As part of ASIC’s ongoing interpretation of the Future of Financial Advice (FoFA) reforms, the regulator has released Consultation Paper 189: Conflicted remuneration (CP 189). CP 189 sets out ASIC’s interpretation of the ban on conflicted remuneration.
What is conflicted remuneration?
Conflicted remuneration is ‘any benefit’ given to a licensed financial adviser, which, as a result of ‘the nature of the benefit’, could reasonably be expected to influence either the ‘choice of financial product recommended’ or the ‘financial product advice given’.
‘Any benefit’ has a wider ambit than just commission payments. It can include any volume-based payment or other payment method that could influence the choice of advice.
While it will generally be on the party arguing the payment is conflicted (ie ASIC) to prove it is conflicted, the onus of proof is reversed where the payment is a volume-based payment.
ASIC has identified certain payments that by their nature are conflicted, including:
- up-front and trailing commissions
- volume-based payments from a platform operator
- volume-based payments calculated by reference to the number or value of financial products acquired by clients, based on the advice of the adviser.
ASIC will also look at the substance over the form and will look at the totality of the circumstances surrounding a transaction. That is: does the benefit influence the advice that is given, no matter what form the benefit takes?
ASIC has said that just stating in documentation that the benefit is not intended to influence will be insufficient to override the conflicted remuneration requirements.
And renaming a benefit will be of no effect if its nature is conflicted.
A benefit may also be deemed to be conflicted if it influences the recommendation of a financial product at the expense of non-product financial advice (such as paying down debt).
Not conflicted
ASIC has also identified certain payments that by their nature are not conflicted, such as:
- payments of less than $300 in value
- base salary
- services provided by a licensee to its representative.
While volume-based payments are by their nature regarded as conflicted, if those payments are rebated back to the client then they will not be considered to be conflicted. A volume-based payment not rebated to the client may still be considered not to be conflicted where the payment is used to defer operating expenses rather than passed on to the adviser.
Performance pay
Conflicted remuneration may also apply to performance-based pay arrangements. There needs to be a balance between rewarding for performance and avoiding inappropriate influence over the advice given. ASIC will look to see whether the bonus payments influence the type and choice of advice given. If it favours one product over another or favours product advice over non-product advice then it is likely to be conflicted.
So, if the performance pay increases as a result of the volume of advice then the presumption is that the benefit is a conflicted benefit. It’s then up to the adviser to show why it should not be considered to be conflicted.
Conclusion
ASIC takes a very wide interpretation of conflicted remuneration, taking in payments – such as performance pay – that many may have thought outside the original intent. Anyone remunerating advisers will have to be very careful to not breach these rules or they could find themselves up for fines and penalties.
