With the ongoing COVID-19 pandemic, it’s fair to say that regulators and businesses have shifted their priorities. Timelines for legislative reforms driven
by the Hayne Royal Commission and licence applications for wealth businesses have changed.
APRA and ASIC licences may be delayed
APRA has announced that it will not issue any new insurance
or banking licences for at least 6 months. While ASIC has said it’s ‘business as usual’ for the Australian financial services licensing process, we
expect timelines to be impacted by remote working and a reduced workforce.
Regulators have changed their priorities

ASIC is prioritising challenges arising from the pandemic and regulatory change where:

There is the risk of significant consumer harm;
There are serious breaches of the law;
There are risks to market integrity; or
The matter is time critical.

Policy work on key Royal Commission reforms were to start on 1 July 2020 but these will be delayed by at least six months.1
To help you plan, we’ve identified which changes apply now and which ones are likely to be delayed. This means you may have more time to prepare. We’ll
update this blog as more information comes to hand.

Initiatives already law

Initiative
What
When
More detail

Design and distribution obligations

Target market determinations for retail client products that have a PDS
Extensive distribution, record-keeping and reporting requirements

Changes will apply from 5 April 2021 but this has been delayed to 5 October 2021

Consultation period for ASIC Consultation Paper 325 Design and Distribution Obligations (CP 325) ended on 11 March 2020
Final regulatory guide will be published by December 2020

ASIC’s product intervention powers

Gives ASIC product intervention powers (PIP)
No PIP orders or instruments relevant to financial planning and wealth businesses have been issued

Commenced on 6 April 2019
No delay announced

Consultation period for Consultation Paper 313 Product Intervention Power (CP 313) ended on 7 August 2019
May not become a regulatory guide until after September 2020 unless ASIC believes there is risk of significant consumer harm if delayed

Initiatives likely to be delayed

Initiative
What
When

Enforceable industry codes

Allows ASIC to designate enforceable code provisions in financial services industry codes
Some of these codes will become mandatory
Breaching codes may attract civil penalties

Consultation period for draft legislation ended on 28 February 2020
Legislation expected to pass by December 2020

Ongoing fee disclosure and disclosure of lack of independence
Draft exposure bill requires:
Financial service licensees and their authorised representatives who provide personal advice to retail clients to include a statement in
the FSG that they are not independent (if applicable) and why; and
Financial service providers must:

Seek annual renewal from clients for all ongoing fee arrangements;
Disclose in writing the total fees to be charged;
Set out the services that will be provided during the next 12 month period; and
Obtain written consent to deduct fees from the client’s account under an ongoing fee arrangement

Consultation period for draft legislation ended on 28 February 2020
Legislation expected to pass by December 2020

New financial adviser disciplinary system
The Royal Commission recommended a new disciplinary system and single disciplinary body for financial advisers. 

A consortium of financial planning groups intended to fund and establish a code-monitoring body, however the Government terminated this
plan and will establish the new body.

No draft legislation has been released
The Government intends to establish the new body in early 2021, however we anticipate that this will be delayed until mid-2021 at the earliest
This means there will a Code of Ethics (we anticipate that this will come in from January 2021) but there will be no body to monitor compliance
with the Code

Breach reporting requirements;

Compulsory reference checking; and

Misconduct investigation and remediation obligations
A draft exposure bill for all of this legislation requires:

A compulsory scheme for checking references for prospective financial advisers;
Strengthened breach reporting requirements for licensees; and
Licensees must investigate misconduct by their financial advisers and appropriately remediate clients affected by the misconduct

Consultation period for draft legislation addressing all of these recommendations ended on 28 February 2020
Legislation originally intended to pass on 1 July 2020, but now not expected to pass until mid-2021

If you or your compliance team need help planning for these changes, get in touch – we’d
be happy to help.

Charmian Holmes, Simon Carrodus and Lydia Carstensen
May 2020

1See Treasury’s media release: https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/update-implementation-banking-superannuation-and; and also see ASIC’s media release “20-109MR ASIC defers commencement of mortgage broker reforms and design and distribution obligations” dated 8 May 2020.

As the Covid-19 pandemic continues (despite some restrictions now lifting), client portfolio transfers still need to get done. You can record your transaction
in a time and cost-efficient way with our easy to use, fixed price, customisable template.
Who can use the template?

Our Client Portfolio Transfer Agreement Template (the template) is available for a fixed fee and can be used by buyers and sellers, for:

financial planning and wealth portfolios; and
general insurance broking portfolios.

The template has been prepared in an easy to use format, that subject to the nuances of your transaction, needs minimal customisation. It includes:

standard legal terms and conditions including warranties and restraints;
customary provisions based on current market terms and deal trends including deferred/instalment payments and adjustments for lost revenue; and
a schedule that can be tailored to record the specific commercial terms for your transaction (as negotiated between the parties).

The template also includes 7 key provisions imperative in all portfolio transfer agreements in the current landscape.

1.  Conditions precedent
In these unprecedented times, we anticipate that more conditions will be imposed on transactions, exponentially increasing the risk of deal completion.
This makes it more important to be clear about:

what each party’s obligations are and how to satisfy or waive conditions;
whose benefit conditions are for;
what happens if conditions are not satisfied or waived; and
what happens if there are delays or the timeframes for completing the deal expire.

2.  Pushing the timeline out
In the current landscape you may want to push out the timeline between execution and completion. Desirable on the grounds that waiting may give you more
certainty as to the value of the transaction, your ability to transition the clients of the business and people, and that funding will be available
(whether that be debt or equity).

But doing so, also exponentially increases the risk of deal completion. A delay can be triggered by a ‘material adverse event’ (like the pandemic or a
second wave of coronavirus). You need to be careful how you define a ‘material adverse event’ because use of this clause may allow the buyer to terminate
the deal without material consequence.

A ‘material adverse event’ could be something that:

affects the buyer’s ability to retain clients following completion;
results in the failure to pass good title;
affects the financial performance of the client portfolio; or
reduces recurring revenue by a set percentage (such as 5%). As there is currently greater volatility in their book, sellers will obviously want to
push this percentage up as high as possible.

3.  Purchase price adjustments for recurring revenue transactions
With Covid-19 continuing and speculation as to a second wave, we will no doubt see conjecture over what is an adverse event and material and the basis
for adjustments to purchase price due to declines in client revenue.

For insurance brokers, restrictions on their ability to earn revenue in the period after completion might occur as insurers offer further Covid-19 relief
packages to insureds which allow them to delay the payment of premium and commissions. For financial planners, their ability to recover fees from clients
may be constrained if they need to support clients by offering more favourable payment terms or a pause on fees (or extension to already agreed pauses)
to enable them to continue to access financial advice during this period.

Even once the pandemic is contained, clients will continue to need professional financial advice on their investments and insurance, so a clear understanding
about what is fair regarding adjustments to purchase price between buyers and sellers is vital, until the full extent of the economic fallout from
the pandemic is known.

Our template contains a number of options for adjustment to the purchase price based on the retention of client revenue. It also allows for a rise and
fall to the purchase price.

4.  Securing payment of subsequent instalments
Historically payment for many deals has been structured on an instalment basis, a trend we expect to continue. It’s now common to see instalments of 50/50
or 60/30/10 spread over 18 to 24 months.

Where a substantial amount of the purchase price will be paid after completion, there is a risk to sellers that the buyer could default on payment. Our
template includes 3 forms of protection that a seller can ask for:

Escrow Account: This is where the buyer deposits funds (normally equivalent to the further payment(s) into a bank account held in
the joint names of the buyer and seller.
Deed of Grant of Security Interest: This provides the seller with an interest they can register under the Personal Property Securities Act 2009 (Cth). This means they’re protected if the buyer is declared bankrupt, becomes insolvent or has another type of financial default and cannot
pay the entire purchase price. If this happens the buyer cannot sell the client data to a third party and the seller can essentially regain ownership
of the client data they need to service their clients transferred back to them.
Bank Guarantee: To make sure they can pay the full purchase price, the buyer can provide a bank guarantee issued by an Australian
bank.

For more commentary on managing the risk of financial recovery, see my recent blog.

5.  Warranties
Following the Royal Commission, buyers have become more vigilant about the quality of the portfolios they acquire. They’re asking for better representations
and warranties that cover things like the quality of the financial services provided to clients and the accuracy and usefulness of the client data
that is being acquired. For more commentary on this see my earlier blog.

Sellers now also expect buyers to give warranties around their capacity to contract, complete and pay.

6.  Limiting liability
As discussed in my blog,
buyers will want to extend the seller’s liability to maximise their protection and recourse. It’s important for sellers to limit their liability. 
Our template includes optional provisions on:

the maximum cap on warranty claims;
the minimum threshold for warranty claims; and
setting a definite time frame in which all warranty claims must be notified to the seller.

These provisions protect the seller from:

having unlimited liability;
being liable for small and immaterial warranty claims; and
having to indemnify the buyer for an unlimited period of time.

Sellers should include these provisions to give them certainty around their risk and exposure after completion.

7.  Professional indemnity insurance
To protect themselves and clients, buyers should require sellers to maintain professional indemnity insurance. This should cover professional negligence
claims brought by clients after the transaction is completed but that relate to financial services provided by the seller. It’s particularly important
if the seller:

is leaving the industry or is no longer carrying on a financial services business; or
may not have sufficient financial resources to meet claims brought by clients after completion.

Ideally, the insurance should be in place and in run off for a period of up to 7 years after the completion date to pick up most professional negligence
claims that can be brought by clients.

Sellers should make sure that the agreement includes:

how long they must maintain the insurance for; and
that the insurance must be relied on first before the buyer can seek indemnification direct from the seller (subject to the seller paying the excess
on the policy).

Before agreeing to any professional indemnity clause, sellers should speak to their broker or dealer group as the insurance market will probably continue
to harden because of Covid-19.

8.  Protective (restraint) covenants
To protect the goodwill in the portfolio, the buyer should make sure the seller can’t compete with them. This is important regardless of the story behind
the sale as the seller may decide to re-enter the industry.
It’s essential that buyers protect themselves by including a right to:

seek compensation for losses caused; or
get an injunction if the seller breaches the restraint.

All of these provisions are included in our template. You can view a sample of it here.

While our template does give you guidance, if you’re unsure about what you should agree to or have further questions – get in touch.
If your transaction documents need customisation, we can also help with a legal review and bespoke drafting.

Katie Johnston
May 2020

Design and Distribution Obligations (DDO) will be imposed from 5 April 2021. While a number of legislative reforms have been delayed due to the disruption from the global Covid-19 pandemic, this legislation has been passed and may not be delayed.

Business may have slowed down, but that may be a blessing in disguise – there’s 12 months for the industry to become compliant with the new DDO regime,
and we expect that product issuers and product distributors will need every minute of it.
What is DDO?

In April last year, the government passed legislation implementing the DDO regime. The purpose of the DDO is to ensure that consumers
are not at risk of purchasing products that are inappropriate for their needs, financial situation, and objectives.
To achieve this, the DDO imposes separate obligations on both product issuers and product distributors, relating to the design of the
product and its subsequent distribution to retail consumers.
The next few months will be uncertain, but what is clear is that when everyone recovers, consumers will still need quality insurance products that are
tailored for their needs. So how can you use the coming months to prepare for these changes?
Step One – Conduct an inventory of affected products

The first step for you, either as a product issuer (i.e. insurers and underwriting agencies) or a product distributor (i.e. authorised
representatives and general insurance distributors) is to review the general insurance products you offer and confirm whether the DDO will actually
apply.
The regime applies to any general insurance product that requires a Product Disclosure Statement (PDS) and which is in existence as at
5 April 2021, or created after this date. This analysis may result in a decision about whether to maintain the current number of affected products
or reduce the products you intend to offer in 2021.
Step Two – Work out your obligations and begin your project plan

Separate parts of the DDO regime apply to product issuers and product distributors.
A Target Market Determination (TMD) must be prepared for each affected product. The person who is responsible for preparing the PDS should
prepare the TMD (generally this will be the insurer or an underwriting agency who is the product issuer). TMDs need to have certain information about
the product but importantly they must identify the target market for the product.
Product issuers must ensure that:

the TMD is easily available to the public and product distributors, free of charge;
they can take reasonable steps to ensure that affected products are distributed in accordance with the TMD, including when it is sold through a distributor;
they can take reasonable steps to comply with the TMD;
the TMD remains appropriate and they take any necessary actions when a review trigger has occurred;
they can keep complete and accurate records of their decisions (and reasons for their decisions) for:

(i) all TMDs for the affected products;
(ii) review triggers;
(iii) review periods;
(iv) the content and distribution requirements for each TMD; and

they can and do report significant dealings to ASIC.

Product distributors are required to:

not distribute an affected product unless they reasonably believe that a TMD exists for that product (or one is not required);
distribute an affected product in compliance with its TMD;
keep complete and accurate records of certain information, including complaints and sale outcomes;
provide any necessary information to product issuers by the relevant timeframe; and
report significant dealings in a product which are inconsistent with the TMD to the product issuer.

Step Three – Map out, test and implement your product governance framework
Beyond drafting a TMD, issuers and distributors will have to work together to build out the technology and other systems (including
record-keeping) to communicate and report to each other and to monitor whether sales are in compliance with the TMD or not.
Product issuers and product distributors have 12 months to plan and to develop a ‘product governance framework’. A ‘product governance framework’ is ASIC’s
term for the systems, processes, procedures and arrangements that a product issuer and product distributor need to comply with the DDO regime.
For product issuers, this will include:

communicating information to product distributors;
developing and delivering training for staff (of both product issuers and product distributors);
monitoring and supervising product distributors’ compliance with TMDs;
creating a review calendar;
periodically reviewing TMDs;
monitoring the occurrence of review triggers; and
recording all decisions in relation to TMDs.

For product distributors, this will include:

reviewing TMDs and understanding their obligations;
reviewing their distribution channels to confirm that they are compliant;
collecting and recording relevant information; and
communicating information to product issuers.

As part of this, product issuers and product distributors will also need to:

vary their agreements to incorporate the necessary provisions for both parties to comply with their DDO;
review their websites, promotional material and online sales platforms; and
confirm whether their IT systems can help facilitate compliance with the policies and procedures required for the DDO regime.

In this digital (and remote working) world, many product issuers and product distributors will have systems in place to supply information and documents
to consumers electronically (e.g. using email delivery, hosting documents on your website or customer access to an online portal) and to sell the products.
Product issuers and product distributors should review these systems to identify whether they can be adapted to support the compliance requirements
for DDO.
Take action as early as you can
There’s a lot to be done and less time than you might think. Our DDO Whitepaper is available here and contains more guidance on what the DDO regime means for you and how to prepare for it.
We can work with you to provide a detailed and customised roadmap that will help you understand the relevant requirements and project manage your DDO project.
Get in touch – we’d be happy to help.
Julie Hartley and Lydia Carstensen
April 2020

So you’ve got an awesome idea, MVP or full product/service offering and are eager to disrupt the market… but don’t know how you’re regulated or
how to comply?
I’m not surprised! The Australian regulatory landscape is complex and can favour incumbents and the big end of town. Start-ups often find regulatory requirements
confusing and an impediment to challenging the status quo and doing things better, different, faster and in a more customer-centric way.
It can all seem bigger than Ben-Hur at times. Don’t fear – this blog has your back! It looks at the two things you can do from a regulatory perspective
to narrow down what requirements apply to you and ensure you comply on day 1.

Step 1: Access expert knowledge

There are some places you can access expertise:

Your local start-up community: Incubators, hubs and VC funds have broad and deep experience in the fintech space. They may also know
whether your business may be regulated and who you can contact for help.
ASIC Innovation Hub: While they can’t tell you whether your business will be regulated, the ASIC Innovation Hub can point you in the
right direction. This may involve directing you to the relevant ASIC guidance, which is helpful but only takes you so far. Why? Because most ASIC
guidance requires you to make a judgement call about whether it applies to your situation. This often requires specialist legal or compliance expertise.
APRA and AUSTRAC: These regulators don’t have dedicated fintech hubs but they can give you helpful guidance on regulatory requirements
and compliance.
Specialist lawyers and compliance experts: While they’re not usually the first port of call, specialists can help you work out whether
your business is regulated and how. The earlier you bring them into the fold the better as their advice can shape your offering and go to market
strategy. By advising you on what regulations apply and what strategies will work best for your business, you can avoid having to make major changes
to your business structure, product/service model and distribution channel.

Step 2: Know your options

If your business will be regulated and needs a regulatory licence, approval or registration, you have a number of options:

1.  Get your own licence: This option gives you the greatest flexibility and control but can be quite costly and time consuming.
The application process can be quite finicky and detailed. It can also take up to 6 – 12 months to get an Australian financial services licence (AFSL)
and 4 – 6 months for an Australian credit licence (ACL).
2.  White label someone else’s product: Partner with an incumbent and act as their distributor. You may need to be appointed
as a representative or access some other option. This option works well for banking, insurance and super products. It’s also a fast way to market with
minimum regulatory investment. The main con is that you may find an incumbent’s regulatory framework is not fit for purpose and can be quite onerous.
This can be a challenge if you’re looking for a healthy risk appetite, agility, autonomy and flexibility.
3.  Become a representative: This is where you act on behalf of someone who already has a licence. It can work for both financial
services and credit but the mechanics work slightly differently. Similar to option 2, this doesn’t provide you much flexibility and relies on a helpful,
resourceful and clued up licensee.
4.  Access an exemption: There are some exemptions for financial services and credit activities. For example, the intermediary
authorisation which is available to product issuers dealing through someone else who holds an AFSL. These exemptions may let you establish your business
and build experience and momentum before getting your own licence.
5.  ASIC Regulatory Sandbox: Recent changes have expanded the scope of the regulatory sandbox. They allow fintechs to test certain
products and services without needing to hold an AFSL or ACL for a limited period. To date, this option hasn’t been used much. Hopefully, the recent
expansion will change this. A couple of caveats with this option: First, it isn’t a long term solution. It is designed for testing. So if you’re looking
at alpha or beta testing, this option may work for you. If you’re looking for a longer term solution, this is not it. Second, it also has limited utility
– not all products/services are covered and there are financial exposure and customer limitations that will limit activities and may impact your product
lifecycle and funding runway.

The regulatory space can be tricky for start-ups. It would be great if it was designed to encourage and foster self-help, but we’re not there yet. In the
meantime, regulatory geeks like us can help you work out if and how your business is regulated so you can get to market quickly and seamlessly. If
you’d like help getting your start-up to market, get in touch. We’d be happy to help.

Michele Levine

March 2020

Mortgage brokers must meet the best interests duty from 1 July 2020 or risk a fine of 5,000 penalty units or $1.05 million.This means you must show you
have your client’s best interests at heart.

Who is a mortgage broker?

A mortgage broker:

is either a licensee or credit representative;
carries on a business of credit assistance in relation to credit contracts secured over real property;
offers these credit contracts for more than one credit provider; and
does not perform the obligations or exercise the rights of a credit provider.

Essentially, they offer credit products from more than one provider to individuals purchasing a home, investment or commercial property.

From 1 July, mortgage brokers must act in the best interests of their client. This means they must put their client’s interests above their own.

How do I act in my client’s best interests?

Mortgage brokers haven’t been given the benefit of a “safe harbour” test – that means there are no steps you can follow to make sure you definitely meet
your best interests duty. Instead, you’ll need to decide what actions to take for each individual client.

However, ASIC’s draft guidance identifies some things you can do:
1. Gather information

To determine what your client’s best interests are you must ask them questions about their needs and personal situation. As you find out more about
your client, you may find that the credit assistance they need changes.

If you don’t get all the information you need, you may not be able to act in their best interests and therefore shouldn’t act for them.

2. Make an individual assessment

When making an individual assessment of your client’s needs and best interests, you should consider:

their objectives;
their priorities and preferences for different products and providers;
their personal circumstances and financial situation and if these may change in the reasonably foreseeable future;
whether the loan has features that meet their needs and requirements;
if any features of the loan are inconsistent with or are unnecessary to meet their needs and requirements;
if they have multiple needs, the relative importance of these;
if some of their needs or objectives are inconsistent, how you will resolve this conflict;
the term and structure of the loan compared to their needs;
the lender’s credit policy and risk appetite;
the interest rate, fees and charges;
their understanding of the product; and
if switching products, is it in their best interests.

You should also consider whether you have access to the products, ability or expertise to make recommendations that meet your client’s requirements.

3. Consider cost

You must consider the cost of the product you’re recommending to a client but it is not the sole, or even in some cases, the most important factor. However,
failure to consider it at all will be a breach. For example:

If you recommend a loan that costs more than another that would meet their needs, you must support your recommendation with strong evidence as to why
they needed that loan.
Don’t just consider the interest rate or comparison rate. Consider other features, like an offset account, that may give the client substantial savings
and make the loan cheaper or otherwise meet their needs.
When refinancing, consider if the costs of refinancing exceed the cost savings of the new loan.

4. Consider other factors and product features

In your overall assessment, consider non-cost features as well. This includes features that may:

realistically offer the client a net benefit; and
be irrelevant to the consumer. For example, a fixed rate loan may not be suitable if it has a substantial break fee and the client wants flexibility.
Similarly, offset accounts may offer limited benefits to a client who doesn’t have large account balances.

In some situations, non-cost factors will be highly relevant. For example, if the loan is approved quickly for a time-sensitive transaction. In cases like
this, ASIC will expect you to substantiate your reasons.

5. Present your recommendations

Once you’ve assessed which options are in your client’s best interests, you must explain it to them. It is helpful to do this by presenting them with a
shortlist and one recommended option. ASIC’s view is that you should always present more than one option, but sometimes this isn’t possible, such as
where the client is credit-impaired and has limited choices.

When presenting your recommendations:

clearly articulate how your recommendation will achieve their objectives and is in their best interests; and
make sure you have explained and they understand why:

(i) you selected these options;

(ii) other options have not been presented;
(iii) a particular option is recommended; and
(iv) if all options are with the same credit provider, why this is so.

After you’ve presented your recommendation, your client may decide some product features are more or less important. This may mean that you need to re-consider
your recommendations.

It’s important to challenge your client’s needs and requirements

Sometimes a client may not want a particular product even though you believe it’s the most appropriate for them. For example they:

want to use or exclude a particular lender regardless of competitiveness; or
want a feature that isn’t suitable for them, like an interest-only loan or an expensive offset account.

In these situations, explain to your client why the product is detrimental or poor value and offer them an alternative. This helps them make an informed
decision. If they still want a product that’s not in their best interests, they can choose it and you can help them with their loan application, but
make sure you document the discussion.

Providing credit assistance

After you’ve given the client your recommendations., you must continue to act in their best interests when helping them apply for their loan. Misrepresenting
your client, even if this improves the chance of their loan being approved, will always be a breach of your best interests duty.
ASIC is consulting on their guidance for mortgage brokers’ best interests duty until 20 March 2020. If you need help understanding your best interests
obligations or want to make a submission to ASIC, please contact us. We’d be
happy to help.

Jaime Lumsden

March 2020

A group purchasing body (GPB) arranges or holds insurance or risk cover for its members. They don’t have to meet some legal requirements (like holding an AFSL) but with these benefits come certain constraints.

What do GPBs do?

A GPB is anyone who arranges or holds insurance or risk cover for its members provided they don’t give financial product advice or issue insurance products.
For example:

industry associations;
clubs;
sporting groups;
corporate groups; or
buying groups.

GPBs may:

arrange a master policy, group policy or individual policies on behalf of its members; or
pool contributions from members to buy protection for them.

Generally, businesses need to be appointed as an authorised representative or be licensed to provide these type of services. But ‘eligible’ GPBs don’t
have to meet some legal requirements.
Who is eligible?

A GPB is eligible if they don’t have an Australian Financial Services Licence (AFSL), or have a limited AFSL, and they:

provide financial services to a member incidentally to another relationship they have with the member; and
do not carry on any business in order to make monetary payments to members.

If the GPB does have an AFSL (but not a limited AFSL) or is an authorised representative, they are eligible if they only arrange or hold insurance or protection
for their officers, employees or their relatives.
What relief do GPBs receive?

Eligible GPBs are not required to:

have an AFSL;
be appointed as an authorised representative or general insurance distributor;
register as a managed investment scheme;
meet the retail client disclosure requirements; or
meet the statutory trust accounting rules.

There are many restrictions attached to this relief

While this sounds good, it comes with many restrictions. For example, GPBs can’t earn a profit and can only receive some very specific financial benefits
for arranging the protection (like payment for the reasonable costs of providing the services and rebates for expenses they incur). GPBs are only able
to recover their legitimate administrative costs and this means that they are not able to ‘average out’ their costs, eg estimate their costs and charge
a fee for that amount to their members.
GPBs must also meet several stringent requirements including:
1. They must establish a facility to allow each member to confirm that the group policy has been issued and remains current.
2. If the protection will not apply for the period represented (including where it is cancelled or not renewed), they must:

take reasonable steps to notify each group member (unless the product issuer does so or substantially similar protection applies instead); and
compensate group members who suffer loss for the GPB’s failure to notify the member.

3. They must provide information and statements to group members as soon as possible after a group member has access to the cover, including:

factual information about the nature of the cover, including the GPB’s role and the period for which the cover will apply;
details about the amount payable to obtain cover (in dollar amounts and separately identified from other amounts payable);
information about any rebates they will receive when arranging the cover including amounts or a description of how those amounts are calculated;
a statement that the GPB will ensure a copy of the terms and conditions of the cover will be supplied (without charge) within a reasonable time after
the member’s request;
information about how to access the facility to confirm the cover has been issued and remains current; and
a statement that the GPB does not hold an AFSL (or holds a limited AFSL) and the group member should consider obtaining financial product advice about
the cover (where the GPB is not an AFSL holder).

What are the alternatives?

Because of these restrictions GPBs may be better placed to partner with an AFSL holder as an authorised representative or general insurance distributor.
As an authorised representative or general insurance distributor the GPB may be able to:

agree a more flexible or lucrative commercial relationship with the AFSL holder;
‘white-label’ the insurance if they’re an authorised representative. This means they can offer the product under their own branding; and
earn profits or benefit financially from providing these services as long as they tell their members.

If insurance is mandatory then there may be another option

Soon a deferred sales model will apply for add-on insurance products that are sold to retail clients. This means that a GPB will have to wait four days
before offering a member an insurance product that is usually sold alongside another good or service. A GPB may avoid this if the insurance is not
offered separately (by opting in) but is instead bundled as part of the benefits of membership.
For example, a sports club could:

give all its members personal accident insurance as part of their membership; and
include the cost of the insurance in its membership fees.

Then it wouldn’t need to wait four days to offer members the insurance and the GBP could access the relief outlined above. This would help to minimise
the impact of regulation on the group’s arrangements.
A word of warning

The current GPB relief may be replaced soon. ASIC indicated that they would consult with the industry and other stakeholders in 2019 and decide what changes
were required by the end of 2020 but this hasn’t happened yet.
ASIC also hasn’t updated or replaced Regulatory Guide 195 (group purchasing bodies for insurance and risk products) since 2010, so it can’t be relied on.
In other words, things could change.
If you’re considering offering protection to your members or want to know how to structure your group purchasing arrangements, get in touch.
We’d be happy to help.

Lydia Carstensen

March 2020

After two separate consultation papers on the deferred sales model (DSM) for add-on insurance, Treasury has released an exposure Draft Bill, exposure Draft
Regulations, an Explanatory Memorandum and an Explanatory statement.
In our latest blog in our Royal Commission
Response series with Finity we explore what we know about the DSM for add-on insurance (assuming there are no substantive changes to the Exposure documents).
If you need advice on how to prepare your business for the changes – get in touch,
we’d be happy to help.

Finity is a leading consulting firm with deep domain expertise in the general insurance sector. With actuarial, claims, risk, operations and strategic advisers, along with a cadre of data analytics specialists, the firm has become a trusted adviser to many insurers in the Australian market. Highly regarded for understanding of each client’s business and providing actionable, management-oriented advice. Finity was awarded the Insurance Industry’s Professional Services Firm of the Year in 2018. www.finity.com.au

Jaime Lumsden; Lydia Carstensen; Raj Kanhai (Finity)
February 2020

We’re well into 2020 and the FASEA Code of Ethics (the Code) is currently in force. What should advisers and licensees be doing to make sure they comply with the Code?

The Code came into effect on 1 January 2020. To make sure we’re all on the same page, I’ve answered some FAQs.

I am an AFS licensee, does the Code apply to me?

No. The Code applies to individuals not companies. But AFS licensees must take reasonable steps to ensure that their advisers comply with financial services
laws and this includes the Code.

Who is monitoring and enforcing the Code?

AFS licensees are responsible for monitoring that their advisers comply with the Code. There is no external organisation monitoring the Code (yet).

Isn’t there a Code monitoring body?

Treasurer Josh Frydenberg has said that the Government will establish a new body to monitor the Code in early 2021, but this depends on the passage of
legislation through Parliament. So in reality a Code monitoring body might be 18-24 months away.

Isn’t ASIC monitoring and enforcing the Code?

No. ASIC has made it clear that it is not their role to enforce the Code, but they do monitor AFS licensees.

What about AFCA?

AFCA made a statement that it will take a “measured and considered approach” to interpreting the Code’s provisions until a monitoring body is established.
In other words, advisers have some breathing space.

No man’s land

Even though the Code came into effect on 1 January, the consultation process is not yet complete. In late 2019, FASEA conducted consultation sessions and
accepted submissions from licensees, educational and industry bodies, advisers and consumer groups.

Many hoped this process would result in a re-drafted Code that would clarify the major points of confusion. Second on the wish list was a re-drafted guidance
document. No such luck.

Instead, we have a “preliminary response to the submissions” (i.e. more guidance) and the promise of a “further detailed response” later in 2020.

We are in a phase of ‘facilitative compliance’. This means that no regulatory action will be taken provided licensees take reasonable steps to ensure their
advisers comply with the Code. This means licensees should:

Review their policies;
Update systems;
Provide training and guidance about the Code; and
Monitor their adviser’s compliance with the Code.

This is in recognition of, as ASIC put it, “…the timing of the guidance provided by FASEA… and the evolving industry understanding about
the meaning and implications of the Code.” In other words, the Code is technically in effect but it’s in such a state of flux that it would be unfair
to punish an adviser for not complying with it.

Wood for the trees

Putting aside the shortcomings of the wording used in the Code and its related guidance, the principles and themes of the Code make it clear what FASEA
is trying to achieve. FASEA wants advisers to put their clients’ interests first and manage any potential conflicts of interests so that they don’t result in poor client outcomes like those exposed by the Royal Commission.

Sound familiar? It should. The Corporations Act already requires advisers to:

Avoid conflicted remuneration;
Prioritise their client’s interests;
Act honestly and fairly;
Provide appropriate advice; and
Act in the best interests of each client.

If you’re already doing (and adequately documenting) these things then you shouldn’t be worried about complying with the Code.

What should I do now?
You have until sometime in 2021 to adapt and enhance your compliance framework. You should use this time to:

Educate your advisers about the Code;
Review your best interests duty policy and guidance;
Update your product replacement policy, paying particular attention to in-house or related-party products and services;
Review your referral arrangements, in particular the referral fees you receive for outbound referrals;
Review your SOA template and APL policy to ensure they don’t restrict advisers from complying with the Code;
Review your guidance on scoped/scaled advice to ensure that advisers are not inadvertently scoping out topics that a client needs advice on; and
Identify clients who have not yet provided clear consent to the fees that you receive.

We have helped many advice firms adapt to the new regulatory environment. If you’d like advice on how to future-proof your business, please get in touch.

Simon Carrodus

February 2020

Payments are a central part of everyday life but the regulations that govern them are complex. If Australia is to be a leader in the fintech space, it’s
time for a holistic review of our regulatory framework for payments.
Digital payments are on the rise

Every purchase or sale we make requires some form of payment. With an increasingly digital native population and the globalisation of marketplaces, we’re
seeing a move away from cash to digital payment options. Payments, wallets and supply chain related services are now the 4th largest sector by fintech
type and account for 17% of the Australian fintech industry according to the EY FinTech Australia Census 2019.

In the past 5 years, we’ve seen a proliferation of technology in the payments space including:

Buy now pay later products (like Afterpay, Zip, Latitude and Open Pay);
Digital wallets (Apple Pay, Samsung Pay and Android Pay);
Real-time payment applications (Beem It);
Global payment platforms (Airwallex, OFX and Transferwise); and
Crypto tokens (Bitcoin and Ethereum).

Central banks are even considering digital currencies with Sweden assessing the case for an e-krona. We are also seeing large tech companies launching
stable coins e.g. Facebook’s Libra.

Regulation of the payments ecosystem is overly-complicated

The regulation of payments in Australia is fragmented and complicated. There are 3 different regulators that supervise discrete aspects of the payments
ecosystem:

Reserve Bank of Australia (RBA): Regulates credit and debit payment systems and some aspects of purchased payment facilities.
Australian Prudential Regulation Authority (APRA): Regulates banking activities and purchased payment facilities.
Australian Securities and Investments Commission (ASIC): Regulates non-cash payment facilities.

Unfortunately, these regulatory regimes do not neatly dovetail into each other. In some cases, they also rely on outdated guidance that doesn’t necessarily
make sense in a digital world.

Our complex regulatory regime makes it difficult for new entrants like fintechs to challenge the status quo. In our experience, fintechs also often aren’t
aware of all the regulatory requirements that apply to payments and what it means for their technology and business.

Given the important role payments play in our economy and for fintechs, our regulatory landscape needs to be re-designed.

It’s time for the regulatory system to change

There has been some progress in this space with the Council of Financial Regulators conducting a review of retail payments regulated in relation to stored
value facilities in September 2018. It covered purchased payment facilities, non-cash payments facilities and the interaction between the 3 regulators.
Key focus areas were:

Regulatory simplification, transparency and clarity;
Ensuring technology neutrality and future proofing; and
Promoting innovation and competition whilst balancing consumer protection and system robustness.

The review has been completed but the report has not yet been released to the public. Watch this space!

In addition, the RBA released an issues paper seeking feedback on retail payments regulation in Australia in November 2019. The paper outlines recent developments
in the space, the RBA’s regulatory actions, global reforms and key issues to consider to enhance competition and efficiency in the designated payment
schemes.

Hopefully, the combined outcome of both reviews is that a broader, considered and measured review of payments in Australia is completed to ensure we have
a regulatory framework for the future. In my view, key to achieving this is asking these questions:

Should there be a single dedicated regulatory framework for payment systems?
Should there be a single dedicated regulator for payment systems?
Should the regulatory mandate promote competition and innovation and how should this be balanced with consumer protection?
How should the payments regulatory framework be designed to cater for future developments that we haven’t contemplated yet?

Given the fast paced changes and global competitiveness in the payments space, the quicker we solve this the better. Hopefully, the Senate Select Committee
on Financial Technology and Regulatory Technology will pick this up as part of their inquiry. Submissions closed on 31 December 2019.

I believe Australia can build a best in breed regulatory framework for payments by drawing on the experience of other jurisdictions, like the United Kingdom.
In the meantime, you can rely on payment geeks like us to help you navigate the payments
space.

Michele Levine

February 2020

The Government will introduce a Compensation Scheme of Last Resort by the end of this year. You have until 7 February 2020 to submit your views on how
it should work.
The new Scheme will compensate the consumer or small business if AFCA makes a determination for compensation that is not paid. The Government is considering
whether, in time, the Scheme may also provide compensation for unpaid court judgments or tribunal decisions. Also under consideration is who should
pay for the Scheme and what it should cover.
What feedback can you give?

Who should it cover and who should pay – Should it be all AFCA Members, or just non-APRA regulated firms like financial advisors and
investment services and credit services?

The discussion paper considers whether the scheme should have a narrow coverage and be restricted to financial advice failures. It notes that the Ramsay
Review found that the largest share of unpaid determinations was from financial advice, with a significant share also from investments, and a lower
portion from credit.
Alternatively, the scheme could cover distribution services (including the provision of financial advice and brokerage services), investment services
(including services relating to investment in securities, managed investment schemes and derivatives) and/or credit provided to consumers and small
businesses. An argument for this is that there is evidence of unpaid compensation in all these areas, while an argument against is that it may
not be clear to consumers whether the services they receive are covered.
The broadest coverage would be to cover all AFCA members. This allows unexpected claims costs to be met by a wider range of members, while on the downside
it would also cover prudentially regulated firms who are at low risk of not paying a determination.
It seems reasonable that all AFCA members should pay for and be covered by the scheme, except perhaps prudentially regulated entities, given the higher
level of regulation applied. However, voluntary members should be included in the scheme, otherwise there is less reassurance to consumers that
determinations will be paid. This ensures that unpaid decisions made by AFCA are covered, while not penalising members unlikely to need the scheme.

Who should pay more, who should pay less – Should financial advisors pay more or should the levy be even? Could the levy be unaffordable
for smaller firms?

The paper considers whether to cost the scheme at a financial service class level e.g. the levy is determined by reference to the services a firm is
authorised to provide, without reference to whether that firm actually provides the service, or how frequently it is provided, or if it has ever
been provided non-compliantly. This would be simpler but the question is then whether to apply a levy for administrative costs evenly plus a levy
based on the risk level of services provided by the firm e.g. for the higher risk associated with providing personal advice. It notes that a risk
based funding model may make it unaffordable for smaller financial firms and result in increased costs to consumers.
The paper also asks whether the funding model should be based on a firm’s ability to pay e.g. based on market share at an individual firm level or
a financial service class level.

What unpaid decisions should it cover – Should it just compensate for unpaid AFCA determinations, or also unpaid court judgments
and tribunal decisions? This question flows on to deciding whether there should be compensation limits.

Any extension of the scheme to court and tribunal decisions would need to consider how this increases the levy cost and what it means for affordability.
What is not up for debate?
We know from the discussion paper that:

The Scheme will be operated by AFCA.
It will be industry funded – although it is open to discussion as to who in the industry will contribute.

The Government is seeking your feedback on the discussion paper by 7 February 2020.
If you have any queries or need assistance in making a submission, get in touch – we’d
be happy to help.

Chris Deeble and Nicholas Pavouris

February 2020

A well-drafted term sheet can save time and money when negotiating a sale agreement.
Why do you need a term sheet?
Term sheets are an important step to include in your transaction timeline. They set the foundations upon which the transaction agreement is based. It can
prevent a transaction from falling over, by giving the parties a clear understanding of the important commercial terms and a roadmap for the deal to
follow. They provide certainty around key dates, which conditions will be satisfied and when the deal will be completed.
By taking the time to document each party’s essential terms, you can thrash out any issues that will be a deal-breaker early on.
A term sheet also makes it difficult for key commercial terms to be renegotiated later, because anything in writing is difficult to refute.
When should you enter into a term sheet?
A term sheet should be drafted and signed once you’ve had the commercial discussions and agreed the critical and major terms of the transaction. Doing
this before getting the lawyers to prepare the transaction documents gives clarity on what should be included in those documents.
Are term sheets legally binding?
Generally, term sheets are not legally binding but there are some exceptions which I discuss below. Even if they’re not binding, a term sheet is still
worthwhile because (as flagged above), they give you a clear understanding of the key commercial terms of the agreement before you start incurring
significant legal fees. If your intention is that the term sheet is not binding, it needs to be expressly stated that it is non-binding and not an
offer capable of acceptance. There have been cases where failure to do this properly has resulted in a tax liability for the seller.
What should your term sheet include?
Your term sheet should include all the obvious things like:

detail the purchase price and how it is calculated;
payment structure, including instalments (e.g. how much and when);
required conditions precedent (e.g. finance, offers of employment, etc.);
key completion deliverables (e.g. termination of contracts, assignment of leases, bulk transfer of clients and data transfer);
identify specific indemnities to be given;
limitations like financial caps and timeframes for warranty claims; and
restraints, non-compete/non-solicitation, including agreed periods.

Generally, all of the above terms will be drafted in the term sheet as non-binding.
Your term sheet should also include the following additional provisions:

Exclusivity: As you’re spending time and money, it’s important to lock the other party into an exclusive period where they can’t shop
around. Your exclusivity period should have a sunset date (which is when it expires) and this period should be binding on both parties. We usually
draft exclusivity periods to expire either on a set date or when binding transaction documents are signed, whichever is earlier.
Confidentiality: If you haven’t already signed a confidentiality agreement, then the term sheet should also include a binding confidentiality
provision operative before you share any information like financials or client data. The confidentiality provisions should also survive the expiry
or termination of the term sheet.
Reimbursement for transaction costs: If you intend to invest a lot of time and money in the transaction between signing the term sheet
and completing the transaction, then it’s worth including a binding reimbursement provision. If the deal falls over, which usually happens when
one party breaches exclusivity or terminates, then the breaching or terminating party must reimburse the other party’s transaction costs. This
would cover things like due diligence, legal fees incurred and integration planning costs. It’s recommended that you cap these costs in the term
sheet based on reasonable anticipated expenses.

If you’re considering entering into a transaction or want to draft a term sheet, we have an experienced team of transaction lawyers who specialise in financial
services. Get in touch, we’d be happy to help.

Katie Johnston

January 2020

Draft legislation on how ASIC will regulate claims handling has now been released by Treasury. Many businesses that handle and settle claims will need to be licensed as an AFS Licence holder or authorised representative by 1 July 2020.

In the latest blog in our Royal Commission Response series
with Finity we look at:

Who needs to be licensed;
Exemptions;
What further obligations apply;
Disclosure;
Timeframes; and
How to prepare for the changes.

If you need advice on how to prepare your business for the changes, get in touch – we’d be happy to help.

Finity is a leading consulting firm with deep domain expertise in the general insurance sector. With actuarial, claims, risk, operations and strategic advisers, along with a cadre of data analytics specialists, the firm has become a trusted adviser to many insurers in the Australian market. Highly regarded for understanding of each client’s business and providing actionable, management-oriented advice. Finity was awarded the Insurance Industry’s Professional Services Firm of the Year in 2018. www.finity.com.au
 Charmian Holmes,
The Fold Legal; Julie Hartley, The Fold Legal & Raj Kanhai, Finity
December 2019

Often the last thing on a Buyers mind when completing a new acquisition is the need to pay stamp duty. But pre-transaction, when buying assets such as a new client portfolio or book/list, stamp duty is assessed based on the location of the assets purchased and the purchase price paid.
Generally speaking, there is no longer a requirement to pay stamp duty on the purchase of shares in Australia in any State or Territory (noting specific
exceptions such as for land rich entities). Buyers are still required to pay stamp duty on purchases of “dutiable” property including goodwill and
assets in the Northern Territory, Queensland and Western Australia.

When is stamp duty triggered?
Buyers may not realise that often stamp duty needs to be paid outside the state in which they and the Seller operate their business.

There appears to be a misconception that if the Buyer’s business is principally located in New South Wales or Victoria (whether that is where the head
office is or where the majority of the assets or goodwill is located), then there is no need to pay any stamp duty. However, this is not how it works.

Stamp duty is paid depending on the location of the assets. For client portfolio purchases, this is the location of the individual clients. Therefore,
despite purchasing a client list from a Victorian Seller, duty may still be payable in the Northern Territory, Queensland and Western Australia, if
individual clients within the client book/portfolio purchased are located in any of these jurisdictions.

Along with other transaction costs, such as GST and legal fees, Buyers should factor anticipated stamp duty into the transaction costs before agreeing
binding terms.

What to do about clients with unknown locations?
If you have acquired an ‘orphaned’ client book with unknown locations/client addresses, be prepared to pay stamp duty at higher rates.

With ‘orphaned’ client books, it may not be possible to confirm client locations before completion. Whilst there are usually mechanisms built into the
sale agreement to protect the Buyer from paying for clients that don’t move across (such as clawbacks and price adjustments) the bottom line is that
these mechanisms cannot help the Buyer when it comes to stamp duty lodgement. All three Revenue Offices take a hard-line view: if there are unknown
clients in the portfolio, this will likely mean that stamp duty for those clients will need to be paid 3 times (once in each state).

Whilst there is the possibility to seek a refund for any overpaid duty at a later date, this is obviously not ideal. It can be a long, expensive and drawn
out process (amongst other considerations).

Taking steps to avoid this by making reasonable investigations to ascertain the client location during due diligence will avoid this.

When do I lodge, if I am paying by instalment?
The requirement to lodge is triggered on execution of the agreement and the lodgement timeframes are strictly enforced. This is despite the fact that often
in client portfolio purchases, the final purchase price won’t be known until the final instalment is made.

If a stamp duty assessment is lodged outside the requisite time, late fees and penalties will apply. Late lodgement fees and penalties will start accruing
between execution and completion and these fees will continue to accrue until the duty is paid. There is some scope to seek a more flexible approach
from the Revenue Office, however, as an initial step each Revenue Office requires you to make an initial lodgement in the timeframe and request a refund
at a later date.

Outline of the stamp duty lodgement timelines

State or Territory
Minimum value in that State/Territory before duty is required
Timeframe to lodge from execution

Queensland
$5,000
30 days

Northern Territory
$0
60 days

Western Australia
$0
60 days

What can you do to prepare?
Buyers should insist on receiving as much information as possible from Sellers and work quickly to identify where clients are located to minimise the duty
payable. This should be done as part of the due diligence investigations. At this time, the proportion of purchase price payable per client or location
can be confirmed (given the duty payable will be assessed against that number and overall purchase price).
What do you have to lodge?
All three Revenue Offices typically require past financial statements going back up to 3 years in order to make an assessment. However, given that for
the most part client portfolio/book purchases are based on revenue in a 12 month period, there should be no need to supply this extra information,
provided that the purchase price calculation and transaction is adequately explained in the lodgement submissions.
In order to avoid paying more than you need to, seek legal advice on the stamp duty implications before making any purchase and proceeding with any lodgements.
We can assist in handling stamp duty assessment including explaining to an assessor the rationale
behind a submission.
Nicholas Pavouris
December 2019

The Royal Commission recommended that Treasury lead a working group to develop an industry-wide deferred sales model (DSM) to be implemented as soon as possible.
The situation so far
Treasury released a Proposal Paper which proposed an industry-wide 4-day DSM with three tiers of regulation for add-on insurance. One tier includes the
use of the product intervention power to regulate the offer of high-risk add-on insurance. ‘Add-on’ insurance is sold alongside a primary good or service
(for example, selling extended warranty insurance to a consumer who purchases a motor vehicle).
Add-on insurance products, especially those sold through caryard intermediaries, have historically posed a number of problems including:

Pressure-selling;
Poor product-value;
Weak or reverse competition (where product providers compete for distribution, not customers); and
Consumer fatigue and disengagement.

ASIC then released a Consultation Paper as part of its product intervention powers which proposed exercising its product intervention powers to impose:

An immediate mandatory 4-day deferred sales period for all add-on products sold through caryard intermediaries;
Use of a consumer roadmap and additional information/metrics to assist consumers to assess the offer of an add-on product; and
Additional product design changes and restrictions for the sale of mechanical breakdown warranty products where a manufacturer’s warranty exists.

Industry-wide implications
Under the proposed DSM for add-on insurance sold in caryards, there will be increased compliance costs for businesses in:

Implementing new policies;
Training staff; and
Conducting monitoring and supervisory activities.

A DSM of 2 clear days was implemented in the United Kingdom for the sale of consumer credit insurance products. After the first two years of the DSM in
the UK, the Financial Conduct Authority evaluated the impact of their intervention including the DSM. Sales of add-on insurance products were reduced
(by approximately 16%) but not significantly, customers did shop around more and they purchased other products but the price did not decrease in line
with the FCA’s expectations.*

Until the full effect of other regulatory reforms is seen, product providers are wondering whether a DSM will be a ‘blunt’ instrument.

A shorter deferral period might give ASIC a chance to assess whether there are positive outcomes from the DSM or whether other recent regulatory reforms
to improve consumer outcomes are having a greater impact, including:

The ban on hawking insurance products;
The proposed cap on commissions paid to caryard intermediaries;
Design and distribution obligations including target market determinations;
The unfair contract terms regime to apply to insurance products sold to consumers.

A DSM appears to be a foregone conclusion. So what are some of the key challenges for add-on product providers and intermediaries?
Financing
Add-on insurance products sold with motor vehicles are often subject to finance.
A 4-day delay between purchasing a vehicle and confirming that the consumer wants to purchase an add-on insurance product means it can’t be included in
the finance application on the day the consumer purchases the vehicle.
Will financiers make allowances for the DSM so that consumers who still want to access finance, can do so for both their vehicle and the product at the
end of the DSM? If financiers do not support the sale of add-on products, more expensive options like premium finance and personal loans will reduce
affordability for consumers.
Direct sales
The DSM doesn’t apply to direct sales which means that a caryard intermediary can refer customers to a third party or call centre who will offer the insurance
directly and immediately. This will not be caught by ASIC’s product intervention – so some of the important consumer protections ASIC has proposed
to improve the quality of the product and give the customer information to make a purchasing decision including the consumer roadmap, restrictions
on the sale of some products (where the vehicle has a manufacturer’s warranty) and product design improvements will not apply.
Product metrics
Product providers selling add-on products in caryards may be required to provide metrics about their products to customers prior to a sale, including information
to customers about the claims loss ratio. This is intended to guide them in deciding whether the product provides value for money.
This is a legal minefield if there is incomplete or inaccurate information, or if each provider records the data differently. It is particularly problematic
if the product provider has limited data sets (i.e. they have not been offering the product for very long). It could result in misleading and deceptive
conduct if it is relied on by consumers to make a purchasing decision.
If ASIC was responsible for collecting and releasing this data at an industry level, this might ensure that the data is collected using consistent and
reliable methodologies and mitigate the risk that product providers might publish misleading information.
Commercial and educated/well-informed consumers
There is no ability for a consumer to end the 4-day DSM period early where they are purchasing an add-on product through a caryard intermediary (even though
Treasury has proposed an early opt-out for other types of add-on products). This means that even where the consumer is a small business user and has
done the research or is well-informed about the product and can make their own assessment, they must wait out 4 days to purchase.

An option to end the DSM period earlier seems a sensible outcome for those customers who understand what they are buying and who require the product quickly.
Best case scenario
When ASIC and Treasury finalise the draft legislation, it is important that consumer protection is balanced with consumer convenience.
If you offer add-on products and want to understand how the proposed DSM will impact your business, get in touch – we’d be happy to help.
*Source: https://www.fca.org.uk/publication/corporate/gap-insurance-intervention-evaluation-paper.pdf
Charmian Holmes, Jaime Lumsden, Lydia Carstensen

November 2019

In our final post in this series on insurance alternatives, we outline the ultimate peer-to-peer insurance alternative – discretionary mutuals.
What is a discretionary mutual?
A discretionary mutual is a structure that offers discretionary risk protection to its members.
Discretionary protection is similar to insurance because both offer protection against a certain event or risk (for example, damage to crops from hail).
However, the key difference is:

Under an insurance policy, the protected person (the insured) has the contractual right to have their claim paid (if the claim meets all the
policy terms and conditions);
Under a discretionary risk product, the protected person has the right to have their claim considered and for a decision to be made about
paying the claim (the exercise of discretion).

By the people, for the people
Discretionary mutuals are usually set up by industry or professional groups, or by businesses or corporate groups, to cover common or similar property
and liability risks. This is because:

Discretion to pay claims is often exercised by people with industry experience, who may be sympathetic to the person making a claim;
Discretionary risk products can be tailored by the mutual to provide industry-specific coverage quickly and easily, and may provide more extensive
benefits than would be available from the traditional insurance market;
Mutuals are often able to influence the risk management behaviour of their members in a positive way; and
Depending on the membership size, the board may be able to consult the mutual members before they make a decision or have members sit on the board.

Increasingly, mutuals are being used for ‘hard to place’ risks or uninsurable risks, or to improve the buying power of particular groups such as:

Industry participants who are not able to obtain insurance for their risks (for example, farmers in the agricultural industry);
Buying groups who are being charged high premiums but can demonstrate a low loss ratio and good claims history;
Buying groups with the technology to assess their risk and develop innovative and responsive products (which the traditional insurance market may be
slow to embrace);
Buying groups who are eager to manage their liability on a community basis and support their participants; or
Government or large corporate groups who want a high level of control over their protection and the ability to customise their program by increasing
discretionary layers and decreasing insurance and changing this from year to year to take advantage of the insurance cycle.

As an insurance alternative
Discretionary mutuals can be a good alternative because:

Discretionary mutuals are generally simpler and less expensive to set up and capitalise, and have a lower tax burden than an insurance company or captive;
The discretionary power means that the mutual can manage their exposures in terms of structuring the program to maximise their buying power for excess
of loss and stop loss/reinsurance;
There are tax advantages because GST is payable but income tax and insurance taxes like stamp duty are not; and
Mutuals can raise equity by issuing Mutual Capital Instruments (which are similar to shares) to investors.

This model is also popular because it is more flexible and allows for innovation:

The mutual doesn’t have to be fully-funded: claims can be partly paid, or even completely denied, due to lack of funds.
The mutual can arrange alternative payment methods: for example, Latevo Farmers Mutual,
a mutual covering multi-peril crop risks for Australian farmers, allows contributions to be paid partly in cash and partly by way of grain contracts.
A discretionary mutual can utilise a number of other innovative solutions, eg the discretionary mutual may have a parametric trigger and payment structure
providing a truly bespoke product for its members.

Discretionary mutuals offer a regulated financial product and the product issuer must have a ‘miscellaneous financial risk product’ authorisation on their
Australian Financial Services Licence. It is possible to employ a professional mutual manager who has the expertise and skills to manage the mutual
for the buying group and the appropriate licence authorisation.
A discretionary mutual must have a Product Disclosure Statement for members even if they are wholesale clients. There are different structures for the
mutual – companies limited by guarantee and trusts are the most common. A feasibility study is important prior to establishment because this is a long-term
solution for buying groups and needs to operate for 5 to 10 years for the true benefit to be experienced by the group. Establishment costs can be substantial
but maintenance of compliance requirements is substantially less after the first year.
If you’re considering a discretionary mutual and want advice on establishment, or would like to make sure you’ve got the right licensing arrangements in
place, get in touch – we’d be happy to help.
To download The Fold’s whitepaper on Discretionary Mutuals, click here.

Lydia Carstensen

November 2019
 

Aggregate deductible funds (ADFs) are becoming a more common type of insurance alternative for buying groups who are looking for new ways to manage their
risks.

What is an aggregate deductible fund?
An ADF is a self-insurance pool that is often used by corporate or community groups, religious institutions, sporting organisations or other groups of
buyers who have similar insurance needs. It requires the insured group to self-insure certain losses themselves by paying those losses out of a specific
fund.

ADFs are also used to subsidise insurance deductibles across the buying group, allowing them to reduce the cost of their insurance program by retaining
some of the losses. For example, a sports club may agree to self-fund claims up to $100,000 on its personal accident policy and then the insurer pays
any claims in excess of $100,000 (up to the limit of insurance). The first $100,000 is called the self-insured retention.

Are ADFs a regulated financial product?
If you are managing an ADF, you may be:

Dealing in a risk management product by arranging cover for other people;
Providing a custodial or depository service by holding a risk management product on trust for or on behalf of another person; or
Providing financial product advice.

These are financial services that are regulated under the Corporations Act and generally you must hold, or be authorised under, an Australian
Financial Services (AFS) licence to carry out these activities.

However, there are a number of exemptions you may be able to rely upon, depending on the structure of the ADF:

Group purchasing bodies relief: A body who purchases products to cover the group’s risks does not need to be licensed or authorised
where the product is ‘incidental’ to the group’s normal activities and the body is not a financial services licensee or acting as an authorised
representative and is not receiving remuneration for arranging the protection.
Incidental financial products: This exemption applies to any financial product that is offered as one component of a relationship/facility
that has other non-financial components.
Unregistered managed investment scheme: A managed investment scheme does not need to be registered if it has less than 20 members
or if it is promoted by a person who is not in the business of promoting managed investment schemes.

Groups/bodies who do not qualify for one of the exemptions may be providing a financial service, and will need to:

Obtain an AFS Licence; or
Be appointed under an AFS Licence (eg as an authorised representative).

A regulated ADF may also require:

Disclosure documents for retail clients;
AFCA membership; and
Professional indemnity insurance.

Sometimes it is impossible to structure an ADF so that it qualifies for an exemption, and it can be expensive and time-consuming to seek an AFS Licence.
However, you may be able to partner with a manager who holds a Licence.

Even where a group does qualify, you might also prefer to partner with a professional, where you require additional skills or resources. It is common for
ADF buying groups to partner with a broker to support the placement of the insurance program and to assist by helping with claims decisions, administration
of the fund and collections and payments for the group, for a set period of time to gain the necessary skills and qualifications to apply for an authorisation
themselves.

ADF Structure
Even if your ADF is not a regulated financial product, it is important to have a legal structure and appropriate governance policies and procedures. This
provides certainty to the members of the group and ensures that the ADF can be managed in a business-like manner.

For example, rules similar to those that apply to common or managed funds are useful, as they give all members of the group an understanding of their legal
rights as beneficiaries of the ADF:

Members should be made aware of how ADF payments are collected from members of the group and when payments will be made from the pooled funds;
What rights members have under the ADF, including in relation to voting or exiting the fund;
Whether there is any ability for the funds to be invested and the investment mandate and other powers of the manager;
Rules should also cover things like whether a manager of the fund is appointed and their liability/indemnity for acting; and
What will happen if the ADF is wound up and there is a surplus of funds – will those funds be returned to members?

What are the benefits of an ADF?
ADFs are becoming more popular as the insurance market is hardening, because the group can increase the amount of their deductible on an ‘as-needed’ basis.
For a buying group, the benefits of an ADF are:

Reduced costs for your insurance program because of the higher deductible;
Increased flexibility to manage your liability. You can modify and change your self-insured levels from year to year and include provisions for ex
gratia payments that would not be protected by the insurer;
A quicker recovery process because you control the fund. So assessing the loss is not as critical and you can begin making payments; or
Increased protection for a group where insurance is simply not available for a risk.

Who can use ADFs?
ADFs are frequently used by:

Organisations, community groups or clubs, such as sporting bodies, religious bodies or group purchasing bodies, with common interests and a group insurance
program;
Industry associations, buying associations, and other groups with similar stakeholder interests, such as pilots, travel agents, motor repairers, or
other industry-specific SMEs;
Businesses and individuals who can afford to set aside the necessary amount to fund the ADF; or
People who want to cover a risk that they believe is easily quantifiable or unlikely to happen.

It’s important to seek professional advice before you set up an ADF. You need legal advice on how this arrangement should be structured, whether it is
a regulated financial service and you should also seek taxation advice.

If you’d like to set an ADF up and want to know more about how you could take advantage of this insurance alternative – get in touch.
We’d be happy to help.
Lydia Carstensen
November 2019

Even though interest rates are going down, the traditional funding market for business is tightening, making funding more difficult to obtain for anyone
purchasing a financial advice business. This is leading to a desire for buyers and sellers to explore other options like vendor finance.

Traditional lenders in the financial services space are currently reassessing their appetite for funding deals for smaller advice businesses. Changes to
remuneration structures for advice businesses (including clawbacks to revenue) and defaults by existing borrowers, are affecting the willingness of
banks to fund these acquisitions. The upshot is that some transactions are being delayed but, in the worst cases, where buyers are unable to fund acquisitions
they’ve already entered into, those acquisitions are being terminated.
Sometimes the nature of the buyer’s business is the reason why they can’t get finance. For example:

If the adviser is setting up their advice business for the first time and does not have a track record of managing a client portfolio; or
Where the size of the buyer’s business is such that the bank requires collateral in the form of a mortgage over property, but the buyer does not have
the supporting assets and equity in line with the bank’s requirements.

Finding out early on the status of finance applications, and whether the buyer is pre-approved, is important.
The days of funding against the recurring revenue of the client book without other security seem to be over.
Whilst buyers reliant on finance will include finance conditions in their purchase contracts, these other factors (often outside the buyer’s control) put
the seller’s position at risk.
A potential solution is vendor financing.

Vendor finance is where the seller funds all or a part of the purchase price. The buyer pays a deposit on completion and then repays the balance (with
interest) over an agreed period of time via regular repayments. Essentially, it is a loan between the buyer and the seller.
This approach is particularly useful when the purchase price is paid by instalments over a lengthy period (i.e. 2 or 3 years) and recalculated when each
tranche for payment is due.
Vendor finance can be used to fund the book purchase entirely, but buyers may want to restrict it to funding the first instalment, so the revenue earned
from the purchased book can be used to service the loan. Then once retained and ongoing revenue has been demonstrated, the buyer can often obtain traditional
funding from a bank/financier to cover the balance. This is also optimised when the subsequent instalments are much smaller percentages of the overall
purchase price.
Vendor finance ensures that both the seller and the buyer remain committed to the purchase:

The seller will be motivated to ensure that the clients move across to the buyer as their new adviser; and
The buyer will need to actively service those clients to maintain the revenue earned from the book to make the repayments to the seller.

The buyer benefits from vendor finance by being able to fund their purchase. It also gives them some comfort that the seller believes the revenue stream
from the book will continue and some assurances as to the quality of the advice and client base.
For the seller, vendor finance means that the sale actually goes ahead. It also means they can get their asking price. This is particularly relevant because
buyers often try to negotiate a lower multiple or reduced purchase price when financing is difficult to obtain. Of course, vendor finance cannot be
used effectively for a seller who needs most of their purchase price immediately and cannot be ‘drip-fed’ the purchase price over a longer period (e.g.
retiring brokers who need the payment for their superannuation or to fund another business opportunity).

Any seller that is providing vendor finance should at a minimum:

Require security over the buyer’s assets (for example, a deed of grant of security interest to make sure the seller can take the client book back if
there are defaults). This includes registering the seller’s interest on the Personal Property Securities Register.
Undertake some targeted due diligence on the buyer, as noted in my earlier blogs on Warranties and Indemnities and Managing the Risk of Recovery. This will help the seller understand the buyer’s financial position and make sure the assets
over which the security is granted are sufficient (should the seller need to make a call on the security).
Consider personal (owner/director) guarantees as well.

As with any debt financing arrangements, the vendor finance terms should also be adequately recorded. This can be done in the sale agreement and should
include details about:

The security arrangements;
Repayment schedule;
Interest rate;and
The process upon default. This may include granting a power of attorney so the seller can step in and regain control.

If the plan is to seek to convert to a traditional finance source during the vendor finance term, this should be explored by the parties prior to formalising
the agreement, so that:

Appropriate provision and flexibility to facilitate the switch is included in the agreement; and
Forethought is given to anticipated financier considerations, so that those can be managed at the time of initial due diligence. For example, financiers
are looking more closely at client ownership and licensee arrangements.

As the lending market tightens, financiers are looking more closely at sale/purchase agreements. I expect this practice will only increase moving forward.
Financiers are interested in making sure that the buyer is getting what they pay for so that the financier has comfort that the debt can be serviced.
So it’s important that the documentation is adequate and clearly states each party’s rights and obligations.
If you’re considering offering or accepting vendor finance, it’s best to get legal advice before you sign the contract. Get in touch with us, we’d be happy to help.
Katie Johnston

November 2019

Buy now pay later is regulated in a number of ways even though it isn’t ‘consumer credit’ under the National Credit Code.
Some consumer protections apply to buy now pay later
The consumer protection provisions in the ASIC Act apply to buy now pay later. This includes prohibitions on:

Misleading conduct;
Unconscionable conduct; and
Unfair contract terms.

ASIC also has new product intervention powers that apply to buy now pay later arrangements.
ASIC’s product intervention power

ASIC’s product intervention power enables ASIC to make a range of orders if it is satisfied that a buy now pay later product, or a class of products, has
resulted or is likely to result, in significant detriment to consumers.
ASIC can make orders in relation to a specific product which applies to a specific person as a result of an individual problem, or in relation to market-wide
products, which applies to a person in relation to a class of products as a result of a widespread problem.
The order will be for the person to not engage in certain conduct, either entirely or only in accordance with conditions.
For example, ASIC can:

Ban a provider from issuing a product to consumers;
Direct that a product can only be offered to particular consumers or in particular circumstances; or
Direct that a product must have an appropriate warning or label, or restrict or ban its marketing, promotional and disclosure material.

ASIC can do this, even if there has not been a breach of the law. It’s hard to say what might amount to ‘significant detriment’ in the case of buy now
pay later, but ASIC did identify some potential harms that it’s actively monitoring in Report 600. These include:

Whether providers adequately protect consumers from over-committing. For example, if a consumer misses a payment with one provider, can they still
access credit with another?
If consumers are charged more by merchants to use these arrangements.

ASIC can make orders against a ‘person’ who is not a consumer, as long as the person is engaging in conduct in relation to a consumer. So it’s possible
that orders could be made against providers of buy now pay later arrangements and merchants who offer them as a payment method. For example, it’s possible
that ASIC could make an order against a merchant if a merchant inflates the cost of their goods or services as a result of offering the payment method,
or in relation to information provided by a merchant about buy now pay later products to consumers.
More regulation may be coming
The recent Senate Report into credit and financial services recommended that the buy now pay later sector should be regulated but didn’t specify how this should be done. Buy
now pay later could become a new form of ‘consumer credit’ which would bring it under the National Credit Act or it could have a new regulatory framework
of its own.
The Senate Inquiry’s recommendations loosely resemble the current obligations of ‘consumer credit’ providers but they also made some extra recommendations:

Providers consider a consumer’s personal financial situation before extending credit;
Consumers have access to internal and external dispute resolution mechanisms;
Providers offer hardship provisions;
Products are affordable and offer value for money; and
Consumers are properly informed about terms and conditions before entering into an agreement.

If you’re a buy now pay later provider, it’s a good time to review your procedures.
If you’re unsure about your obligations or want to know how your service is regulated, get in touch.
We’d be happy to help.
Chris Deeble
October 2019

The challenges for AMP advisers with their buyer of last resort arrangements (BOLRs) has dominated the headlines. Many other advisers have BOLR arrangements
with their dealer groups/licensees and while many of them have not yet refused to honour them, there is a definite shift in attitude. For some advisers
this will mean a delayed exit process and for others, changes from the agreed valuation approach for their client book.

If you are thinking about exercising your BOLR, there are some things you should be aware of.

BOLR rights are not a guaranteed exit strategy

BOLR arrangements should not be confused with first right of refusal arrangements. A BOLR requires the dealer group/licensee to buy the client book if
the adviser cannot otherwise find a buyer. The purchase is compulsory. Whereas, a first right of refusal is where the dealer group/licensee is not
compelled to purchase the client book, but before the adviser can sell the client book to someone else, they have to first offer it to the dealer group/licensee.
If they decline to buy, the adviser can sell the client book elsewhere. If they elect to buy the client book, the adviser has to sell their book to
them.

The BOLR process may not be what you expect, particularly if your adviser/AR agreement was drafted some time ago. This is because the agreement may have
been amended over the years or poorly drafted initially.

In either case, the contract terms for the BOLR may be subject to interpretation. There could be scope for the licensee to argue it is optional rather
than mandatory, or the value you thought you were entitled to is less.

Some dealer groups/licensees are now “going slow” on BOLRs for a range of reasons. Despite being contractually bound, they are not always willing to follow
the BOLR timeframes.

If you are planning to retire and the BOLR will be your succession plan, don’t leave your preparation/planning to the last minute. BOLR transactions are
taking more time to complete. Most good succession plans take about 3 to 5 years to implement – treat your BOLR exit the same way.

As part of your planning there are two things you should do:
1.  Get your house in order

We’ve seen licensees add hurdles to exit, like additional compliance reviews and audits.

Just because you had regular compliance audits and passed those audits in the past, don’t expect the process to be the same. The dealer group/licensee
is effectively conducting due diligence for a BOLR transaction. They are looking at a far broader range of issues (following the Royal Commission)
and particular areas of focus for them include quality of advice, fees, FDS/opt in compliance, and risk profiles/fact finds in addition to SoAs and
RoAs.

They are also looking at many more client files and where there are breaches/non-compliance, they are seeking to have the adviser remediate those issues
before they will proceed with the purchase. Undoubtedly, they are also focusing on where they can manoeuvre away from the agreed valuation – effectively,
reducing it to take account of compliance issues and recoverability of recurring fees.

To avoid this delaying your exit, don’t give your licensee any excuse to delay your exit (or withhold remuneration). Make sure your files are in order
and compliant with current regulatory and market expectations before you start the process.

Review your fee for service arrangements and ensure that they are appropriate and allow you to future-proof for regulatory changes like the ban on grandfathered
remuneration and life insurance commissions. Have a strategy for how you will deal with these changes, understanding what the impact of those changes
are for your advice business.
2.  Know your rights

Make sure you assert your rights when it comes to your BOLR and are aware of any limitations. If you need to, get legal advice in advance about:

How your book will be valued. The BOLR may have a set process or the value may be determined by an independent third party. Either way, know your rights
so you can maximise your value.
What your options are. While it’s a buyer’s market (and will be for a long time), you may be able to negotiate a better deal for yourself on the open
market rather than relying on the BOLR. So check whether you’re restricted from shopping your book around. If you aren’t restricted then the best
way to maximise your price is by having your book in good order and making it part of a competitive tender process.
What the timeframes in the BOLR process are. Once you’ve confirmed these, diarise them and don’t miss any actions or give your licensee any excuse
to refuse or delay the process.
What ‘notice’ must be given to commence the BOLR process. For example, older agreements may require delivery by post or facsimile only. This means
if you email, your notice won’t be effective.

If you want to start putting a strategy in place to sell or exit via a BOLR, get in touch.
We’d be happy to help.

Katie Johnston

October 2019

Following on from our last post about insurance alternatives, in this post we outline what parametric insurance is and how it can help you in a hardening insurance market.

What is parametric insurance?

Parametric insurance pays out a pre-agreed amount when a ‘trigger’ event happens. The amount is paid regardless of whether you have suffered any loss or
not.

The trigger event could be anything at all as long as it’s objective and measurable. For example, it may be hurricane winds that have reached a certain
speed or an earthquake of a certain magnitude on the Richter scale. The amount that will be paid is agreed upfront when the contract is made. The payment
is made regardless of the actual loss incurred.

For example, a farmer may insure their crop for $1 million if it rains less than 300mm in a year. At the end of the year, if the rainfall has been less
than 300mm the farmer will be paid $1 million regardless of the damage they actually suffered or the costs incurred to replant the crop.

The benefits of parametric insurance for insurers
For insurers the benefits include:

Lower dispute resolution costs because it’s harder for claims to be disputed;
Lower costs overall because there’s no need to engage loss assessors or investigators to measure the loss suffered;
Less profitable industries may be more attractive because administration costs are lower; and
Less chance of fraud or human error in the claims and assessment process.

Parametric insurance also opens up the opportunity for insurers to find and develop innovative ways to further reduce their costs and open up new markets.
Technology could potentially be used to:

Collect data and more accurately assess and price products;
Execute contracts, record payment triggers and arrange automatic payouts by leveraging blockchain; and
Service remote customers entirely online. By relying on data to assess and pay claims, insurers can potentially service customers anywhere. For example,
crop insurance that’s based on agricultural indices can be offered to outback stations.

Insurance buyers also benefit
Parametric insurance also benefits customers by:

Reducing delays in payment. This is because loss assessments are not required. In some cases, a delay in receiving insurance payments can be even more
devastating than the initial loss;
Reducing the cost of insurance compared to more conventional insurance products;
Covering risks where previously there was no appetite for insurance;
Giving more flexibility in the type of products that can be offered because a parametric trigger can be designed in a number of ways; and
Simplifying the claims process and making the payout mechanism quick and predictable. This improves the customer’s experience and potentially increases
their trust and confidence in the industry because there’s less likely to be a dispute.

The biggest issue with parametric insurance is that the payout might not cover the customer’s actual loss. In the example above, if the farmer’s failed
crop cost $1.5 million, then the farmer may be out of pocket and will need to absorb the additional loss.

When you could use parametric insurance
Parametric insurance is popular for risks that can cause huge financial devastation but can be modelled or calculated based on a pre-defined metric. For
example, it’s used in the agricultural industry because weather indices and crop yields can be used to calculate the scale of parametric insurance
payouts.

It’s also popular where customers want convenience and the loss can be easily calculated. For example, in travel insurance where a missed or cancelled
flight can be easily identified and calculated. Customers can be paid out quickly so they can continue their travels.

Natural disaster risks like earthquakes, cyclones and floods are also suitable for parametric insurance products. This is because the loss can often be
pre-determined and speed of a payment is vital to the customer so they can start recovering from the loss.

Generally, parametric insurance is suitable for:

Customers who can afford to pay for part of their loss or are willing to take that risk in exchange for a high level of convenience; 
Buying groups who need to cover a hard-to-place risk;
Risks that traditional insurers aren’t willing to cover, but where the reinsurance market and a co-insurer can price the risk; or  
Niche, in-demand types of insurance for consumers.

As the accuracy of data collected and analysis improves, more losses will be able to be predicted or modelled. This will only increase the use of parametric
products. There are also opportunities to structure these types of products differently. For example they could be structured as a derivative but this
would change the type of financial product (ie from an insurance product to a derivative).

The market for parametric solutions in Australia is still in its infancy, but we can expect this to increase as insurers understand how to use data to
price risks better.

If you’re considering putting in place a parametric insurance product or would like to make sure you’ve got the right licensing arrangements in place,
get in touch. We’d be happy to help.

Lydia Carstensen

October 2019