EXPLANATORY STATEMENT
Issued by authority of the Treasurer
Australian Securities and Investments Commission Act 2001
Australian Securities and Investments Commission (Investigation into Grandfathered Conflicted Remuneration for Financial Advice) Direction 2019
Section 14 of the Australian Securities and Investments Commission Act 2001 (the Act) provides that the Minister may direct the Australian Securities and Investments Commission (ASIC) to investigate certain matters when, in the Minister’s opinion, it is in the public interest for the matter to be investigated.
Section 17 of the Act provides that at the end of such an investigation, ASIC must prepare a report about the investigation.
In its response to the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the Government announced that it would end grandfathering of conflicted remuneration for financial advice effective from 1 January 2021.
The Government announced that, from 1 January 2021, payments of any previously grandfathered conflicted remuneration still in contracts will instead be required to be rebated to applicable clients where the applicable client can reasonably be identified.
The Government also announced that, to ensure that the benefits of industry renegotiating current arrangements to remove grandfathered conflicted remuneration ahead of 1 January 2021 flow through to clients, the Government will commission ASIC to monitor and report on the extent to which product issuers are acting to end the grandfathering of conflicted remuneration for the period 1 July 2019 to 1 January 2021 and are passing the benefits to clients, whether through direct rebates or otherwise.
The Australian Securities and Investments Commission (Investigation into Grandfathered Conflicted Remuneration for Financial Advice) Direction 2019 (the Direction) requires ASIC to investigate the extent to which persons who are giving or accepting grandfathered conflicted remuneration in relation to financial advice as at the commencement of the Direction are changing their arrangements to end the payment of grandfathered conflicted remuneration prior to 1 January 2021. [section 5]
Where these persons do change their arrangements, ASIC will investigate the extent to which they are passing the benefit of ending the payment of grandfathered conflicted remuneration on to clients, whether through direct rebates or otherwise.
Grandfathered conflicted remuneration is defined in the Direction as any benefit, the giving or acceptance of which would be prohibited by Subdivision C of Division 4 of Part 7.7A of the Corporations Act 2001 but for the operation of section 1528 of that Act. [section 4, definition of ‘grandfathered conflicted remuneration’]
The direction is a legislative instrument for the purposes of the Legislation Act 2003.
ASIC was consulted on the Direction. Public consultation was not considered necessary as the Direction is of a minor or machinery nature and does not substantially alter existing arrangements.
The Direction commences on 1 July 2019. [section 2]
Overview
The Australian Securities and Investments Commission (Investigation into Grandfathered Conflicted Remuneration for Financial Advice) Direction 2019 was enacted to address the issue of grandfathered conflicted remuneration in the financial advice sector, as part of the broader response to the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. This direction was issued under section 14 of the Australian Securities and Investments Commission Act 2001, allowing the Minister to direct the Australian Securities and Investments Commission (ASIC) to investigate matters deemed to be in the public interest. The policy objective behind this direction is to ensure that the benefits of eliminating conflicted remuneration arrangements flow through to clients, specifically by requiring any grandfathered conflicted remuneration to be rebated to clients where they can be reasonably identified, effective from 1 January 2021. The Direction mandates ASIC to monitor and report on the actions taken by entities to end such grandfathered conflicted remuneration between 1 July 2019 and 1 January 2021 and to assess whether the benefits of these changes are being passed on to clients.
Scope and Application
The Australian Securities and Investments Commission (Investigation into Grandfathered Conflicted Remuneration for Financial Advice) Direction 2019 applies to any person involved in the giving or accepting of grandfathered conflicted remuneration in relation to financial advice, as defined in the Corporations Act 2001. This encompasses individuals and entities engaged in financial services, particularly those who may be offering or receiving payments that would otherwise be prohibited if not for grandfathering provisions. The Direction is in effect from 1 July 2019 and extends until 1 January 2021, aligning with the timeframe set by the Government for ending the grandfathering of such remuneration. The scope of the Direction includes monitoring and reporting on the actions taken by product issuers to cease these payments and to ensure that any benefits from these changes are passed on to clients, potentially through rebates or other means. The Direction is a legislative instrument under the Legislation Act 2003 and requires ASIC to conduct investigations and prepare reports on the compliance and conduct of entities within the financial services industry during the specified period. The Direction does not require public consultation as it is considered of a minor or machinery nature, not substantially altering existing arrangements.
Key Provisions
The Australian Securities and Investments Commission (Investigation into Grandfathered Conflicted Remuneration for Financial Advice) Direction 2019 (section 5) primarily mandates the Australian Securities and Investments Commission (ASIC) to investigate the actions of entities involved in the payment or acceptance of conflicted remuneration in relation to financial advice as of the commencement of the Direction. Specifically, ASIC is tasked with assessing whether these entities are altering their practices to cease the payment of such grandfathered conflicted remuneration before 1 January 2021. If changes are made, ASIC is further required to investigate how the benefits of ending these payments are being passed on to clients, whether through direct rebates or other means.
Under this Direction, the obligations on the entities involved are clear. They must transition away from practices that involve the payment or acceptance of grandfathered conflicted remuneration. This involves not only ceasing these payments but also ensuring that any benefits derived from such cessation are communicated and provided to clients. This requirement is intended to ensure that clients benefit directly from the changes being made within the financial services industry.
The Direction also provides for potential consequences should entities fail to comply with these requirements. While the Direction itself does not explicitly detail the penalties for non-compliance, the broader framework of the Australian Securities and Investments Commission Act 2001 (ASIC Act) and the Corporations Act 2001 provide for a range of enforcement actions. These may include fines, legal proceedings, and other regulatory measures. The exact penalties can vary depending on the severity and nature of the non-compliance, but they are designed to enforce adherence to financial services regulations and protect consumer interests.