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Volume based fees and anti-avoidance provisions and soft-dollar exceptions
A number of submitters expressed concern that some industry players have
moved to vertical integration structures to avoid the bans on volume-based
payments. This chapter discusses these views and the proposed anti-avoidance
provisions contained in the Corporations Amendment (Future of Financial Advice)
Bill 2011 and the Corporations Amendment (Further Future of Financial Advice
Measures) Bill 2011 designed to address these activities.
The bans on soft-dollar benefits will also be discussed, including
concerns that some legitimate forms of professional development will be banned.
Submitters' views on the proposal to limit professional development benefits to
within Australian and New Zealand are also canvassed.
Volume-based shelf-space fees
Currently, employers can pay incentives to advisers to sell a certain
type or a certain volume of products. The Bill proposes to prohibit:
- volume-based shelf-space fees paid by funds managers to platform
- volume payments from platform operators to financial advice
The Explanatory Memorandum (EM) outlines that volume-based incentives
deemed to be conflicted remuneration include benefits which are dependent on
the value of financial products of a particular class recommended or required
and the number of financial products of a particular class recommended or
The EM states:
In an industry as complex and fast-evolving as the financial services
industry, there are and will always be a wide range of remuneration
arrangements. However, volume-based payments of the kind described in section
963L appear on the face of it to be inherently conflicted, since the financial
adviser will have a financial incentive to maximise the value of the payments
irrespective of the suitability of the products or investments for the client.
Diagram 6.1conceptualises the interactions between product issuers, platform
operators and financial advice dealer groups. It demonstrates, in a simplified
form, the benefits offered, and received, between these parties.
Diagram 6.1: current structure of volume-based rebates
Source: Committee secretariat,
adapted from Explanatory Memorandum, Corporations Amendment (Further
Future of Financial Advice Measures) Bill 2011, pp 7, 25; Treasury, Submission
22, pp 8–9; Jennifer McDermott, 'What's that: Shelf-space fees', The
Australian, 9 June 2010.
The term 'shelf-space fees' is derived from the retail grocery industry
where a manufacturer may pay more for its product to receive greater prominence
in a store. In the context of financial products, shelf-space fees refer to the
levies paid by manufacturers (typically managed funds) to have preferential
treatment for their product when listed on a menu of products accessed by
financial advisers on behalf of their clients.
The lists of products are generated by platform operators (or investor
directed portfolio services) which 'can also be thought of as a one-stop shop
or virtual supermarket for managed funds and other financial instruments'.
Treasury defines a platform operator as:
...a financial services licensee or RSE licensee (as defined
in the Superannuation Industry (Supervision) Act 1993 ('SIS Act')) that
offers to be the provider of a custodial arrangement. 'Custodial arrangement'
is defined in the existing section 1012IA of the Corporations Act; broadly, it
is an arrangement where the client may instruct the platform to acquire certain
financial products, and the products are then either held on trust for the
client, or the client retains some interest in the product. Under this
definition, it is taken to include arrangements where the client may direct the
platform to follow an investment strategy of the kind mentioned in the SIS Act.
Vertically integrated models
A number of submitters voiced concerns that some adviser groups will
move to vertically integrated models to avoid the bans on volume-based
payments. Professional Investment Services (PIS) suggested that the ban on
volume-based remuneration creates an anti-competitive environment as the
provision targets non-vertically integrated models and overlooks vertically
integrated models including in-house or proprietary products. PIS commented
that in this scenario the profit may pass over the adviser/licensee, yet is
still retained within the broader group of associated companies. There is,
therefore, still the capacity for conflicted advice:
The revenue, and source of profits, may sit in different
entities however the capacity to influence financial product advice is arguably
far greater in a vertically integrated model.
A non-vertically integrated model may have a much broader
range of products and platforms to choose from, than vertically integrated
models. In such an environment, where there is broad product choice, and the
adviser receives no benefit from recommending one product over another, where
does the conflict arise? In an environment where there is a narrow APL filled
with proprietary product, which is associated with the Licensee or the
Licensee’s parent company, and the adviser has an extremely limited product choice
to recommend from, how great is the capacity to conflict advice?
Associated Advisory Practices (AAP) offers compliance and business
development services to independently owned Australian Financial Services
License (AFSL) holders. AAP were concerned similarly that volume rebates will
result in an anti-competitive environment and argued that leading banks will
hold considerable advantage over smaller players:
Banks and institutions operate vertically integrated business
models [and] therefore have considerable scale and distribution advantages, and
the advent of FoFA will see an expansion of these advantages. While views on
the impact of these proposals diverge, the reality for independents, boutiques
and smaller dealer groups is that these measures will increase the cost of
providing financial advice and reduce their capacity to operate profitable
planning practices – at least on a level footing with the large players.
It should be emphasised that whilst we support the reforms to
the extent that it aims to improve the trust and confidence of Australian
retail investors in the financial planning sector, we are concerned that the
uneven playing field under its proposed delivery will not only push many small players
out, but may also result in pricing an important consumer segment out of the
market- and it will ultimately be consumers who will suffer.
PIS recommended that the prohibition against volume rebates from
platform providers to licensees be reconsidered in recognition that potential conflicts
can be effectively managed without the ban.
AMP Financial Services agreed that the broad ban on conflicted remuneration
would be sufficient to ensure that shelf space payments would 'only be banned when
they could reasonably influence the advice provided to retail clients'.
Permissible volume-based rebates
should pass on to consumers
The Industry Super Network (ISN) also acknowledged the propensity the
ban creates for dealer groups to restructure and become de facto platform or
product providers. The ISN argued, however, that volume-based rebates should be
completely banned to address this issue, or only permitted in circumstances
where the rebate is required to be passed through to the end consumer:
We also strongly disagree with the permissive treatment of
volume rebates, which are in effect a wholesale commission paid to incentivise
product recommendations. While notionally justified on the basis that they
enable a platform to realise scale benefits, the proposed regulatory setting
does not ensure that the end consumer benefits from the payment of a rebate.
ISN submits that volume rebates should have either been completely banned, or
that they should have been permitted only if required to be passed through to
the end consumer. As predicted, there will be a number of dealer groups which
develop creative structures to become de facto platform or product providers to
retain volume based payments.
Vanguard Investments Australia has also submitted that there is a need
for a requirement to pass any volume-based benefits platforms received through
to the end investor:
...even rebates that are considered by platforms and fund
managers to reflect reasonable scale efficiencies may influence the product options
that an adviser gets access to through platforms unless the cost benefit is
delivered through to the end investor.
Vanguard noted that some platforms currently do pass the benefit on to
the consumer and that the Bill creates a risk that these practices may cease.
In Macquarie Bank's view, the Bill will allow for volume-based
payments to be passed on to the end consumer. Macquarie Bank believed that this
activity is essential for a competitive environment between independent
providers and vertically integrated suppliers:
In Macquarie's view the ability to pass volume-based
discounting of administration fees to fund members is a positive and essential
feature of the tabled FOFA provisions...We consider that the ability to provide
such discounts to fund members on this basis is essential for independent
providers to be able to continue to compete with vertically integrated
providers which will inevitably have flexibility in the pricing of their
The Financial Services Council (FSC) recommended that section 964A (Platform
operator must not accept volume-based shelf-space fees) be amended to exempt
any benefit that is passed on in full to the end investor to be permissible:
That is, any volume related benefit payment that flows from a
fund manager via a product provider licensee such as a custodial arrangement,
superannuation fund or managed investment scheme should be permitted if passed
in full to the retail investor without having to prove the benefit met
s963A(3)(b) scale efficiency test.
The Superannuation Committee of the Law Council of Australia noted that
some large superannuation funds negotiate favourable rebates that will exceed
efficiency savings, and that these should be allowed, especially as
'superannuation trustees are required by law to hold all rebates for the
benefit of their members and cannot retain those rebates for their personal
benefit'. It recommended that trustees of superannuation funds should therefore
be excluded from the definition of platform operators or an additional
exception should be applied that allows for volume-based fees that are received
for the benefit of the retail client. 
Treasury responded to a written question on notice from the committee which
sought to clarify whether volume-based benefits could be passed on to the end
consumer. Treasury stated that '[t]he Bill does not prohibit volume-based fee
rebates that are not otherwise banned from being passed from the platform
provider to the end consumer'.
The Australian Securities and Investments Commission (ASIC) acknowledged
that the concept of volume-based shelf-space fees has not previously been
considered by the courts, and will provide further guidance on how the provision
will be interpreted in 2012. ASIC commented that it:
...will need to assess the effectiveness of these new
provisions over time and in light of regulatory experience. However, to assist
industry in adopting measures to comply with the FoFA reforms, ASIC will
provide guidance on how we interpret this provision in 2012.
The government is cognisant of the fact that some industry players
intend to avoid various measures, in particular the ban on volume-based
payments from platform providers to dealer groups.
The Boutique Financial Planning Principals Group (BFPPG) commented:
A ban on volume rebates alone will not be effective and we
have already seen larger dealer groups moving to protect their revenue base by
becoming their own Responsible Entity and recommending their own products to
retain the income that they would have received from volume rebates and that will
now be banned.
In response, the first tranche
of the FOFA reforms includes anti-avoidance provisions which 'prevents a person
from entering into a scheme if the sole or dominant purpose of doing so was to
avoid the application of any provision in Part 7.7A' (Best interests
obligations and remuneration). Contravention of the anti-avoidance provision is
subject to the standard maximum penalty of $200,000 for an individual and $1 million
for a body corporate:
If a fee recipient continues to knowingly or recklessly
charge a client an ongoing fee after the termination of the relevant ongoing
fee arrangement, the Court can make an order for the fee recipient to refund the
fees to the client. However, a Court may only order the payment of a refund if
it is reasonable in all the circumstances to do so. The Court may make the
order on its own initiative, on application by ASIC or the client.
The second tranche
of the FOFA reforms amends the new anti-avoidance provisions to capture a
broader range of schemes designed to avoid the application of the FOFA reforms.
The amendment changes the determination of what constitutes an avoidance scheme
from whether 'the sole or dominant purpose' of the scheme is avoidance, to
whether avoidance is the sole or a non-incidental purpose of the scheme.
The Law Council has recommended that the anti-avoidance provision be
further amended to expressly state that the provision does not apply if the
scheme was entered into on before a specified date. The Law Council is
concerned that the provision would not apply just to a scheme entered into on
or after 1 July 2012, but any scheme before that date also.
The committee believes that the anti-avoidance provisions of the future
of financial advice reforms are adequate to address moves from advice dealer
groups to use vertically integrated models to continue receiving volume-based
shelf-space fees. The committee acknowledges that ASIC has undertaken to
provide further guidance on how the provision will be interpreted and the
committee await with interest this guidance.
Soft-dollar benefits are non-monetary benefits within the definition of
conflicted remuneration that could 'reasonably be expected to influence
financial product advice'.
The Bill provides exceptions for the ban on conflicted remuneration for
soft-dollar benefits under the amount prescribed by regulation (proposed to be
$300). It also provides an exception for soft-dollar benefits with an education
or training purpose and soft-dollar benefits that provide information
technology software or support.
Claims that legitimate forms of
professional development will be banned
The Financial Planning Association of Australia (FPA) and Westpac submitted
that the provisions do not consider the importance of educational services that
go beyond financial product advice such as practice management, general
economic information and client relationship skills.
Westpac recommended that the exemption needs to be broadened to 'allow for
legitimate education and training which does not influence advisers to
recommend a particular product'.
The ABA also raised concerns in relation to the Bill's reference to
professional development being relevant to subparagraph 963C(c)(ii), the
provision of 'financial product advice'. It argued that this provision will
lead to uncertainty regarding the range of topics that could be covered at
professional development events and that financial advisers engage in
activities beyond simply 'giving financial product advice', such as dealing and
administrative activities including marketing, accounting, business strategy, and
FSC argued that the relevance test in subparagraph 963C(c)(ii) should be
omitted and that the requirement for the benefit to have a genuine education or
training purpose and to comply with the regulations would be sufficient. FSC
suggested that any concerns about particular types of training should be
addressed in regulations:
Financial advisers are engaged in a range of activities which
extend beyond giving advice. Not only do they engage in dealing activities such
as arranging for investments to be made and for trades to be placed, they also
undertake administrative activities for clients. Furthermore, there is a range
of training that may be relevant to the business of a financial adviser but
which would not be obviously 'relevant to the provision of financial advice'
such as training relating to equal opportunity, occupational health and safety
training, running a (small) business and marketing.
Nor would it permit the development of soft skills like
client servicing/client relationship training which we understand from
discussions from ASIC pre the issue of Consultation Paper 153, are areas ASIC
is interested in seeing advisers improve. Courses on these types of topics are clearly
for a genuine education or training purpose but could be prohibited by
s963B(c)(ii). We are concerned that by requiring the training to be "relevant to the provision of financial advice" uncertainty may arise
regarding the range of topics that can be covered at a conference.
FSC recommended that subparagraph 963C(c)(ii) be omitted or redrafted to
read 'the benefit is relevant to the provision of financial services or to the
conduct of a financial services business'.
Information technology software and
Subparagraph 963C(c)(ii) also applies to non-monetary benefits in the
form of IT support and software 'that are related to the provision of financial
product advice and that comply with any other requirements detailed in the
The Joint Consumer Groups (JCG) argued that the carve-out for IT
software or support is too broad, and should be limited:
It covers software or support services that are 'related' to
advice in relation to the product provider’s products. 'Related' is a very
broad concept and, therefore, as currently drafted, the carve-out might allow
the provision to financial advisers of, for example, Microsoft Office,
expensive practice management and advice expert software like COIN which is not
product or platform specific.
The JCG suggested that the Bill and EM be amended to specify that the
carve-out does not apply to standard IT software and only to software relevant
to a specific financial product:
The carve-out for information technology software or support
provided by product providers, in s963C(d), should be modified so that
s963C(d)(ii) reads ‘the benefit is essential to the provision of financial
product advice in relation to the financial products issued or sold by the
benefit provider.’ The Explanatory Memorandum should further explain that this carve-out
does not allow the provision of standard information technology software and support
necessary for the operation of any financial advice business but, instead, is
intended to allow the provision of information technology software and support
that is essential to allow sales of, or advice in relation to, a specific
Treasury have provided the following table that outlines when commercial
software is intended to be banned.
Table 6.2: Some examples of the operation of the ban (not
subsidised business equipment or services, such as computer hardware, office
rental and commercial software, over $300.
have the potential to influence product selection and decision making.
administrative information technology services, such as software to access a
platform or access to a website to place orders.
So long as it
can be shown that the administrative information technology services is
relevant and tangible to the licensee's business, this is a benefit that will
be permitted as it facilitates access to advice.
Source: Adapted from Treasury,
Future of Financial Advice Frequently Asked Questions, 'Why has the Government
decided to ban soft-dollar benefits and what is included in the ban?', http://futureofadvice.treasury.gov.au/content/Content.aspx?doc=faq.htm#Q3_2(accessed 10 February 2012).
The committee recognises that subparagraph 963C(c)(ii) creates potential
for some legitimate forms of education to be considered as conflicted
remuneration under the provisions of the Bill. However, the committee also recognises
the counter argument, that if the carve-out for soft-dollar benefits were to be
broadened, it could include non product or platform specific support such as
the Microsoft suite. To overcome this concern, the committee considers that
further explanation of legitimate forms of education should be provided.
The committee recommends that further material be provided in the Explanatory
Memorandum to the Corporations Amendment (Further Future of Financial Advice
Measures) Bill 2011 to outline examples of legitimate training, such as
practice management or client relationship skills. Legitimate forms of training
should also be provided in the regulations.
The EM outlines that 'benefits under the amount prescribed by
regulations (proposed to be $300), [will not be regarded as conflicted
remuneration] so long as those benefits are not identical or similar and
provided on a frequent or regular basis'.
The FSC and the ABA are concerned that there is uncertainty in
determining when a benefit is provided on a 'frequent or regular' basis and
recommended that this be clarified in the EM.
While we do not believe it is appropriate to define these
terms in the legislation. We recommend that the EM should be amended to include
examples of what is and is not deemed to be "frequent or regular" for
For example, we would determine that taking a representative
out to lunch once a year would not be "frequent or regular", but
acknowledge other interpretations may exist and seek confirmation via an
amendment to the EM that this example is not frequent or regular.
Conversely, we acknowledge that taking a representative out
to lunch once a month is likely to be interpreted as both frequent and regular.
The committee agrees that there is a need for greater clarity in
relation to this matter.
The committee recommends that the Explanatory Memorandum for the
Corporations Amendment (Further Future of Financial Advice Measures)
Bill 2011 be amended to provide clarity on the application of the $300
limit for soft-dollar benefits. Further, the committee recommends that examples
of what is and is not deemed to be 'frequent or regular' should be stated in
the Explanatory Memorandum and the regulations.
Overseas professional development
As part of the non-monetary conflicted remuneration measures, it is proposed
that professional development and training will be restricted to that which is
conducted within Australia and New Zealand. This includes a 'majority time
requirement' where 75 per cent of the time during a standard 8 hour day is
spent on professional development. Further, that any travel costs,
accommodation and entertainment outside the professional development activity
be paid for by participants.
While the majority of submitters are in support of the measures to allow
genuine education or training as a form of remuneration, many submitters did
not agree with the domestic requirement.
PIS argued that this measure will 'seriously undermine professional
development' of advisers and the industry as a whole.
PIS went on to state:
Such a prohibition will considerably restrict Australian
financial services professional’s cross-jurisdictional education, and
development as well as significantly hampering domestic innovation and
development. From an educational and content perspective, it is also important
to highlight the rationale for holding conferences on an international basis is
often driven by increasing exposure to highly regarded international speakers
which are not available domestically. Given the geographical distance and separation
between Australia and the U.S or Europe, access to international speakers is
often not attainable unless conferences are arranged internationally.
Limiting the professional development exemption to domestic
basis will significantly undermine Australia's international financial services
exposure and is inconsistent with the government's objectives of promoting Australia
as a financial services hub.
IOOF Holdings suggested that the domestic requirement restriction be
extended to the Asia-Pacific region. It also highlighted that many larger
licensees will have overseas commitments for professional development
activities planned at least 18‑24 months in advance. These activities may
include potential liabilities if participants withdraw from contractual
arrangements. IOOF Holdings submitted that in the event that the domestic
requirement is passed by the parliament a minimum 2 year transition period
AMP Financial Services recommended that the criteria to determine
whether professional development is genuine should be defined by the activity,
rather than geography.
The EM notes that 'it is envisaged that there will be further consultation on
the regulations' in relation to professional development and the domestic
The committee considers that provisions restricting professional
development benefits to Australia and New Zealand are too stringent and that
professional development benefits should be based on the activity rather than
6.45 The committee recommends that the proposed consultations on the
regulations for the Corporations Amendment (Further Future of Financial Advice
Measures) Bill 2011 include consideration of the potential impact of
restricting soft-dollar benefits of professional development to within
Australia and New Zealand.
6.46 The committee recommends that no geographical restriction be placed on
professional development where it is professional development focussed on
education and training.
Scrutiny of Bills
The Senate Standing Committee for the Scrutiny of Bills noted that
subsection 963C(3) of the Bill allows for an exception for non-monetary
benefits when 'the benefit complies with regulations made for the purposes of
this subparagraph'. It also noted the types of regulations that will be
included (as discussed above) are outlined in the EM (pages 31 and 32).
It has highlighted this subsection as part of its role to report to the
Senate when it considers a Bill has 'inappropriately delegate[d] legislative powers'.
It suggests that the Senate consider whether this delegation of legislative
power is appropriate.
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