The TPB hopes to hope to align its requirements with FASEA’s CPD activities as much as possible, but one industry commentator has questioned just how much this can be achieved.

The TPB is reviewing its policy on CPE for registered tax practitioners. It has issued a discussion paper and is looking for responses by March 18.

Its reasons for proposing longer CPE hours are that businesses are increasingly operating in an environment of continuous change, tax laws are always changing and other associations, including FASEA, require longer CPE hours.

TPB chief executive Michael O’Neill says: “The review is an opportunity for us to both understand how practitioners view the existing system and to obtain input into the process for defining CPE policy requirements.”

The Tax Agent Services Bill says: “Keeping up-to-date with developments in the relevant taxation laws and tax administration may require agents to undergo a certain minimum number of hours of tax-related continuing professional education per year as determined by the board.”

Meeting CPE requirements is a requirement for renewal of a tax agent’s registration.

Currently tax agents must complete a minimum of 10 hours a year and a minimum of 90 hours over three years. BAS agents must complete a minimum of five hours a year and a minimum of 45 hours over three years.

Tax (financial) advisers must complete a minimum of seven hours a year and 60 hours over three years.

A maximum of 25 per cent of CPE should be completed through relevant technical or professional reading.

After receiving initial feedback, the TPB says it is looking at aligning its CPE requirements with FASEA requirements. Another proposal is that the minimum CPE hours should be the same for all practitioner groups.

It is also considering a proposal that compliance with FASEA’s requirements would automatically satisfy the TPB’s CPE requirements for tax (financial) advisers.

The TPB says it takes a “pragmatic” approach. “For example, the TPB acknowledges that many tax practitioners are members of recognised professional associations that offer a range of relevant CPE activities, such as tax technical topics, practice management and cyber security.”

These would be included as relevant CPE activities for the TPB’s requirements.

“Further, while noting that compliance with FASEA’s CPD requirements does not automatically equate to compliance with the TPB’s CPE requirements for tax (financial) advisers, the TPB also understands a likely outcome is that tax (financial) advisers who complete CPD activities that meet the CPD requirements of FASEA are also likely to meet the TPB’s CPE requirements.”

Rob Lavery, technical and policy manager at knowIT digital says that, while the TPB consultation paper proposes that advisers who meet FASEA CPD requirements would likely meet the TPB’s CPE requirements, the situation is not clear cut.

Lavery says: “There is a caveat: FASEA CPD activities must be able to be demonstrably linked to the adviser’s tax (financial) advice services to qualify as CPE under the TPBs requirements.

“Much of an adviser’s FASEA CPD activities will not relate to providing tax (financial) adviser services. In the technical competence CPD area, training on topics such as aged care, social security and some investments may contain no tax component.”

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As part of its education standards for financial advisers, FASEA approved applications for the recognition of coursework to attain a professional designation from the Association of Financial Advisers and the Stockbrokers and Financial Advisers Association.

Advisers who have completed coursework to attain the FChFP or ChLP designation between May 2009 and June 2013, offered by the AFA, have been awarded one credit recognition for prior learning (RPL).

Advisers who have completed a Professional Diploma in Stockbroking coursework to attain the SAFAA Specialist designation from 2001, offered by SAFAA, have been awarded one credit RPL.

The approvals are recognition of the course content and assessments advisers are required to undertake to complete the programs.

A maximum of two credits towards completion of higher education requirements can be awarded for an existing adviser who has completed one or more of the prescribed approved courses to attain a professional designation.

FASEA has approved credits for coursework to attain a professional designation for eight professional associations.

FASEA also approved the Financial Advice Regulatory and Legal Obligations and the Behavioural Finance Client and Consumer Behaviour bridging courses at Swinburne University.

The bridging courses are available for existing advisers to meet the education standard. They will be added to a future Degree, Qualifications and Courses legislative instrument.

FASEA chief executive Stephen Glenfield says: “The approval of these additional courses builds on the body of courses approved by FASEA and provides additional choice to advisers seeking to meet the education standards.”

FASEA has approved a total of 66 historical courses, 63 current bachelor or higher degrees and 27 bridging courses.

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The regulatory sandbox is designed to allow companies to test new and innovative fintech products and services without the need for an Australian financial services licence or an Australian credit licence.

When the sandbox scheme was launched in 2016, the licensing exemption was for 12 months with up to 100 retail clients and total exposure of no more than $5 million.

At the time, ASIC said it recognised that start-up businesses face a couple of problems when dealing with regulators: the regulatory process slows their speed to market; and they may lack required organisational competence to provide a licensed financial service.

But with its fairly limited scope there was not a lot of take-up. The new law is designed to enhance the regulatory sandbox by allowing more businesses to test a wider range of products and services, and for longer periods than 12 months.

The explanatory memorandum accompanying the bill says: “The new regulation recognises that innovation is not limited to new offerings previously unseen in the market, but may encompass improvements to specific elements of a product or service, draw on practices from other industries or combine elements together in new ways to deliver benefits to consumers.”

ASIC has the power to make decisions regarding when exemptions start and finish. The regulator also has the power to cancel a licensing exemption if the company fails to meet prescribed conditions.

“ASIC can respond to identified non-compliance with prescribed conditions and prevent misconduct or fraudulent behaviour in the business’s provision of products or services to consumers,” the explanatory memorandum says.

The new law also gives the government flexibility to change regulations in response to market conditions. And it includes a requirement that the relevant minister arrange for an independent review of the scheme.

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It also harmonises ASIC’s search warrant powers and enhances the regulator’s ability to access certain telecommunications information.

The Financial Sector Reform (Hayne Royal Commission Response – Stronger Regulators (2019 Measures)) Act includes the following changes:

Search warrants. ASIC has had a range of search warrant powers contained in different pieces of legislation. The powers were “not as practical or effective as they should be”. Now they are harmonised in the ASIC Act.

The new law also incorporates many of the ancillary powers in the Crimes Act to beef up ASIC’s powers. For example, ASIC now has power to take photographs and make video recordings, use electronic equipment to access data and move devices to another place for processing.

Telecommunications intercept. ASIC was not listed as an intercept agency under the Telecommunications Interception and Access Act, which meant that it could not apply for warrants to intercept telecommunications and could not share information with intercept agencies.

The new law allows interception agencies to provide ASIC with information about an interception warrant or lawfully intercepted information, where the information relates to an offence that ASIC can investigate.

Licensing and false or misleading documents. Under the old law an applicant for an Australian financial services licence had to be “of good fame and character”, while an applicant for an Australia credit licence had to be “fit and proper”. This anomaly created some practical problems.

Under the new law applicants for both licences must be fit and proper. The fit and proper persons test has been widened to cover all officers, partners and trustees of an applicant. The test must be satisfied on an ongoing basis.

ASIC will greater power to demand information about an applicant, as well as the power to refuse to grant a licence when a material particular in an application is false or misleading.

Banning orders. The new law expands the grounds on which ASIC can make a banning order, allowing it to take a broader range of activities into account when determining non-compliance with financial services laws.

The existing grounds for banning a licensee include a finding that a person is “not of good fame and character”, is not adequately trained, is not competent to provide a financial service or is insolvent.

New grounds include: the person has been linked to a refusal or failure to give effect to an AFCA determination on more than one occasion; on more than one occasion, the person has been an officer of a corporation that was unable to pay its debts.

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Details of the dashboard are included in the rules for the Consumer Data Right in banking (Open Banking), which the Australian Competition and Consumer Commission released last week.

The Consumer Data Right is designed to give people greater choice over how their personal data is used and disclosed. It allows consumers to access particular data and transfer it to an accredited person.

The ACCC rules give legislative force to consumer data sharing obligations in banking, which will become mandatory from 1 July. From that date consumers will have the right to direct their bank to share their data with an accredited data recipient.

The rules cover a range of “product reference data” including interest rates, fees and charges, eligibility criteria for banking products, transaction and other customer data.

Consumer data relating to credit and debit cards, deposit accounts and transaction accounts must be available from July.

The rules will apply progressively to a broader range of products over time. Consumer data relating to mortgage and personal loan data must be available from 1 November

The major banks have been sharing product reference data on a voluntary basis since July last year.

According to the rules, there are three types of requests that can be made to a data holder to disclose CDR data: consumer data requests made on behalf of CDR consumers by accredited persons; consumer data requests made by eligible CDR consumers directly; and product data requests made by any person directly

An important element of the rules is a data minimisation principle. Accredited persons must not seek to collect more data than is reasonably needed.

For example, to assess consumer eligibility for a home loan and accredited person could ask for the past 12 months of transaction data but not future transaction data.

In another example, an accredited person could access consumer data to set up an aggregation service but not necessarily a profile of the consumer’s spending habits and disposable income.

Some CDR data must be de-identified. This will occur when it is redundant or when it is used for another purpose.

Accredited persons will have to satisfy the Data Recipient Accreditor that they are fit and proper.

Accredited persons must provide consumers with an online “consumer dashboard” that will enable them to see and manage their consents for the collection and use of their data. Consumers must be able to withdraw consent from an accredited person at any time.

Consumers must also be able to direct that their redundant data be deleted.

Typical accredited persons would include comparison sites, banks, non-bank financial institutions, providers of consumer finance apps and service providers such a travel companies that may track and categorise travel spending.

Data holders and accredited data recipients must have complaints procedures.

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According to the information memorandum accompanying the bill that was passed last week, “there are circumstances where the mortgage broker may not have acted in a consumer’s best interests even if the responsible lending obligations were complied with.

“For example, even if a home loan product is ‘not unsuitable’, recommending it to the consumer might not be in the consumer’s best interests.”

The new law says that where there is a conflict of interest, mortgage brokers must give priority to consumers in providing credit assistance.

It also says mortgage brokers must not accept conflicted remuneration, which means any benefit that could reasonably be expected to influence the credit assistance provided. The bill allows for conflicted remuneration to be prescribed in regulations.

The law covers “credit assistance”, which includes things like suggesting that a consumer apply for a particular credit contract, suggesting that a consumer apply for an increase to the credit limit of a credit contract and suggesting that a consumer remain in a particular credit contract with a particular provider.

The broker must act in the best interests of the consumer not only in relation to the mortgage but also in relation to any other credit contracts for which they provide credit assistance. These might include credit cards and personal loans.

Any recommendations would be expected to be based on consumer benefits. “A broker should not recommend a loan by prioritising factors that cannot be substantiated as delivering benefits to that particular consumer.”

Mortgage brokers are expected to take active steps to identify all conflicts of interest that might arise as a result of their relationships with third parties. For example, if a mortgage broker has referral arrangements with a real estate agent, then the broker would need to consider the conflicts that could arise and ensues that they give priority to the interests of the consumer over their own interests or those of the real estate agent.

The industry had lobbied to have the best interests duty only apply to home loans but it was not successful.

Dentons special counsel Jon Denovan says this means that once a business is categorised as a mortgage broker, best interests duty will apply to all regulated credit products arranged for customer.

Denovan says: “This means that finance such as personal loans, credit cards and car finance arranged by mortgage brokers will be subject to best interests duty, even when that finance is a stand-alone product.

“But if the finance is arranged by a broker who is not a mortgage broker, the duty will not apply.”

The industry had also lobbied to have the bill make it clear that brokers don’t have to arrange the cheapest loan and review all available products.

Denovan says the duty is a principles-based standard. What conduct satisfies the duty will depend on the individual circumstances in which credit assistance is provided.

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Treasurer Josh Frydenberg released a draft bill on Friday, implementing a number of outstanding recommendations of the Hayne royal commission. Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumer – 2020 Measures) Bill 2020 contains 24 separate measures relating to financial services, credit and superannuation licensees.

Frydenberg says that by the end of 2020, all remaining total commission recommendations requiring legislation will have been introduced. The bill includes the following measures:

A requirement that ongoing fee recipients renew the arrangements annually. This provision applies to licensees providing personal financial product advice to retail clients under ongoing fee arrangements. Licensees must set out the total fees that will be charged over the period.

The Financial Planning Association says this change would “further increase the time and the administrative burden on financial planners helping their clients.”

It says: “The FPA agrees financial planners should be required to periodically review and renew ongoing fee arrangements. However, we believe requiring this to be conducted annually… adds considerable time and cost pressures on financial planning practices.”

A requirement that a financial services licensee or authorised representative provide written disclosure of “lack of independence”. The use of terms such as “independent”, “impartial” and “unbiased” will be restricted.

A person may only use a restricted word or expression in relation to a financial services business or financial service if they do not receive a commission, remuneration based on the volume of business placed or gifts or benefits that may be expected to influence the person.

Rob Lavery, the technical and policy manager at knowIT digital, says: “Effectively, any adviser who has an ownership or licensing relationship with a product provider, who receives commissions or volume-based payments of any sort, or who has a difficult time recommending off-APL products cannot be considered independent

“This captures most advisers in Australia and, ultimately, if this become law most advisers will be required to include a statement in their FSG declaring that they are not independent, unbiased or impartial.”

Deferred sales model for add-on insurance. This provision covers consumer credit insurance, travel insurance and mobile phone screen protection insurance.

Add-on insurance is a financial product that is sold in connection with the consumer entering into a commitment to acquire a product or service and which manages financial risk related to the principal product or service.

A four-day deferral period is designed to give consumers an opportunity to consider the suitability of the add-on insurance product.

The Association of Financial Advisers has argued against this measure, saying it may provide consumer protection but it does nothing to stop the sale of poor insurance products. It wants to see minimum product standards.

A cap on vehicle dealer commissions. ASIC will be given power to set a cap on the amount of commission that can be paid in relation to add-on risk products sold in connection with the sale or lease of a motor vehicle.

Stronger breach reporting requirements. The bill expands the situations that need to be reported to ASIC. These include investigations about whether a specific breach has occurred and outcomes of those investigations, incidence of negligence or fraud.

The bill introduces a comparable breach reporting regime for credit licensees. Most of the changes will apply from 1 April next year.

Reference checking and information sharing protocols in relation to financial advisers and mortgage brokers. It will be a licensing condition to comply with reference checking and information sharing regarding a former, current or prospective employee. The protocol will be modelled on the current Australian Banking Association protocol.

The bill creates a civil penalty for non-compliance with the obligation.

Granting ASIC power to designate enforceable industry code provisions and the establishment of a mandatory code of conduct framework. A court may impose a penalty if a declaration has been made that an enforceable code of conduct provision has been breached and there is a contravention of the obligation to comply with the enforceable code provision.

Advice fees in superannuation. The bill removes a superannuation trustee’s capacity to charge advice fees from MySuper products. Trustees would still be permitted to charge fees in relation to intra-fund advice as administration fees.

Trustees of registrable superannuation entities should hold no other role or office. The bill will prohibit trustees from having duties other than those arising from or in the course of the performance of its duties as a trustee of a super fund.

No hawking of superannuation and insurance products. The bill also contains a new general prohibition on selling or issuing financial products that are made in the course of, or because of, unsolicited contact. This general prohibition will apply to all kinds of financial products, including securities and interests in managed investment schemes, except in certain circumstances.

Superannuation regulator roles. The bill changes APRA’s and ASIC’s roles in relation to superannuation to accord with the principles that APRA is the prudential regulator and ASIC the conduct and disclosure regulator. The coverage of the Australian financial services licensing regime in superannuation will be extended to give ASIC greater power in the superannuation industry.

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A father established testamentary trusts for his son and daughter in his will. The son and daughter, Mr Bernard and Ms C Bernard, were the trustees of each other’s trusts.

Mr Bernard’s former wife argued that the assets of his testamentary trust should be included in the matrimonial pool.

In the case, Bernard & Bernard, the court rejected this argument, ruling that the son did not have any direct or indirect control of the trust – an important test in these situations. He was neither a trustee nor an appointer.

It ruled that he only had an entitlement to the testamentary trust as a mere discretionary beneficiary.

There had been an accumulation of income which was not distributed by the trustees over a number of years. Mr Bernard and Ms C Bernard operated a business together and were accumulating the income for planned capital works n the business.

Mr Bernard’s former wife argued that under the terms of the trust the accumulated funds should have been distributed to her former husband, where they would be matrimonial property and some of the proceeds would be distributed to her.

The former wife argued that Mr Bernard had effective control of the assets in the trust.

The court ruled that Mr Bernard was a beneficiary with no other entitlement. “He does not have legal entitlement to any asset of the trust, nor does he have any power to appoint a trustee or appoint the assets of the fund to a beneficiary.” It said.

In a note to clients, law firm Cooper Grace Ward says : “It is imperative that the testamentary trust is properly drafted to ensure that the control of the trust is structured properly, balancing the need for protection and the practical circumstances of the client.”

As well as looking at the structure of the trust, the court reviewed the conduct of the trustees.

It found that “neither Ms C Bernard nor Mr Bernard have purported to exercise control over the assets in their trusts, nor purported to have some lawful right to the assets in their trust.”

Cooper Grace Ward says: “Advisers need to be aware that the asset protection benefits of a testamentary trust are not achieved simply through the structure of the trustee and the appointer.

“The ongoing administration of the trust, the way the trustee carries out their role and the records maintained by the trustee are all relevant factors.”

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Earlier this week Treasurer Josh Frydenberg said the Government would undertake a four week targeted public consultation process in regards to a loophole that allows advisers and brokers to receive commissions – so-called stamping fees – on LICs and listed investment trusts.

Frydenberg says: “Public consultation will allow the government to make an informed decision on whether to retain, remove or modify the stamping fee exemption in order to ensure that the interests of investors are protected and capital markets remain efficient and globally competitive.”

“Stamping fees are an upfront one-off commission paid to financial services licensees for their role in capital raisings associated with the initial public offerings of shares.”

Documents released by the Australian Securities and Investments Commission (ASIC) under a freedom of information request reveal that ASIC advised Treasury last November that it is hard to justify maintaining the stamping fee exemption from bans on conflicted remuneration.

ASIC highlights that stamping fees may have a conflicted incentive, with 42 LICs that paid a stamping fee since 2015 returning and average negative 7.3 per cent since inception.

The commissions that the advisers and brokers receive are typically between 1.5 and 3 per cent.

In addition, ASIC found that stamping fees can lead to poor performance, higher management fees and a discount to net tangible assets.

Robo adviser Stockspot says it will continue to support a ban on any payments that investment products can provide advisers and stockbrokers because it is not in the interest of investors.

Stockspot claims that investors in LICs would have been better off by $1.6 billion in 2019 if they had invested into an exchange traded fund (ETF).

The average one-year return of an Australian share LIC was 11 per cent worse compared to the Vanguard Australian Shares Index ETF.

Global share LICs underperformed the iShares Global 100 ETF by 19 per cent and one fifth of LICs had negative returns over 12 months. This was during a period when the share market rose by 25 per cent.

Magellan Financial Group has taken a stand against commissions on the sale of LICs and LITs. Its latest product, the Magellan High Conviction Trust, did not pay commissions to advisers or brokers.

Eligible applicants under the wholesale offer and general public offer will receive additional units worth 2.5 per cent of the value of the units allotted to them.

Magellan chair Hamish Douglass says the 2.5 per cent represents the money that Magellan would have paid to brokers and advisers.

In addition, the Financial Planning Association (FPA) chief executive Dante De Gori supports the Government’s efforts.

De Gori says: “Ensuring that people receive unconflicted advice, that is in their best interests, is vital to the provision of financial advice that Australians can trust and rely on.”

Rod Bristow, chief executive of Clime Investment Management says: “The current level of scrutiny on this part of the industry will lead to improved outcomes for all stakeholders over time, as Government consults with industry and regulators to come up with a model that meets the objectives of investors.”

Bristow says in listing any new investment, the following must be non-negotiable for investors: receive a dollar of value for a dollar of investment on day one, ensure appropriate compensation for risk, and ensure any new issues are in compliance with current regulatory requirements.

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Under Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Power) Bill 2019, financial services companies will be required to identify the target market for their product and will need to design the product for that market. They will have to select appropriate distribution channels and periodically review those arrangements to ensure they continue to be appropriate.

The design and distribution obligations take effect for financial product issuers and distributors on 5 April 2021.

A “target market determination” must describe the class of retail clients that comprise the target market for the product, specify any conditions or restrictions on sale, specify events and circumstances that would suggest that the determination is no longer appropriate, and specify review periods.

Towards the end of last year, the Government issued regulations relating to ASIC’s new powers.

The regulations extend the application of DDO by including distributors of basic deposit products, general insurance products and bundled consumer credit insurance products in the definition of “regulated persons”.

Certain credit licensees and credit representatives are also included.

The list of financial products covered by DDO has been extended to include simple corporate bonds, debentures issued by ADIs and life insurance companies, basic banking products, interests in an investor directed portfolio service, ETFs and custodial services.

The regulations also exclude certain financial products from DDO coverage. They include defined benefit schemes, eligible rollover funds, depository interests in fully paid ordinary shares in a foreign company, financial products not offered in Australia and “certain credit arrangements.”

In its draft guidance (CP 325), ASIC has set out its expectations for the product governance framework. This refers to systems, processes, procedures and arrangements in place to ensure compliance with the DDO.

The target market determination should include consideration of those for whom the financial product “is clearly unsuitable” – the so-called negative target market.

ASIC has set out the factors that will be relevant in determining whether a product issuer has taken reasonable steps to direct distribution of the product to the target market.

These include distribution conditions, marketing and promotional materials, selection of distributors, supervision and monitoring, conflicts of interest and information sharing with distributors.

ASIC has also included some examples of factors that issuers would take into account when assessing whether a target market determination is still appropriate. These include complaints data, consumer feedback, proportion of sales to consumers not in the target market, analysis of recorded sales calls.

The target market determination must be a public document.

Distributors will have to ensure that distribution is consistent with the target market determination. Factors that ASIC says are relevant include distribution method, compliance with distribution conditions, marketing and promotional materials, inappropriate incentives, training.

Distributors are required to keep records of distribution information in relation to products for up to seven years.

One of ASIC’s requirements is that issuers and distributors not take advantage of behavioural biases or other factors that can impede consumers from obtaining appropriate products.

In a note to clients, law firm Hall & Wilcox says: “The guidance is principles based, giving issuers and distributors a fair degree of flexibility.”

Consultation closes on March 11.

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