FOFA reforms – “Conflicted remuneration”

October, 2012

What sellers of financial planning businesses should know

Under the Future of Financial Advice (“FOFA”) reforms to the Corporations Act and associated regulations, the key issues for sellers of financial planning businesses or client registers are likely to be as follows (in brief summary):


1.   Under the FOFA reforms, AFS licensees and authorised representatives will be prohibited from accepting “conflicted remuneration” such as volume bonuses or volume-based shelf space fees.

2.   Under the transitional provisions, AFS licensees will be entitled to “elect to comply” with the FOFA reforms from 1 July 2012.  However, we expect that most AFS licensees will not do so and will wait until the final date of 1 July 2013.  On that date, compliance will become compulsory.

3.   The reforms grandfather future payments to AFS licensees and their authorised representatives in respect of conflicted remuneration where the contractual arrangements for that remuneration were put in place prior to the earlier of:

(a) the date upon which the AFS licensee elects to comply with FOFA; and
(b) 1 July 2013.

4.   However, even though grandfathering should apply to current investments, FOFA will prohibit future payments to licensees (or their representatives) in respect of new post-FOFA investments. This means that the level of volume payments from product providers to dealer groups will crystallise and should not increase in size after 1 July 2013 (or such earlier date as the relevant dealer group elects to comply) except to the extent that there is reinvestment in a product previously acquired.

Earn outs – FOFA issues for sellers

Most financial planning businesses and client registers are sold on an “earn out” basis.  This means that part of the sale price is deferred and paid at a later date based on the post-sale performance of the business.  Generally, the amount of the earn out is calculated by reference to the post-sale recurring revenue.

If you are selling your financial planning business, the FOFA reforms may create a risk in respect of your earn out payment if your business derives revenue from volume bonuses or volume-based shelf space fees.  The risk is, of course, that FOFA will apply to eliminate or cap that element to the recurring revenue of your business following the sale, and therefore reduce the anticipated amount of your earn out.

In this context, our key hints and tips for you as a seller are as follows:

(a)Pay close attention to the definition of Recurring Revenue or Annual Ongoing Revenue in your sale agreement.  For the purpose of calculating your earn out payment, does this definition capture all elements of revenue that you would expect?  In particular, if you expect to receive the benefit of “conflicted remuneration” arrangements as part of the earn out calculation, is this made clear in the definition?

(b)If you expect the benefit of “conflicted remuneration” arrangements to be factored into your earn-out calculation, do your due diligence to find out whether those arrangements will be grandfathered.  Grandfathering should occur through the arrangements being appropriately “locked in” contractually by the buyer (or their dealer group) before 1 July 2013 or such earlier date that they elect to comply with FOFA.

As part of this due diligence process, you will of course also need to find out whether or not the buyer intends to elect to comply (and if so, when).

You should also be mindful that FOFA’s anti-avoidance provisions will prohibit AFS licensees from entering into artificial schemes to avoid their obligations under FOFA.

(c)Be aware that “new money”, i.e. post-FOFA investments, will not attract the benefit of grandfathering.  So, on and from 1 July 2013 (or the earlier date upon which an AFS licensee opts in to FOFA), switching money from one platform or product to another may mean losing any benefit of grandfathering in respect of that money and transferring that money into a non-grandfathered environment.  Of course, in this situation the best interests of the client are paramount and must be the key factor in determining which product or platform is chosen.  However, sellers should nonetheless be aware of the potential financial impact of these choices before signing the sale agreement.  Again, due diligence and understanding your buyer’s philosophy on these matters and preferred products is the key.

(d)  Opt-in requirements for clients will only apply to new fee arrangements entered into after the FOFA legislation applies. However, if a transfer of business results in the arrangement with clients changing character to such a degree that it essentially becomes a new arrangement, opt-in may apply to that new arrangement. Under opt-in requirements, the licensee will be required to give clients a renewal notice every 24 months, under which the client must opt-in to continue to receive the ongoing financial services, or they will not be liable for ongoing fees. Advisers will not be required to comply with the opt-in requirements if they are a member of a professional body such as the FPA that requires compliance with an ASIC-approved code of conduct that achieves the same outcome as the opt-in requirements.

Please note that this legal update is a brief summary only, and is general in nature.  The proposed law in this area is complex and currently uncertain.  Always seek specific advice from Mills Oakley in respect of your particular circumstances.  

Contact Mills Oakley

If you require any further assistance, please contact:


Martin Checketts |  Partner

T: +61 3 9605 0999



Mark Bland |  Partner

T: +61 3 9605 0832


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