ASIC turns the idea of 'innocent until proven guilty' on its head

The Australian Securities and Investments Commission has outlined the draft ground rules on conflicted remuneration and, as Mike Taylor writes, there are inevitable impacts on commercial models across the industry.

For a brief moment in 2011, there were those in the financial services industry who believed that dealer groups and financial planners receiving volume rebates would be able to argue the case that they did not represent conflicted remuneration and that the regulator might then wave those arrangements through.

It quickly became evident that any dealer groups or financial planners wishing to pursue that course of action would need to have deep pockets and the ability to fund a legal argument validating those claims.

When the Australian Securities and Investments Commission (ASIC) late last month released its consultation paper dealing with conflicted remuneration, Consultation Paper 189 Future of Financial Advice: Conflicted remuneration, it was made very obvious that, absent a legal challenge, the traditional volume rebate regime had been ended.

That was made very clear when the ASIC discussion paper spelled out that its regulatory approach would be starting from the presumption that volume rebates represented conflicted remuneration, and that it would be up to the recipients to prove otherwise.

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In doing so, the regulator has turned the notion of ‘innocent until proven guilty’ on its head. Where volume rebates are concerned, you are guilty until you can prove otherwise.

On the face of it, few dealer groups will see fit to do so.

In fact, ASIC's whole regulatory approach to conflicted remuneration makes it difficult for planners and dealer groups to argue the toss in circumstances where the regulator has made clear it proposes to "focus on the substance of the benefit over its form".

That statement may sound innocuous enough, but in reality it represents an assertion that planners and planning groups will not necessarily be able to circumvent the new regime by simply changing remuneration structures or relabeling particular payments.

What ASIC is saying is that it will simply follow the trail of money from its source to its end-point at the planner/adviser to determine whether a conflict can be substantiated.

The degree to which financial planners and dealer groups will find themselves on the back foot in seeking to deal with ASIC's intended approach is outlined under the sub-heading ‘Onus of Proof’.

That section kicks off by stating: "Generally, the party claiming that the conflicted remuneration provisions have been breached will bear the onus of proving that a benefit is conflicted remuneration.

However, where the presumption that volume-based benefits are conflicted remuneration applies, the onus is on the person who seeks a finding that the volume-based benefit is not conflicted remuneration to show this to be the case (eg, a representative who receives the benefit or their responsible AFS licensee)".

In other words, ASIC is saying that it holds that all volume-based benefits are conflicted, and that it is up to those receiving them to prove otherwise, or change the way in which they are remunerated.

ASIC's detailed view is explained as follows:

Volume-based benefits are presumed to be conflicted remuneration: s963L. We propose that the size of a benefit, and the portion of the benefit that is volume based compared with the portion that is not, are relevant when looking to prove that a volume-based benefit is not conflicted remuneration.

We propose that volume-based benefits that may be conflicted remuneration include:

• where a platform operator or other product issuer is also a licensed dealer group, benefits received in its capacity as platform operator or other product issuer ; and

• equity arrangements with representatives.

We propose that, in some circumstances:

• a volume-based benefit may not be conflicted remuneration if it is passed on to the client; and

• we are less likely to scrutinise a benefit that is not passed on to the adviser, if certain controls are in place.

It is worth noting that the regulator has also suggested that volume rebates might also be allowable if dealer groups use the money to invest in improved services to financial planners, such as in improved information technology services.

But the bottom line lost on no one is that the approach outlined in the ASIC consultation paper means that most dealer groups will have to change their commercial models, and many financial planners will have to adjust their expectations in terms of what revenue actually flows from product providers, through dealer groups and, ultimately, to them.

Many dealer groups will likely consult with ASIC about their volume rebate arrangements and whether they will pass muster. It seems very unlikely anyone will seek to challenge the regulator's approach in the courts.