What is Grandfathering?
The Treasury's summary of reforms proposed under the Future of Financial Advice (FOFA) legislation begins with a seemingly simple proposition: Among FOFA's features will be "a prospective ban on conflicted remuneration structures including commissions and volume based payments," according to the Government’s official website.
Advisers have expressed concerns that "grandfathering," the legal principle that allows the continued regulation of certain products and activities under the old rules, is tarnished by significant ambiguity in the most recent draft of the legislation.
That ambiguity may be the result of FOFA’s concentration on investment products, a focus that leaves the status of some insurance products unclear. In one interview, Richard Batten, Partner at Minter Ellis, noted that the new regulatory scheme "is ambiguous when you are talking about a new client in an existing group life insurance scheme" and not an entirely new product.
"It wouldn’t be a new product; we are just talking about a new client joining the fund and being included in the existing group insurance policy," Batten added.
Other advisers have questioned whether a change of licensee or the sale of a practice would trigger the application of the new rules and thereby eliminate grandfathering of existing arrangements.
The Treasury describes grandfathering in general terms: "The ban on conflicted remuneration will not apply to payments made under arrangements entered into before the reforms commence. This means, for example, that commissions currently being paid by product manufacturers to financial advisers in relation to existing investments will not be banned and can continue to be paid after the reforms commence. This is what is meant when it is said that these payments have been 'grandfathered' under the legislation."
Under FOFA, group life commissions will be prohibited beginning 1 July 2013, and resolution of remaining ambiguities becomes more pressing as that date approaches. Adding to that sense of urgency, comments on the proposed regulations must be submitted by 5 June 2012.
A second set of draft regulations, covering training courses, was unveiled along with the grandfathering regulations. According to that second set, advisers' employers are required to bear the cost of accommodation, travel and entertainment for the event, and 75% of the time spent at an event must be focused on professional education and training.
Submission of comments on these training regulations is subject to the same 5 June deadline that applies to the grandfathering regulations.