Moderator: Francis J. Facciolo, Professor, St.
John’s School of Law
Richard Batten, Partner, Minter Ellison & Gail
Pearson, Professor, The University of Sydney Business
School
Australia has put in place a new regulatory system for providing
financial advice that modifies existing obligations and introduces
new requirements. The three planks of the new regime are: a
statutory obligation that advisers must act in the best interests
of the client and in the case of any conflict, give priority to the
interests of the client; a ban on conflicted remuneration that is
explicitly linked to the best interests obligations; and new
arrangements for on-going fees for financial advice that require
disclosure and the client to opt-in, effectively curtailing trail
commissions. The opt-in requirement has been modified by an
exemption that allows financial advisors instead to agree to be
bound by a professional code of practice.
The acronym for the reforms is FOFA: Future of Financial Advice.
Australia has the fourth largest managed funds industry in the
world and sophisticated financial services regulation that
withstood the recent crises. The paper places the FOFA reforms in
this regulatory and industry context and provides a technical
analysis of the three planks of FOFA and allied issues such as
grandfathering anti-avoidance. The obligation to give priority to
the client in case of any conflict extends beyond providers to
their associates. The paper looks in detail at the extent to which
volume based remuneration and asset-based fees are still possible.
It assesses FOFA from both an industry and a client
perspective.
Financial advice in Australia is linked to compulsory
superannuation and market linked retirement incomes. It will remain
an area of risk for regulators and politics as well as the advice
industry and clients.
The critical issue for the financial advice and wealth
management industry is the change from principles based regulation
that required advisors to “manage” conflicts and have a reasonable
basis for advice, to one which is proscriptive—defining what
industry must not do. This has meant changes to distribution
networks and remuneration practices.
For those seeking advice, the question is the availability,
pricing and quality of advice. The new regime modifies a classic
"disclosure for choice" regime shifting it beyond what is suitable
for the client to what is in the best interests of the client. It
remains to be seen whether the new statutory best interest
obligation and allied fee arrangements for advice will be more
effective for clients seeking optimal returns or will increase the
availability of advice.
Arthur B. Laby, Professor, Rutgers University School of
Law-Camden
Several large financial firms straddle the globe. The United States
Securities and Exchange Commission has a strong interest in
regulating the securities activities of those firms, including
activity that occurs outside of the United States. The SEC has
regulated this activity using doctrines borrowed from other areas
of the law, including the conduct and effects test for
extraterritorial jurisdiction. The conduct and effects test worked
well for many years and became an important weapon in the SEC’s
extraterritorial regulation and enforcement program. In
Morrison v. National Australia Bank, the US Supreme Court
held that section 10(b) of the Securities Exchange Act of 1934 is
inapplicable in the case of a non-US plaintiff suing a non-US
defendant for activity regarding shares listed on a non-US
exchange. In so doing, the Court invalidated the conduct and
effects test in the section 10(b) context. Congress tried to
reverse the Morrison case in the Dodd-Frank Act, but the
legislative fix was incomplete in important respects. Scholarship
on the Morrison case has focused primarily on ex post
enforcement—the ability of law enforcement officials or private
plaintiffs to sue non-US persons. This paper focuses instead on the
implications of the Court’s decision on the ability of the SEC to
regulate, ex ante, non-US domiciled firms, such as broker-dealers
and investment advisers, now that the Court has rejected the
conduct and effects test.
Gerard McMeel, Professor, University of Bristol Law
School & Guild Hall Chambers, Bristol
The UK has undergone three major waves of financial regulatory
reform over the last three decades; the Financial Services Act 1986
(introducing an explicitly self-regulatory regime), the Financial
Services and Markets Act 2000 (adopting a single statutory
regulator for banking, insurance and investment) and now the plans
of the Coalition Government for new legislation, adopting a “twin
peaks” model of regulation. At the coal-face the detailed regime
for how product provider, intermediaries and brokers deal with
retail investors has developed and evolved radically in response to
two main drivers. First, membership of the European Union and the
single market in financial services entails that approximately
two-thirds of detailed regulatory requirements for the investment
sector are based on EU measures, principally the Markets in
Financial Instruments Directive (“MiFID”, which is currently under
review). Secondly, repeated mis-selling of investment products
scandals (personal pensions, mortgage endowment policies,
“precipice” bond”) and a concern that commission-rewarded
intermediaries were responsible for bad advice has led to regular
revision of the rules for retail investment business, now
culminating in the Retail Distribution Review (the "RDR”). This
paper will provide an account of the UK’s retail investment
regulatory environment, the changes being driven forward by MiFID
and the RDR and likely future developments. It is also hoped that
some account can be given of the regimes in two other common law
regimes, namely Hong Kong and Singapore.