Surviving grandfathering
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Surviving grandfathering

Batten Richard SmallBrown Christopher Small

The exemptions in the grandfathering regulation are complex and difficult to navigate, but advisers and licensees can still operate within the constraints of the legislation

Batten Richard SmallBrown Christopher Small

The exemptions in the grandfathering regulation are complex and difficult to navigate, but advisers and licensees can still operate within the constraints of the legislation

AS IS to be expected from regulations bolted onto highly prescriptive and detailed legislation, the exemptions in the Future of Financial Advice (FOFA)grandfathering regulation are complex and difficult to navigate.  

One victim of the grandfathering regulation seems to be the adviser who moves to a new licensee after 1 July 2013. To qualify for grandfathering, any benefit that would otherwise be conflicted remuneration would need to be paid under an arrangement in existence before 1 July 2013. On the face of it, this rules out the lateral’s new dealer group arrangements.

But advisers and licensees may nevertheless continue to operate within the constraints of the grandfathering regulation.


It is not much use to a lateral adviser if a commission is grandfathered at the new licensee level but cannot find its way down to the adviser because the new member firm agreement is a new arrangement which does not benefit from grandfathering.

On a larger scale, if a group of advisers wants to change licensee (including where their existing dealer group operations – but not the licensed entity itself – are bought by the new licensee), then they would face the same problem in relation to their new member firm agreements with the purchasing licensee.   

Thankfully, the grandfathering regulation allows a party to a pre-1 July 2013 arrangement to be changed without causing the other party to lose the benefit of the exemption. What this means, in practice, is that a new licensee can step into the shoes of the old licensee under the existing adviser terms, and grandfathering will not be interrupted. Lawyers call this ‘novation’, a process which allows the old party to conveniently step out and the new party to step in.

There may be a number of objections to this approach, including the argument that it amounts to an avoidance scheme contrary to the FOFA anti-avoidance provisions. However, the explanatory statement to the grandfathering regulation is supportive of a change of party.

The Corporations Act also makes clear that the FOFA anti-avoidance provisions will not apply where their application would result in an unjust acquisition of property.

Novating a grandfathered adviser agreement to a new licensee is unlikely to be contrary to the anti-avoidance provisions in the Act because this is a restructuring step expressly permitted by the legislation, and novation simply preserves the status quo in relation to existing clients.  

While these are important considerations, they may in many cases be outweighed by the commercial opportunity. Furthermore, there is likely to be some opportunity to adjust existing terms without losing grandfathering. The degree to which this can take place will need to be explored in individual cases.

Not all trail commission is conflicted remuneration
In addition to the novation route considered above, it is worth bearing in mind that trail commission is only conflicted remuneration where advice may be influenced. If there is no active adviser/client relationship, a particular benefit may not have a conflicting effect.

If the new licensee already has existing arrangements with the relevant product issuer this may only be an issue at the adviser level and one which the new licensee should be able to satisfy themselves whether or not advice will be influenced. Thus, truly passive trail can potentially still be carried into a new dealer group, whether through lateral adviser movement or a client book sale.

That said, the true value of any client relationship is in its potential to be up-serviced. An un-serviced client book, simply paying trail, is a diminishing asset.  However, once the client is engaged in a more active service relationship, the existing trail commission is likely to become conflicted remuneration.

This may require moving each of the affected clients to an adviser service fee arrangement or looking for alternative methods of ensuring the trail does not influence advice.

What are the options for those seeking to transact client books?
The concept of arrangement is broad and confers a number of benefits when looking at this issue as we have discussed above.

Imagine the sale by Adviser A (operating under Licensee X) of a client book to Adviser B who operates under a different licensee (Licensee Y). In this scenario, there are two sets of arrangements that need to be considered.  

First, there are the product issuer agreements between Licensee Y and the various manufacturers on Licensee Y’s approved product list (APL). If there is a strong correlation between Licensee X’s APL and Licensee Y’s APL, then there is a reasonable chance that Licensee Y will be able to grandfather trailing commission payable from the transferred client book.

This will depend on the terms and broad, genuine understanding between Licensee Y and the product issuers. This is likely to involve a mapping exercise and some confirmatory due diligence in relation to each product issuer agreement.

Secondly, having ascertained that there are existing arrangements with product issuers that support grandfathering at the licensee level, it is necessary to ascertain whether the purchasing adviser has an existing arrangement with its licensee that will allow both of them to treat the acquired trail as continuing to be grandfathered at the adviser level.

If the evidence points to an arrangement (that is terms and/or a genuine understanding) where acquired trails will continue to be paid to the adviser, then grandfathering will apply.

Clearly, this involves more effort and thought than simply providing a bulk transfer letter to the relevant fund managers and waiting for the trail on the other side. This is because each of the product issuers, the licensee and the purchasing adviser is subject to a ban on conflicted remuneration, so each of them needs to know that grandfathering will work, or they are likely to be breaking the law.

This additional work and the possibility of some leakage are likely to have a dampening effect on practice valuations which have been under pressure in any event. The uncertainty (which will arise as a result of not all product issuers agreeing that existing arrangements are grandfathered) may result in buyers seeking to de-risk transactions by placing more of the purchase price at risk.  

However, as a general proposition, client book transactions (whether within or beyond an existing dealer group) should continue to be able to take place, albeit with a little more planning and care.

About Richard Batten and Christopher Brown

Batten Richard Medium

Brown Christopher MediumRichard Batten is a partner in the financial services practice and Christopher Brown is a partner in the financial services M&A practice at Minter Ellison.



Surviving grandfathering
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