular product to its clients. Again, a change to a party to an arrangement is generally intended not to cease its grandfathering.
The “pass through” rule If a benefit paid by a licensee is not grandfathered under the rules outlined above, it may be covered by the “pass through” rule.
Under this rule the benefit paid by one party (e.g. a licensee) to another party (such as a non-employed adviser) under an existing arrangement may be grandfathered if:
it is the pass through of a benefit received by the payer under another existing
arrangement (for example a platform provider);
the benefit is no more than 100% of the original benefit; and
the purpose of the payment is consistent with the original benefit’s payment.
Note: It is expected that even if a client who invested via a platform or super fund prior to 1 July 2014 subsequently switched investments or made a new investment (via the platform or super fund), a benefit paid pursuant to an existing arrangement between a licensee and adviser would be grandfathered. Conversely, if an existing arrangement between the licensee and adviser was based on the amount of funds invested in a particular managed fund, then a benefit would generally not be grandfathered if it related to a different investment made on or after 1 July 2014.
Life Insurance Framework (LIF)
Benefits paid in relation to life risk products issued before 1 January 2018, or where an application for cover has been lodged before 1 January 2018 and the policy issued by 30 March 2018, will be grandfathered. That is to say, where a client increases their level of cover within a life risk product which was initially taken out prior to 1 January 2018 example: adds trauma cover to a life policy or increases the level of life cover, the commission rates on the additional premium will be the same as the pre 1 January 2018 rates. Note that if the trauma cover for that same client was to be taken out as stand-alone then the applicable commission rates would be the current ones at the time and not the grandfathered rates.
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Appendix 4 - Conflicted Remuneration decision tree
Monetary benefits not conflicted: (1) GI product
I. II.
(3) Wholesale clients (4) Given to you by your client (except asset
based fees on funds sourced from Gearing)
(5) Other prescribed benefits (6) An agent or employee of an ADI
providing advice on a banking product only S.963D
Start
S.963A Is the benefit
reasonably capable of influencing the advice
or product recommended?
Not C onflicted
S.963B Is it excluded from
the definition of conflicted?
Exempt from definition of
conflicted
Yes
No
Is it grandfathered?
Banned . Do not accept it
S.963C Is it an exempt non - monetary
benefit?
G randfathered
Is it monetary ? Yes
No
Yes
No
Regulation 7.7.A.16 Grandfathering applies if: (1) It is in relation to an existing pre 1 July
2013 (non-LIF); and (2) It relates to a client’s interests in a fund or
platform where they have given a direction pre 1 July 2014.
(3) It is in relation to life risk insurance products Issued prior to 1 January 2018*, or life risk insurance products related to existing products issued prior to 1 January 2018*. *Or lodged by 1 January 2018 and issued prior to 30 March 2018
Yes
No
Yes Exempt non - monetary benefits include any of the following: (1) Benefits relating to General insurance
products only (2) Benefit is of small value <$300 for each
licensee or representative who is a final recipient (includes identical or similar benefits given frequently / regularly over 12 months)
(3) Benefit has a genuine education or training purpose (tests outlined in the Regulations) relevant to the provision of financial service
(4) IT software or support that is relevant to the provision of financial advice in relation to the products issued or sold by the provider
(5) Other prescribed benefits in the Regs 7.7.A.12 (Stamping fees, time share, brokerage, dealing fees)
No
Banned . Do not accept it
Allowed non - monetary
Life Insurance Framework (LIF)
1) Level benefits. Refer to Subregulations 7.7A.11C(1)(b) and 7.7A.11D(1)(b).
2) Life risk products that are group life policies or life policies of default super fund. Refer to Subregulations 7.7A.11C(1)(b) and 7.7A.11D(1)(b) and S.963B(2) and (3) Corporations Act.
)
Life Risk except for:
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