When most people think of the FOFA regulations (Future of Financial Advice) they think of advisers, planners and investments. But, according to TAL’s Gavin Lai, FOFA may impact group life arrangements for superannuation fund trustees as well.
FOFA and the provision of services in the retail advice space has been much discussed and debated, but how the reforms will affect the wholesale provision of group life has not received nearly as much airplay.
With anti-avoidance of FOFA provisions already in place, and the reforms themselves will be compulsory from 1 July 2013, it is becoming increasingly important for every provider affected to understand how the reforms will work within their business models, not to mention the new obligations and compliance requirements.
There’s no doubt it’s a complex new world, and navigating the definitions and their implications can be a challenging task. In an effort to help understand the flow-on effects of FOFA to wholesale life insurance, and how best to make sure your business and products are compliant, we share some important insights for trustees in the following FOFA Q&A.
The big picture, what does FOFA really mean?
The essence of FOFA is that it creates new and stricter obligations on financial advisers. It beefs up ASIC’s ability and power to regulate the financial advice industry, and restricts the types of remuneration available where advice is provided.
With respect to the legislation in place, there are two pieces which govern FOFA:
- Corporations Amendment (Future of Financial Advice) Act 2012.
This Act creates stricter fee disclosure standards for advisers and extends ASIC’s supervisory powers.
- Corporations Amendment (Further Future of Financial Advice Measures) Act 2012.
This Act creates statutory duties for financial advisers designed to protect clients, and bans certain payments and remuneration paid from financial product issuers and volume-based shelf space fees.
It is the second Act, which may affect wholesale life insurance arrangements, which needs to be fully understood and interpreted to avoid non-compliance.
When does FOFA come into effect and to whom does it apply?
Unless there has been an election to comply with FOFA earlier, FOFA will come into effect on 1 July 2013, and any arrangements entered into after this date must be fully FOFA-compliant.
Any arrangements currently in place (ie, entered into before 1 July 2013) will generally be ‘grandfathered’. This means that they will be allowed to remain in place until they are materially altered.
However, anti-avoidance of FOFA provisions came into effect from 1 July 2012 and these mean that any change to existing arrangements must be checked to ensure that they are not designed to avoid the FOFA rules – or that they can’t be interpreted by the Australian Securities and Investments Commission (ASIC) as such.
In other words, you can’t get away with just changing the name of your commissions to ‘administration fee’ prior to the full implementation of FOFA on 1 July 2013.
The FOFA reforms apply to the following groups:
- Financial services licensees and their representatives who provide advice to retail clients;
- Financial product issuers, like fund managers and insurers for example; and
- Regulated superannuation funds.
Isn’t life insurance safe from FOFA?
Things aren’t that simple unfortunately. Some life policies are exempt from the ‘conflicted remuneration’ rules – mainly individually owned, retail life policies.
However trustees need to understand that FOFA restrictions can impact trustees on two main levels:
Conflicted remuneration: banning benefits paid to providers of advice to ‘retail clients’; and
Volume-based shelf space fees: which generally bans payments from ‘product issuers’ to ‘platform providers’ except in certain circumstances.
Not only is there no exemption from the volume-based shelf space fees for life policies, but trustees should also consider if they are providing advice to retail clients – and receiving benefits.
Possible conflicted remuneration impacts on trustees who own group life policies
The first question to ask is, does an exemption apply? Non-superannuation group life policies, as well as any retail life policies for superannuation fund members who aren’t default members, are safe from the conflicted remuneration rules.
Assuming an exemption does not apply, trustees will need to determine:
- If benefits are being received by the trustee from the group insurer (typical benefits found in group life arrangements include commissions, administration fees, etc)
- If the trustee is giving advice to ‘retail clients’
- If the benefit could influence the choice of financial product by, or the advice provided to, the retail clients.
If the answer to all of the three points above is yes, the benefit is presumed to be conflicted remuneration, although they may be grandfathered from the ban starting 1 July 2013.
Interestingly, it appears that business structures are vitally important. If, for instance, advice is provided by a different legal entity (perhaps aligned to the trustee), but the benefit is received by the trustee, then the three requirements above don’t apply, and it is likely safe to assume the arrangement was not set up after 1 July 2012 to avoid the application of FOFA.
What about the volume-based shelf space fees?
The volume-based shelf space fee rule is the possible hidden sting in the FOFA tail for trustees. A volume-based shelf-space fee is a benefit paid to a ‘platform operator’ from a ‘funds manager’ and these are also presumed to be conflicted.
There are only two exceptions: if the benefit paid is a reasonable fee for service; and if the benefit is discount based on efficiencies of scale.
The potential link to group life policy arrangements arises from the fact that a superannuation fund is arguably a ‘platform operator’ – being anybody operating a ‘custodial arrangement’ under the Corporations Act – and the fund’s group insurer is arguably a ‘funds manager’ – which is defined very broadly to be a licensee paying the benefit to the ‘platform operator’.
This may inadvertently catch out profit-share payments and require trustees receiving discounted premium rates in light of insurance administration services performed to ensure that such discounts would be viewed objectively as ‘reasonable’.
What should fund trustees do in light of the above FOFA impacts?
Funds should look carefully at their own products and services to identify if their group life arrangement is at risk.
If so, trustees will need to decide if it is suitable strategy to retain that arrangement under the grandfathering ‘amnesty’ (while being prepared to lose any non-FOFA-compliant benefits upon materially altering that arrangement); or elect to alter it, keeping in mind the need to comply with the anti-avoidance rules.
We have in this article interpreted the legislation as at 19 December 2012 as it affects our own products, but how FOFA affects other businesses and fund trustees will depend of the exact terms and nature of their products, arrangements and duties to members.
If you are unsure about how FOFA affects your business, you should seek advice from an independent expert.
Gavin Lai is head of product, Group Life, at TAL.