Arnold Bloch Leibler Re Proposed Introduction of FOFA Amendments by Regulation

8/13/2019 Arnold Bloch Leibler Re Proposed Introduction of FOFA Amendments by Regulation

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Arnold Bloch LeiblerLawyers and Advisers

1'1 February 2014

By E-mailConfidential & privileged communicationMs Robbie CamPoDeputy Chief Executivelndustry Super NetworkLevel 39, Casselden Place2 Lonsdale StreetMelbourne VIC 3000

Your RefOur Ref MDL ZMFile No. 011797907GontactMatthew LeesDirect 61 3 9229 9684Facsimile 61 3 99'16 [email protected] r953-2o13

Level 21333 Collins Streetl\ilelbourneVictoria 3000AustraliaDX38455 Melbournewww. abl.com,auTelephone6't 3 9229 9999Facsimile61 3 9229 9900

METBOURlIIESYDl'IEY

PartnerZaven MardirossianDirect 61 3 9229 [email protected]

Dear Ms CampoProposed lntroduction of FoFA Amendments by RegulationThis letter sets out our advice on the Commonwealth Government's ability tomake regulations that would implement its proposed amendments to the Futureof Financial Advice ( FoFA',) legislatiol in Part 7.7A of lhe corporations Act2001 (cth).For the reasons summarised below, we consider that such regulations would beinvalid and susceptible to challenge in the courts. A court declaration ofinvalidity would operate retrospectively. This means, for example, financialadviser who relied on the reguations :ould be found to have acted unlawfully.The regulations would therefre create significant uncertainty, and could wellbecom the subject of protracted litigation between financial advisers and theirclients - for example, in an investor class action.The Government has released for consultation a draft Bill and draft Regulationsfor the FOFA amendments. The draft Explanatory Memorandum for the BillStates: The Government's approach is that time sensitive FOFA amendmentswilt be dealt with through regulations,regut@, and then@underlinedWordStobeanacknoWledgmentthattheGovernment's proposed use of regulations might be invalid'Despite being foreshadowed in the Explanatory Memorandum, the draftRegulations d not include provisions implementing these amendments' Theabsence of these provisions is not explained. This Suggests that theGovernment is uncertain about how such provisions would be drafted'According to the draft Explanatory Memorandum, the FOFA amendments to be im ple me nted vi a reg ul ation include:. repealng th requirement that, in order to qualify for the safe harbour tothe best interest obligation, an adviser must take any other step that isreasonably regarded s in the client's bests interests ( catch-all );

Partners[4ark M Lelbler ACHenry D LanzorJosph BolensztajnLoon ZwefPhlip choslorRo$ APalorsonSLephen L SharpKonnolh A GrayKevin F Frawley[ichael N DodgeJno C ShoridanLoonie R ThompsnZavn l\ardirosianJonalhan M WonigPul sokolowskiPaul RubonsleinPoler M SidelAlox KingJohn liitchollBen l\ahoneySam DollardLily TellAndrow SilberborgLisa MorrywlhorJonathn MlnerJohn [lengolianCaroline Goulden[.4atlhew LesGenviove SoxtonJoremy LeiblorRick Nar6vNalhan BrinorJonalhan CaplnJuslin VaalslraClnl HardingJmos SlmpsnSenior LtigatjonCounselRobrl J HoathcoteSeniof AssociatesSuo Keol\olanio AldertonJorja CleelandBsnjmin l\arshllTr6s W4dChristine FlorNncy collinsSusann FordKimborloy l\KaYAndroa-[ownDaniel ,4oloDavid SposrKate LoganLaila Do MoloElizablh SteerAnetla CurkowiczDamion CuddihYDavid RobbinsKrysll PellowGeolroy KozminskYJgremy LanzefNoil BrydgesTyrono cca.thYErin HawlhorneGia CariCon6ultantsAllan Fols AO

ABL/3338226v1


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Ms Robbie CamPolndustry Super NetworkArnold Bloch LeiblerPage: 2Date: 11 February 2014

. amending the best interests obligation to state that that obligation doesnot prevnt an adviser and a clint from agreeing the subject matter ofthe advice ("scaled advice");o repealing the rule that an ongoing fee arrangement terminaiesautomat-ically unless the client renews it every two years ("opt-inrequrement");. repealing the requirement for advisers to provide a fee disclosurestatement to clients who entered into ongoing fee arrangements before 1July 2013 ("pre-1 July 2013 clients"); and. amending the definition of "conflicted remuneration" to exclude benefitsgiven to n adviser that could reasonably be expected to influence theadviser when giving general advice (as opposed to personal advice)'These amendments represent policy choices by the Government and significantof the sorts of matters that are

sPeaking, such changes toregulations are usually onlY as of the day{o-day operaton of an Act'The Government may only make regulations if it is empowered to do so bylegislation. The expfunatry Memorandum does not identify lhe "rele.vantreutation-making pwel' tfrt tne Government proposes to rely upon ln s 1364of-the Act, the G-overnment has a power to make regulations but that power islimited to regulations that are either (a) "required' ot "permitted' by the Act or(b) "necess ary or convenient ... for carrying out or giving effect to this Acf''The ,'necessaly or convenient' power does not, in our view, support--theproposed ,r"ndr"nts. This is because, far from "carrying out or giv.ing.-effect'io tfre Act (as it currently stands), the proposed amendments vary significantlyfrom and are indeed incnsistent with the Act, As the High Coud explained in itsunanimous decision in Morton v lJnion Steamship Co of New Zealand Ltd(1951) 83 CLR 402,410"

" Regulations may be adopted for the more effective administration of theproii"ions actuaity contained in the Act, but not regulations which vary or'deparf from tie positive provisions made by the Act or regulations whichgo outside the fitd of operation which the Act marks out for itself."ln that case, the regulations were struck down because they represented "? ewstep in policy' (it +tZ). That description is apt for the proposed FOFAamendments.The proposed amendments are clearly nol "require.d' by the Act, .so the onlyporri5t"'remaining basis is if the amedments are "permitted' by the Act' PartLIAU the Act des contain subsections that permit the making of regulationsbut these powers are again limited:

o Regulations may alter the steps financial advisers must take in order toqrlty for the sfe harbour to the best interests duty, but regulations canonly do so in "pres cribed circumstances" (s 9618(5))'


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Ms Robbie Campolndustry Super NetworkArnold Bloch LeiblerPage: 3Date: 11 February 2014

o Regulations may provide that the opt-in requirement does not apply m aparticular situation (s 962K(3))'o Regulations may provide that the requirement to give fee disclosu.restatements to pre-t July 2013 clients does not apply in a particularsituation (s 9625(2))'. A benefit is not conflicted remuneration if it /s a prescribed benefit or isgiveninprescribedcircumstances''(ss9638(1)(e)and963C(0)'

These subsections clearly do not permit the Government, by regulation, toimplement some of its proposed FoFA amendments, such as to:. state that the best interests obligation does not prevent an adviser and aclientfromagreeingthesubjectmatteroftheadvice;or. repeal s 961E, which explains the meaning of the catch-all step'It could be suggested that, under the subsections listed above, regulations couldmake the fresCribed Circumstan1es tO be all Cir7umsfanes , and thepafticular situation to be all situations , and that this Would have the sameetect as repealing the catch-all, the opt-in requirement and the requirement togive fee disclosure statements to pre-1that would be an artificial and flawedmaking powers. All situations are not'ordinary language and applies to the ostatements. ln relation to the catchinterpreted broadly (eg, Lane v Soutar t19541 Tas SR 35) but encompassing allcircmstan *orld- make the words prescrbed circumstances redundant'Further, the fact that the Act deals specificatty and n detail with the subiectmatter to which [it] is addressed' indicates that the regulation-making powersare limited (Mortn v L1nion Steamship Co of New Zealand Ltd at 410)' The factthat the meaning of the catch-all step is enshrined in a separate section(s 961E) also tells against the repeal of that step by regulation.ln our view, the proposed amendment regarding conflicted remuneration is in adifferent category. Th t r. ndment doeJ not relate not to a// circumstances inwhich a beneJit is given, but rather is confined to circumstances involving thegiving of general adlice. lt might therefore be possible to make regulations thatave-the ame effect as this proposed amendment'Please do not hesitate to contact us if you have any queries.


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Ms Robbie CamPolndustry Super Network

Yours sincerely

Zaven MardirossianPartner

Arnold Bloch LeiblerPage: 4Date: 11 Febtuary 2 14

Matthew LeesPartner

Arnold Bloch Leibler Re Proposed Introduction of FOFA Amendments by Regulation

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