Stamping fees – what’s all the fuss about?
Following hot debate amongst regulators, industry leaders, politicians and media commentators, the Morrison Government recently announced a snap public consultation on the merits of the rule allowing listed investment company (LIC) and listed investment trust (LIT) operators to pay 'stamping fees' to brokers and advisers.
The Government's four-week review examined the 'conflicted' stamping fees exemption so that it can make an informed decision on whether to retain, remove or modify the exemption.
Background – new Code of Ethics
On 1 January 2020, FASEA's new Code of Ethics came into effect. The Code, which applies to AFS licensees and authorised representatives providing personal advice to retail clients, represents the biggest shake-up to the financial advice industry since the Future of Financial Advice (FOFA) reforms.
Standard 3, which can be construed very broadly, has potentially significant repercussions for advisers by prohibiting remunerations that had previously been carved out from the FOFA reforms.
Standard 3 states that advisers must not '... advise, refer or act in any other manner where [they] have a conflict of interest or duty'. The impact of this on the payment of stamping fees in relation to LITs and LICs has been a hot topic in the media.
A stamping fee is a form of remuneration received by an adviser in exchange for facilitating an approved capital raising, such as an IPO. Stamping fees were expressly excluded from being considered conflicted remuneration when the FOFA reforms were introduced. However, the new Code of Ethics, particularly standard 3, has brought the issue to the forefront again.
The issue arises because standard 3 concisely states that if there is a conflict an adviser should not act. FASEA's guidance note FG002 includes an example of an adviser recommending an investment in an IPO where the adviser was entitled to a stamping fee. According to the guidelines, the adviser's conduct would breach standard 3 if they accept a stamping fee because it creates a conflict of interest. The commentary goes on to state that in order to avoid a breach, the adviser must either decline the fee or rebate the fee in its entirety to the client. The example leaves very little doubt as to FASEA's attitude toward stamping fees.
Unsurprisingly, the industry raised concerns: on the one hand, the Corporations Act clearly permits stamping fees, while the new Code of Ethics, when read with FASEA's guidance, makes it very clear that accepting stamping fees is a breach of the Code.
FASEA issued further guidance to clarify the issue in December 2019. That further guidance said an adviser would only breach the standard when the adviser has an 'actual conflict' and provided a set of criteria to assist in determining what an actual conflict might be. The updated guidance states:
In assessing whether an adviser has an actual conflict, advisers need to consider their remuneration in the context of the whole of the Code and satisfy themselves that this remuneration does not impact their ability to provide advice that meets the provisions of the Code including that:
- the advice is in the best interests of the client;
- the fees and charges (regardless of type) are fair and reasonable and represent value for the client and are fully understood by the client;
- the client understands the benefits, costs and risks of the recommendations made; and
- the advice and fee structure are appropriate for the client.
While the guidance did not specifically mention stamping fees it was, in our view, an attempt to water down the earlier statements by FASEA.
Adding to the confusion, the Corporations Act requires all retail advisers to comply with the Code from 1 January 2020 and to also nominate an external compliance scheme to monitor and enforce compliance with the Code.
However, in November 2019, rather than requiring advisers to nominate an external compliance scheme the Federal Government announced it would establish a single disciplinary body to monitor compliance with the Code. That body has not yet been established, and on 14 November ASIC granted relief from the obligation to register with an external compliance scheme until 31 October 2022.
What does it all mean for advisers?
While there is still some confusion, the current position for advisers is that stamping fees are appropriate where they—
- relate to advice which is appropriate for their client
- are fair and reasonable and disclosed in the relevant offer documents and are well understood by their clients
- the risks of the investment are disclosed in the offer document
- the advice they are giving is appropriate for their client.
There is undoubtedly more to come on this topic which has now moved from a regulatory issue to a political one. Stay tuned as we await the outcome of Treasury's public consultation process which closed on 20 February 2020.