The end of grandfathering: Conflicts, the Constitution and Compulsory Acquisition
On 22 February 2019, Treasury released exposure draft legislation which, if ever introduced, passed and enacted, will prohibit the payment to financial advisers of grandfathering conflicted remuneration.
These grandfathering arrangements in relation to financial advice to retail clients are proposed to be removed from 1 January 2021.
If you, like many advisers, are concerned about how this could be effected without triggering an entitlement to compensation for compulsory acquisition, you should read the draft Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Bill 2019 and the recently released draft regulations.
Essentially, the Bill invalidates the entitlement to compensation, and side-steps the ‘acquisition’ and ‘enrichment’ issues, by requiring that ‘grandfathered benefits’ are passed through to the customer to whom they relate. The draft regulations, and the ‘pass through’ requirement, also introduce additional record keeping obligations on the parties involved in the arrangements.
Why ban grandfathered benefits?
One of the key elements of the FOFA reforms, was the banning of conflicted remuneration.
The public policy reasons for this prohibition were clear, but the ‘grandfathering provisions’ exempted:
benefits paid under arrangements entered into before 1 July 2013 except with respect to benefits given by a platform operator;
volume-based shelf-space benefits paid under arrangements entered into before 1 July 2013; and
asset-based fees on borrowed amounts used to acquire financial products on or after 1 July 2013.
These benefits were not considered to be ‘conflicted remuneration’ and could therefore continue to be offered, paid and received despite the prohibition.
The exemptions themselves are structured in a particular fashion. If you review them, you’ll note that a common element of these provisions is that regulations made in respect of these matters do not apply where the acquisition of property (other than on just terms) would result.
The new law repeals this protection.
Regulation, in respect of these benefits, can be made even where they result in the acquisition of property other than on just terms.
The new law also removes the entitlement for compensation for compulsory acquisition in respect of a benefit given to a financial services licensee, or a representative of a financial services licensee.
The argument for change
Sidestepping ‘acquisition’ (and unjust enrichment)
Some lawyers may argue that banning the payment of conflicted remuneration is an acquisition of property that, in accordance with the Constitution, can only be acquired on just terms and the payment of compensation for compulsory acquisition (s51(xxxi)).
I’ll leave that argument for the constitutional lawyers and simply highlight that it is neither Justice Hayne’s view nor one convincingly supported by binding precedents.
In fact, JT International SA v Commonwealth of Australia British American Tobacco Australasia Limited v The Commonwealth  HCA 43, might alarm some of those depending on litigation to protect their grandfathered income.
For example, one key takeout from the Tobacco Advertising Case (at 42) is that “acquisition is .. not made out by mere extinguishment of rights” but requires acquisition of property by the Commonwealth.
By banning conflicted remuneration, the Government does not acquire any property. Therefore, there’s neither any compulsory acquisition nor any entitlement to compensation. In simple terms, in the absence of what Deane J described in 1983 as "an identifiable and measurable advantage” for the Commonwealth, there is no acquisition.
There may be an argument that the retention of the benefits by the Issuer represents ‘acquisition’ (or unjust enrichment), but the new law avoids this entanglement by allowing “benefits that would otherwise have been paid as conflicted remuneration” to be rebated, after 1 January 2021, to affected retail clients.
The ‘acquisition of benefits’ argument is further undermined, and potentially invalidated but the return of those benefits to the persons to whom they relate.
The Government seems to intend for the rebates, payments or fee reductions to “be based on the conflicted remuneration that would be paid in relation to the affected clients”, but the practicality of this requirement may be more challenging than they anticipate.
Why this matters
Until 25 April 2019, you have the opportunity to submit responses to Treasury’s consultation.
Take the time to consider the proposed changes. Take additional time to consider whether, and to what extent, accepting the Government’s position allows future governments to take a similar position on risk insurance commissions. There’s no immediate threat to Life Insurance given the rearguard action being fought by some Insurers, but the possibility exists.
If their reasoning is valid, the current exemptions could be easily disallowed.
As some commentators have noted, the impact of these changes could be significant.
You have an opportunity to influence the outcome so take the time to consider the impact of these changes on you, your clients and your business. Then, submit a response.
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