Conflicted remuneration – rearranging the shelves

The DBFO Act has clarified the conflicted remuneration provisions, with the changes having taken effect from 10 July 2024.

Before I explain this, be warned that there were two other important changes introduced by the DBFO Act under the conflicted remuneration ‘umbrella’: limitations on advice fees being charged from superannuation accounts (which is already in effect) and the introduction of a consent requirement for the receipt of insurance commissions (to take effect from 9 July 2025).

These topics are covered in different articles on our website, which you can access by clicking the following links:

• limitations on advice fees charged from superannuation accounts; and
• consent requirement for the receipt of insurance commissions.

Client pays exemption

Prior to the DBFO Act, a benefit given to a licensee or its representative by a retail client was exempt from being ‘conflicted remuneration’ where the benefit was given in relation to:

• the issue or sale of a financial product by the licensee or the representative to the client; or

• financial product advice given by the licensee or representative to the client.

Ms Levy observed that the provisions setting this out were confusing, did not make it clear that the conflicted remuneration provisions were not intended by Parliament to apply when the benefit is provided by the client, and were ripe for exploitation by licensees who used the provisions to justify the receipt of asset-based fees only loosely connected with financial product advice.

She recommended that the legislation be amended to clarify that benefits provided by retail clients to licensees, or their representatives are not conflicted remuneration under any circumstances, whether the benefit is a product fee, a transaction fee, or an advice fee.

Modified definition

So, the definition of conflicted remuneration has now been changed.

As previously, conflicted remuneration is any benefit (monetary or non-monetary), given to a licensee or a representative of a licensee, who provides financial product advice to retail clients that, because of the nature of the benefit or the circumstances in which it is given:

• could reasonably be expected to influence the choice of financial product recommended by the licensee or representative to retail clients; or

• could reasonably be expected to influence the financial product advice given to retail clients by the licensee or representative.

But the definition now has an additional limb. If a benefit meets the above parts of the definition, it will only be conflicted remuneration if the benefit is also not given to the licensee or representative by a retail client in relation to a financial product or financial service provided by the licensee or representative to the client.

So, if a retail client’s payment (or other benefit) to you is a payment (or other benefit) given in relation to a financial product or a financial service, it is now definitely not conflicted remuneration.

This change meant that a couple of provisions which attempted to have this effect and didn’t quite nail it have now been ejected from the Corporations Act 2001. The same applies to a number of regulations in the Corporations Regulations 2001, thanks to the effect of the DBFO Regulations.

Twelve-month exemption

There was previously an exemption from conflicted remuneration for a benefit given to the licensee or representative in relation to the issue or sale of a financial product (other than a life insurance product) when the licensee or representative had not given financial product advice about that product (or that class of product) in the 12 months before the benefit was given. The DBFO Act removed this exemption from the Corporations Act 2001. This was on the basis of Ms Levy’s recommendation that any such benefit should just be subject to the usual conflicted remuneration test. She observed that it is likely that such a benefit would not meet the definition but effectively said to let the definition decide, which I think is a good point.

Agents and employees of ADIs

Although not strictly relevant to advice licensees, it may interest you to know about reforms relating to agents and employees of ADIs. Agents and employees of ADIs have long enjoyed an exemption from conflicted remuneration that applies to benefits linked to recommending a basic banking product, a general insurance product or a consumer credit insurance product. Arrangements entered into or varied on or after 10 January 2025, or a benefit given, other than under an arrangement, after 10 January 2025, will no longer attract the exemption. Arrangements that were or are entered into before this date and are not varied after it, or benefits given before this date, will still attract the exemption.

What you need to do

While these conflicted remuneration reforms don’t seem earth-shattering, you will need to update your policies and procedures and educational material you provide to your representatives in relation to conflicted remuneration to ensure they reflect these changes.

Don’t forget to check out our articles in relation to insurance commission consent and advice fees from super, for information on those two key aspects of the conflicted remuneration reforms.

Author: Samantha Hills (Partner)

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