Soft dollar benefits - sticking to the rules
With the festive season well and truly upon us, now is a good time to examine the obligations of financial advisers in relation to receiving non-monetary (or soft dollar) benefits from product providers, writes Craig Parker.
Monetary benefits provided for life risk insurance are afforded an exemption under the s363B of the Corporations Act 2001 (Cth) – but there is no life risk insurance exemption for non-monetary benefits.
This means that if an adviser receives a non-monetary benefit from a product provider, they must be comfortable that the benefit:
- Is less than $300 in value;
- Has a genuine education and training purpose;
- Is for IT software or support; or
- Is given by a client.
Less that $300 in value
Benefits of less than $300 are permitted for any 12-month period, providing that identical or similar benefits are not given by the product provider on a frequent or regular basis.
Examples of permissible non-monetary benefits include:
- Gifts with a value of up to $300 – for example, a $250 gift hamper from a product issuer as a one-off gift for an adviser’s birthday;
- Entertainment with a value of up to $300 including lunches, dinners, movie tickets, theatre tickets and sporting events; and
- Promotional items with a value of up to $300 including pens, notebooks, umbrellas and labeled wine.
It is important to understand that the costs of non-monetary benefits from the same product provider need to be combined if they are largely the same in character, and a combination of these non-monetary benefits will need to be less than the $300 threshold to be FOFA compliant.
For example, the cost of lunches, sporting tickets, movie tickets and theatre tickets provided from the same product provider to an adviser would need to be combined and would not be able to exceed $300 for any 12-month period.
It is advised to keep a record of these benefits to show that the benefit/s met these conditions.
Genuine education or training purpose
The training must be relevant to providing financial product advice to the client. The benefit must:
- Be for the provision of an education or training course to the adviser; or
- Have the dominant purpose of education or training.
Where the benefit is for the provision of an education or training course:
- Education and training activities for the course must take up at least the lesser of six hours a day or 75 per cent of the time spent on the course; and
- The adviser, their employer or their dealer group must pay for travel and accommodation relating to the course, and events and functions held in conjunction with the course.
The cost of the course or seminar is allowed to be funded by the product provider, but the product provider must not pay for flights, accommodation or the entertainment associated with the event.
The product provider may be able to provide the entertainment (ie, pay the cost of a gala dinner) provided that it falls within the $300 per adviser threshold.
IT software or support purpose
The benefit must be related to providing financial product advice to retail clients about the financial products issued or sold by the benefit provider.
Examples of IT software and support which are permitted are:
- Software for an administration platform where the benefit is given by the owner or distributor of the software;
- Access to an information technology ‘help desk’ for problems in using administration platform software, where the benefit is given by the software owner or distributor; and
- Access to a website for the adviser to place client orders.
- Examples of IT software and support that are unlikely to be permitted are:
- Payroll administration software and related support services;
- Accounting software and related support services to manage the accounts of the business; and
- Anti-virus software.
Benefit given by a client
Benefits given directly by a client are not conflicted. Some examples of the non-monetary exemptions in practice follow.
Case study 1: entertainment
The business development manager (BDM) of a product provider has obtained box tickets to a concert and invites a number of advisers to attend.
Tickets are valued at $295 per head.
Before the event, the BDM takes the advisers out for a gourmet champagne breakfast at $80 per head.
Are the advisers legally able to accept all of the life insurer’s hospitality?
Analysis
The concert tickets and champagne breakfast are viewed as one continuous benefit. Combined, they would exceed the $300 threshold.
The advisers could accept the concert box tickets but could not also accept the champagne breakfast. The adviser, their employer or dealer group will need to fund the breakfast to ensure the $300 threshold is not exceeded.
Additional facts
If the product provider also offered to pay for the spouse of the adviser to come to the concert, would this be allowed? What about if the product provider offered a number of tickets to a financial advice practice?
Analysis
No, if a ticket is also provided for the spouse of the adviser, the combined amount of the two tickets is $590, which is well above the adviser’s $300 threshold.
This also applies if a ticket was provided to both the adviser and an employee of the adviser.
If the financial advice practice has more than one adviser, the product provider may offer tickets to each adviser. Each adviser has their own individual $300 threshold. Hence a practice with four advisers may each receive a ticket to the concert.
Case study 2: wine (with client end recipient of benefit)
A product provider sources some bottles of branded wine, and has it branded with its own specially designed labels.
The BDM gives six bottles each to a number of advisers to pass on to their clients.
The total value of the six wines is $420.
Analysis
It is intended that the adviser’s clients are the end recipient of this benefit.
The adviser can accept the benefit so long as it is passed on to the client promptly (in any case, within three months).
The end recipient is the client and the gift is not intended to influence the advice given to a retail client, so the benefit is allowed.
Case study 3: education and training
A product provider which has completely revamped its product, processes, adviser interface and underwriting engine invites advisers to a two-day conference in Noosa so that it can explain all of the changes and teach the advisers how to use the new adviser interface system. The conference also includes a large number of other non-product specific educational seminars.
The provider offers to pay for the flights and accommodation for the advisers.
In addition, the provider has organised a gala dinner and entertainment valued at $250 per head.
Analysis
It is acceptable for the company to act as a provider of the education and training.
It is not acceptable for the provider to pay for the flights and accommodation. These must be paid for by the adviser, their employer or dealer group.
The gala dinner is acceptable, but only if that this is the only entertainment provided and the life insurer has not provided similar entertainment recently to the advisers. The cost at $250 is within the $300 threshold, so on its own is not conflicted.
Craig Parker is the general manager of TAL-owned dealer group Affinia.
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