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The matter of carve-outs:
basic banking, stockbroking and the timeshare industry
A number of submitters have requested further clarity on, and suggested
amendments to, the existing carve-out for employees or agents of Authorised
Deposit-taking Institutions (ADI) that are providing advice on basic banking
The proposed carve-out for stockbrokers, intended to be addressed in
regulations, was also discussed. The need for the Bill to be amended so that
the timeshare industry is precluded from the bans on conflicted remuneration
was also canvassed. These matters are discussed below.
Carve-out for basic banking products
Treasury argued that the carve-out for basic banking products has been
provided on the basis that provision of advice on basic banking products is
deemed a low risk to consumer detriment:
Basic banking products and general insurance are recognised
as being simple in nature and are more widely understood by consumers. This
means that there is a lower risk of consumer detriment in relation to the
provision of advice on these products. For this reason, exclusion from the
obligation to give priority to the interests of the client more appropriately
balances the benefits to consumers with the compliance costs to providers.
The carve-out for employees or agents of an ADI that are providing
advice on basic banking products is conditional on the agent not providing financial
product advice on financial products other than basic banking products, either
in combination with or in addition to advice provided on basic banking products.
The Bill defines a basic banking product as:
(a) a basic deposit product;
(b) a facility for making non-cash payments (see section
763D) that is related to a basic deposit product;
(c) an FHSA product of a kind mentioned in subparagraph
(c)(i) of the meaning of FHSA in section 8 of the First Home Saver Accounts Act
2008 (first home saver accounts);
(d) a facility for providing traveller’s cheques;
(e) any other product prescribed by regulations for the
purposes of this paragraph.
Treasury outlined that the bans are not intended to target sub-sections
of the industry:
The ban on conflicted remuneration structures is not designed
to target certain industries, or sub-sections of the financial advice industry.
The focus of the ban is removing conflicts of interest that may cause bias, or
the potential for bias, in financial advice due to payments from product providers
to those providing advice.
The Australian Securities and Investments Commission (ASIC) divides
banking products into Tier 1 and Tier 2 (see Table 7.1). ADI employees that
offer advice on the lower level Tier 2 products may receive lower levels of
training than those that advise on Tier 1 products.
Table 7.1: Tier 1 and Tier 2 products
All financial products except those listed under Tier 2
- General insurance products
except for personal sickness and accident (as defined in reg 7.1.14)
Note: Travel insurance products and included in Tier 2, even where the
product covers losses arising due to sickness or accident while travelling
- Consumer credit insurance (as
defined in reg 7.1.15)
Note: Consumer credit insurance products are included in Tier 2, even where
the product covers consumer credit liabilities that cannot be paid due to
sickness or accident
- Non-cash payment products
- FHSA deposit products
Note: First Home Saver Account (FHSA) deposit accounts are FHSAs issued by an
ADI. Other types of FHSAs are Tier 1 products: see RG 146.45‑RG 146.46.
Source: Australian Securities
and Investments Commission, Regulatory Guide 146: Licensing: Training of
financial product advisers, December 2009, p. 17.
Abacus – Australian Mutuals welcomed the carve-out for ADI employees
assisting consumers with basic banking products. However, it was concerned that
the carve-out does not go far enough. Abacus argued that imposing any new
regulations on people who advise on basic banking products 'is a clear case of
excessive coverage' and 'is likely to reduce the availability of advice to
The Australian Bankers' Association (ABA) suggested that the scope of
the FOFA reforms should target identified market failures and 'should not
impose unnecessary and inappropriate obligations on banks and banking groups'. The
ABA recommended that the Bill reflect the stated policy intent
and the carve-out for basic banking products must be absolute:
Regulation should target identified market failures. However,
we are not aware of any identified market failures, consumer detriment or
systemic concerns regarding practices by banks in the offer of basic banking products
or the provision of general advice by bank staff. We consider that the legal
risks, regulatory burdens and compliance costs that will be imposed on banks as
a result of the broad scope of the FOFA legislative package are unnecessary and
The ABA highlighted numerous legal and regulatory obligations 'to ensure
banks are managed prudently' and bank products and services are transparent,
accessible and delivered responsibly. It argued that the FOFA reforms will
result in unnecessary compliance costs for banks which in turn will increase
consumer costs. In addition, it argued that consumers may be adversely affected
if banks withdraw the availability of 'simple' advice, general or 'scaled'
advice in response to the FOFA reforms.
The ABA went on to state:
...banks that provide bank customers with financial advice
may be required to restructure their business and/or alter their distribution
model – this could result in no financial advice being provided through bank
branches and call centres, and possibly result in a reduction of products and
providers in the market. We consider this an undesirable outcome and would be
contrary to the policy intent of the FOFA legislative package to broaden the
availability of simple advice for consumers or for financial advice to be scalable
to the needs of consumers as well as contrary to the efforts of the Government
to ensure competition within the banking industry.
The CEO of the ABA elaborated on this argument in his evidence to the
Given the training that is already required of bank staff,
given their obligations under existing legislation, I do not see providing
advice to a customer who has come into the bank to go away and think about is
necessarily a dangerous thing. In fact, one of our fears is of creating a
situation where the customer walks into the bank branch and all the bank can
say to them is 'Here's a form to fill in for a term deposit.' We know what
customers are looking for in banks. One of the things banks are very conscious
of is that customers sometimes feel we do not deliver a sense of it being a
partnership between the customer and the bank where the bank can work with the
customer to try and make the right decision. Our concern is that tellers and
other bank staff are already under existing operations and adding these further
obligations is just going to complicate things. In fact, we have already seen
some banks pull out of providing anything that looks remotely like advice.
ANZ Wealth argued that the Australian Prudential Regulation Authority
(APRA) regulation of ADI remuneration policies is adequate, and further
regulation of Tier 2 accredited employees is unnecessary:
ANZ recommends that the second tranche legislation be amended
to classify certain benefits given by an employer to an employee or contractor
relating to the recommendation of any financial product as not being conflicted
remuneration if the employee or contractor is only Tier 2 Accredited and the
ADI can demonstrate that its risk and remuneration policies respond to the
relevant APRA standards and guidance on remuneration. That is, existing APRA
Prudential Standards provide adequate safeguards in respect of Tier 2 Accredited
employees and contractors of banks, who are also subject to ASIC Regulatory
Guide, and should therefore be carved out.
ANZ also suggested that front-line banking staff should be entitled to
remuneration for financial products other than basic banking products, and that
a balanced scorecard approach to incentivising staff should be allowed as it
provides appropriate safeguards against the mis-selling of products:
Remuneration arrangements for frontline banking staff rewards
out-performance while ensuring avoidance of inappropriate risk. This is done by
utilising a balanced scorecard framework, aligned to role specialisation and
capability, customer satisfaction and advocacy and a strong compliance
management framework that includes risk gateways and where necessary reduction
of or ineligibility for incentives for inappropriate behaviour. Even if an
employee out-performs in relation to their financial metric, where value or
volume based targets are used, they can still fall short of receiving an
incentive payment if they have not met their other non financial performance
ANZ noted that the EM 'appears to recognise the balanced scorecard
approach as an acceptable remuneration arrangement'.
However, ANZ suggested that greater clarity is required on how 'it can be
proved' that the remuneration could not 'reasonably be expected to influence'
The ABA asserted that the terminology of 'reasonably be expected to
influence' the advice is too subjective and that it 'should not be assumed that
all incentive structures result in negative outcomes for consumers'. It argued
that the conflicted remuneration definition should be limited to a negative
influence and should only consider distortions to remuneration, which misalign
the best interests of the client and the adviser.
The Joint Consumers Group (JCG), however, opposed the carve-outs for
ADIs. It claimed that there is no clear rationale for the carve-out of
employees or agents of ADIs providing advice on basic banking products.
Accordingly, the JCG argued that the carve-out should be removed:
The consumer representatives do not accept that the argument
that basic banking products are simple, well-understood products justifies this
carve-out. The consumer representatives note that (unlike insurance products)
there is no need to encourage sales of basic banking products and that basic banking
products, which can include term deposits of up to 5 years, can and have been
mis-sold to consumers.
The committee believes that the carve-out from the conflicted
remuneration bans for ADIs providing advice on basic banking products is
sufficient to allow for current performance-based remuneration structures in
ADIs to continue. However, the committee acknowledges requests from industry
that further clarity be provided on how it can be proven that the remuneration
could not 'reasonably influence' advice.
7.17 The committee recommends that the Australian Securities and Investments
Commission (ASIC) provide regulatory guidance material on how Australian Authorised
Deposit-taking Institutions (ADIs) can prove that remuneration does not
'reasonably influence' advice.
In contrast to ASIC's division of financial products, general insurance
is not grouped within the list of basic banking products in the Bill (see table
8.1 above). The exception for ADI employees advising on basic banking products
will not apply where advice on a non-basic banking product is provided in
combination, or in addition to that advice. The EM outlines that the intent of this
provision is to 'encourage customer service specialists, who wish to continue
receiving volume of sales bonuses, to focus on providing advice on basic
banking products only'.
While general insurance is not subject to the broader ban on conflicted
remuneration, Abacus expressed concern that precluding general insurance from
the definition of basic banking products in the Bill creates a risk of
unintended outcomes. In addition, it appears that an ADI employee providing
advice about general insurance would become ineligible for the basic banking
carve-out as advice on basic banking products cannot be provided in combination
with other financial products. Abacus argued that in this case:
It reduces consumer choice and diversity in retail financial
services distribution and it has a direct impact on the potential earnings of
frontline ADI staff. These ADI employees are not highly paid "financial
planners". Customers will not wish to be referred to separate staff if
they wish to talk about other simple products, such as general insurance, in
addition to basic banking products.
ANZ also noted that ADI employees will be unable to provide advice on
general insurance products in conjunction with basic banking products. As a
consequence, ANZ argued that this will have a detrimental outcome for
If a bank employee is in the process of opening a transaction
account for a customer and uncovers a need for building insurance to protect
against natural disaster, the bank employee may need to refer the customer to a
different member of staff to deal with the insurance matter. This would be
required in order to preserve the "non conflicted remuneration" treatment of the basic banking product transaction. ANZ has a number of smaller
branch sites where there would not be a different staff member to deal with the
Abacus recommended that the ban on conflicted remuneration for ADI
employees advising on basic banking products be amended to allow for advice
categorised as Tier 2 in ASIC Regulatory Guide 146 (see Table 8.1 above).
The ABA highlighted that banks provide an important 'one-stop-shop' for
consumers on a variety of products that are regulated by an array of legislation
including the Corporations Act and the National Consumer Credit Protection
Act 2009. The ABA asserted that the restriction to provide advice 'solely'
in relation to basic banking products presents difficulties, using general
insurance as an example:
Bank staff may provide information or advice to a customer on
a basic banking product (e.g. savings account) and also on a non-basic banking
product (e.g. general insurance product). Even though the general insurance
product is carved out of the conflicted remuneration provisions, as currently
drafted, the fact that the employee gave information or advice also on a
non-basic banking product means this would result in the full best interests
duty obligations applying and the employee not being able to receive an annual performance
bonus or a payment relating to the offer of the basic banking product or the general
The ABA recommended that paragraph 963D(b) should be amended so that
access to the benefit is dependent on the licensee/representative recommending
a basic banking product, but not solely in relation to a basic banking
ANZ asserted, however, that amendments to legislation or regulations to
accommodate numerous products across the banking industry would be a complex
approach. It requested that government consider a carve-out of superannuation
products comparable to MySuper products prior to the MySuper start date of 1
The ABA recommended that the EM be amended to define basic banking
products to include other exempt products, such as general insurance and other
exempt products made by regulations.
Definition of 'basic banking
The ABA welcomed the ability to prescribe additional products as basic
banking products by regulation.
However, it recommended that the EM be amended to broaden the exemption for
basic banking products to include all types of at-call accounts, term deposit
accounts (with a term less than five years), basic banking products offered
along with other exempt products and non-financial products (for example credit
products) and financial services associated with the offer of basic banking products.
Abacus voiced concerned that any effective narrowing in the category of
deposits in the 'basic deposit product' will have significant implications for
ADIs and consumers. Abacus noted that ADIs are the most highly regulated
entities in the financial sector, and that deposits are the safest and simplest
form of financial product.
In November 2011, ASIC released Consultation Paper 169: Term deposits
that are only breakable on 31 days' notice: Proposals for relief. Following
the Basel III international liquidity reforms on the banking sector, term
deposits that are only breakable on 31 days' notice could fall outside the
definition of basic deposit product and therefore be considered a Tier 1
product. ASIC proposed relief for ADI requirements in relation to certain term
deposits and whether they qualify as 'basic deposit products'. It claimed that
term deposits of up to two years that can only be broken on 31 days notice should
be subject to the same regulatory requirements as 'basic deposit products'.
Abacus and the ABA recommended that the proposed relief for the basic
product definition be clarified to include term deposits of up to two years
where early withdrawal is at the discretion of the ADI. Further, it proposed that
the definition of basic deposit product includes term deposits of up to five
years, where early withdrawal is at the discretion of the depositor, with a
notice of withdrawal period of up to 31 days.
Consumer credit insurance
Consumer credit insurance (CCI) is a combination of life and general
insurance under one insurance contract and is typically jointly issued by a
life company and a general insurer. ANZ requested clarification on how CCI fits
with the proposed exemptions, and whether it is deemed a general or a life
insurance product. It requested that CCI be defined as being a general
The JCG argued that the Bill does not consider incentives for CCI as
conflicted remuneration, noting 'strong reservations' about this decision. It
highlighted recent studies showing cases of mis-selling of CCI where:
- consumers have not been aware that they have purchased CCI or
that CCI is optional;
consumers have not been asked whether or not they wish to purchase
- consumers have not been eligible to claim on all components of
the CCI they have purchased;
- there has been potential for consumers to be pressured or
harassed by sales staff; and
- consumers have not understood the cost or duration of the CCI
The JCG also noted that CCI commissions are significant:
ASIC Report 256 found that commissions were close to 20% of
the premium for the CCI product. It is probable that commissions are one of the
drivers for such mis-selling. In light of this, the consumer representatives
are concerned that the decision to allow financial advisers to continue to receive
conflicted remuneration in relation to CCI is likely to lead to continued
misconduct in relation to this product.
The Insurance Council of Australia argued, however, that the ASIC report
cannot be used as a case for CCI to receive differential treatment under the
The ASIC review did not identify CCI remuneration practices
as contributing to current sales practices and the report makes no
recommendations in this regard. There is no basis within this report upon which
to single out CCI for differential treatment in relation to conflicted
Furthermore, the proposal by the Joint Consumer Submission to
subject CCI to a ban on conflicted remuneration would create inconsistencies
with other insurance products of comparable complexity, particularly since CCI
(along with almost all general insurance products) is considered a Tier 2
product for training purposes under ASIC’s Regulatory Guide 146.
We therefore submit that CCI should receive the same
treatment under the FOFA reforms as that given to all other general insurance
The committee's view
Noting the comments of ANZ and the JCG, the committee sought advice from
Treasury about how CCI fits with the proposed exemptions from the Bill's
conflicted remuneration provisions, and whether it is deemed a general or a
life insurance product. Treasury responded that it is 'exploring this issue
The committee considers that it is important that Treasury does provide
guidance on this issue. It is also important that in determining whether to allow
CCI an exemption from the Bill's conflicted remuneration provisions, careful
consideration is given to the evidence that CCI has been mis-sold in the past
and thereby poses a threat to consumer welfare if a ban is not applied.
Extending the carve out to non-ADI
The FSC and AMP Financial Services suggested that the carve-out for
basic banking products should not be limited to representatives of an ADI, and
that the 'simplicity of the product and the advice should not be complicated by
who is giving the advice'.
Treasury argued that the carve-out is limited to ADIs as basic banking
products are usually sold by ADI frontline staff, and consumers are aware that
ADI's will be selling the employer's product:
As these basic banking products are often sold by frontline
staff, the carve-out is largely intended to address the more routine activities
of frontline staff, such as tellers and specialists.
While these employees may provide either general or limited
personal advice in relation to these basic banking products, these products are
generally easier for consumers to understand, and consumers more readily understand
that the frontline employee of the ADI is in the business of selling the
The EM refers to a carve-out that will be provided to exclude certain
stockbroking activities from being considered conflicted remuneration, with the
precise breadth of the carve-out being subject to further consultation.
It is proposed that the receipt of 'stamping fees' from companies for
capital-raising on those companies' behalf not be considered 'conflicted remuneration'
where the broker is advising on and/or selling certain capital-raising products
to the extent that they are (or will be) traded on a financial market.
Minister Shorten has stated: '[w]here brokers undertake financial planning
activities, the ban on product commissions will of course still apply, ensuring
there is no gap in protection for consumers'.
The Stockbrokers Association of Australia (SAA) noted that the intention
is that there will be no material change for traditional stockbroking services
under the FOFA reforms:
For the traditional stockbroking service, buying and selling
shares on the market, it appears that the carve-out means that there will be no
material change. It will not be impacted unduly, I think the minister said. We
are waiting for details of what that means. But in stockbroking there are a
range of business models, as you would appreciate. Within large stockbroking
firms with retail clients there are financial planning divisions. All of them
have financial planners. So all of the issues facing financial planners which
relate to buying and selling managed funds, conflicted remuneration, fee
disclosure and opt-in will apply to stockbrokers in terms of the advice on
SAA commented, however, that it would seek clarification on whether the
carve-out applies to both authorised representatives and employee stockbrokers.
ANZ suggested that absolute clarity on the scale of the carve-out from conflicted
remuneration as it applies to stockbroking should be included in the Bill and
the EM in relation to the execution-only services exemption. It also
recommended that 'Treasury develop with industry a comprehensive list of what
specific stockbroking activities are considered capital-raising and are thus
Treasury informed the committee that issues pertaining to stockbrokers
will be best addressed in the forthcoming regulations.
Treasury have provided an outline of some of the issues being considered in
relation to stockbrokers:
There are various considerations and concerns being
considered in relation to how the reforms may impact the activities of
stockbrokers. For example, Treasury is aware that a typical charging model for
stockbrokers may involve a payment, commonly referred to as a 'commission', from
the client to the broker that is typically charged as a percentage of the value
of a certain transaction or a fee per transaction. These arrangements are being
explored, however it is not the intent that a transparent and product neutral
regime with a client-paid fee would be subject to the ban, unless it is an
asset-based fee relating to geared products or investments amounts.
Treasury also understands that brokers do not always divide
their fees into an advice component and a transaction brokerage component and
is exploring the implications of this in relation to the reforms. The nature of
payments between market-linked brokers and 'white label-brokers', as well as
any payments between structured product providers and brokers are also being
Treasury is undertaking further targeted consultation with
industry on what types of payments will be permissible, while having regard to
the principles the Government has announced in its reform package. Legislation
will have the capacity to carve out specified payments if unintended payments
are captured, or unintended consequences occur.
The timeshare industry
The timeshare industry provides vacations to members through a managed
investment scheme structure. Members can earn Vacation credits which are deemed
financial products under the Corporations Act.
The Australian Timeshare and Holiday Ownership Council (ATHOC) expressed
concern that their business models have been unintentionally caught in the
regulatory design of the proposed FOFA reforms.
Several members of the timeshare industry have argued that the reforms
will remove the possibility for timeshare issuers to remunerate sales
representatives and will either jeopardise the industry
or make it unviable.
Gold Coast Tourism argues that if the timeshare industry is not exempted from
the Bill 'there could be substantial and material negative impact on the
timeshare industry and tourism in Australia'.
Timeshare industry participants have supported a carve-out on the basis
that a timeshare product differs from other financial products. Classic
Holidays highlighted some of the key differences:
timeshare only sells a single product and there is little
likelihood for conflict or consumer confusion and resultant consumer harm;
- holiday interests are not distributed through dealer groups or
advisors, but are sold directly through sales offices, therefore volume-based
payments have no wider impact on competition in the financial planning industry;
holiday interests are an in-house product and not provided by a
financial product manufacturer.
Further, ATHOC emphasised that timeshare is a lifestyle product and not
a personal financial investment, and this is made clear to consumers before
Timeshare is not sold or offered as a financial investment,
it is not designed or sold to improve a consumer's financial wellbeing any more
than the purchase of a car or other discretionary purchases and is not designed
or represented to hold its value upon resale. Sales staff do not provide advice
to customers or potential customers about different ways of investing their
money, only advice as it relates to purchasing this holiday product. Our
product, timeshare, just happens to be regulated as a financial product under
the Corporations Act. Indeed, in most jurisdictions timeshare is regulated as a
real estate, not as a financial product.
In all of our disclosure documents and compliance plans it
quite clearly states that this is not an financial investment. We have this in
an owner understanding that we go through with a consumer that decides to buy
before they purchase to make sure that they fully understand that there is no
financial gain, that the product will not increase in value, and that this is
not a financial investment, that it is an investment in their lifestyle.
ATHOC argued that the 'best interests' duty proposed in the Bill would
prevent a timeshare representative advising a consumer to purchase a larger
amount of time share than would be in the client's best interest.
Moreover, ATHOC emphasised that timeshare representatives adhere to a specific
set of regulations and disclosure requirements designed to protect consumers:
The industry and even some of the legislative bodies have
openly said that we are very highly regulated. All through the process there
are consumer protection measures, even going to the last aspect. If someone
buys, they have a seven-day cooling off period. But before they get to that
stage, when they say, 'We would like to buy this product and we have understood
what has been said here today,' we have a one-page owner understanding form
that goes through and highlights specific points that we are governed by. One
is that this is not a financial investment. They have to initial against that.
The second part says, 'You are not going to get a return on this. This is a
lifestyle investment. Please sign.' They get a cooling-off period statement
that they have to acknowledge, and we keep a record that they have received it
and they can send it back to us if they wish to renege on it within seven days.
Finally, ATHOC argued in its submission that the rationale behind the
basic banking product exemption for ADIs could also be applied to the timeshare
Like ADIs, timeshare companies generally arrange their sales
teams by means of a sales office such that consumers appreciate that the
representatives they purchase their timeshare from are employed by the
timeshare company and their job is to sell the product. In our opinion, the situation
is exactly analogous to that of the ADI employee.
The committee recognises the intent of the FOFA reforms was not to
capture the Timeshare industry given it is not offering a financial services
product. Therefore, the committee recommends that the Timeshare industry is
carved out from the bans on conflicted remuneration.
7.50 The committee recommends that the Corporations Amendment (Further Future
of Financial Advice Measures) Bill 2011 be amended so that the Timeshare
industry is precluded from the bans on conflicted remuneration.
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