On 14 November 2023, the Government released the first tranche of exposure draft legislation in response to the Quality of Advice (QAR) Review (Draft Bill). The Draft Bill proposes to amend the Corporations Act, the SIS Act and the Income Tax Assessment Act 1997 (ITAA 1997).
The amendments are primarily intended to remove unnecessary regulatory red tape for financial advisers and super funds. In addition the amendments will:
- provide greater certainty on the operation of the law in specific areas, for example, greater certainty on the ability of super trustees to claim tax deductions for advice fees
- have consequences for superannuation trustees and other product issuers as they would need to update their processes for the new advice fee consent requirements
- have consequences for product issuers as they will need to review payments to financial advisers that rely on current exemptions for benefits being given by clients.
The Draft Bill adopts the QAR’s recommendations on the following (covering 11 of the recommendations from the QAR):
- Deduction of adviser fees from superannuation
- Ongoing fee arrangements
- Flexibility for FSG requirements
- Conflicted remuneration
- Standard consent requirements for certain insurance commissions.
Consultation closes on 6 December 2023.
Importantly, there are key aspects of the Government’s initial response to QAR that the Draft Bill does not cover and which are expected to be covered in later tranches of legislation.
What should you do now?
The Draft Bill’s proposed amendments will affect current processes of superannuation trustees, advice licensees and other product issuers. The amendments streamline some aspects but also include new requirements. We recommend trustees, advice licensees and other product issuers review their processes to identify whether the amendments create unexpected issues.
Even though the amendments are only in draft, the recommendations in the QAR were released almost a year ago so there has been a reasonable period of time for the industry to consider the recommendations. As the consultation period is only 3 weeks long, we don’t expect the Draft Bill to change markedly. Most amendments would commence subject to limited (or no) transitional periods, with the change for insurance commissions to commence 3 months after the Draft Bill becoming law. Some amendments have retrospective application. We recommend super trustees, advice licensees and other product issuers commence planning for the changes that may need to be made to their processes, forms and other documents.
What’s covered in the Draft Bill?
Deduction of adviser fees from superannuation
SIS Act amendments – charging advice costs to members
The Draft Bill replaces section 99FA of the SIS Act to provide greater clarity about the basis and circumstances in which a trustee can deduct an advice fee for financial product advice from a member’s superannuation interest. It does not propose any changes to the intra-fund advice fee charging rules in section 99F.
Subsection 99FA(1) will set out requirements to be satisfied before the trustee can charge the cost of advice against the member’s interest in the fund:
- the financial product advice is personal advice and is wholly or partly about the member’s interest in the fund, which means that advice fees can be deducted from a member’s super account even if the advice covers some non-super topics
- the fee is only paid to the extent the advice relates to the member’s interest, which aligns the charging rules with the sole purpose test (ie the amount of the advice fee that can be deducted from a member’s super account must be the proportion relating to super topics only)
- the trustee charges the cost in accordance with the terms of a written request or written consent of the member, which consent must be (1) for ongoing fee arrangements, provided in accordance with the Corporations Act rules, or (2) for non-ongoing fee arrangements, provided in accordance with any form approved by ASIC
- the trustee has the member’s request or consent, or a copy of it, and
- particular requirements for consent and related matters are met, depending whether the advice is provided under an ongoing fee arrangement or another arrangement.
These changes would provide greater clarity regarding the ability of a trustee to deduct advice fees from member accounts but would not substantially change a trustee’s legal obligations in relation to the deduction and payment of those fees.
Unfortunately, there are no specific rules which deal with member consents following a change of trustee or a successor fund transfer. As a result, it is recommended that the industry lobby ASIC for it to include appropriate declarations to cater for these situations in any form it approves for these purposes and superannuation trustees carefully consider the terms of any consent forms so that they cater for a change of trustee or a successor fund transfer.
These amendments to the SIS Act commence 6 months after the commencement of the legislation (“start day”).
There are transitional provisions, but only in relation to the consent arrangements, so that written consents in force before the start day are taken to satisfy the new requirements until the earlier of the day the arrangement is terminated, varied or renewed or the end of the period of 12 months beginning in the start day. The other requirements of section 99FA not related to the written consent (e.g. that the advice must be personal financial product advice) will apply in respect of costs charged after the start day.
ITAA 1997 amendments – a new deduction
The Draft Bill makes amendments to the ITAA 1997 to ensure that financial advice fees charged under section 99FA of the SIS Act as well as certain ‘intra-fund advice’ are, to the extent that they are paid by the fund:
- tax-deductible for the fund ; and
- not treated as superannuation benefits of the member (and therefore can be paid regardless of whether the member has satisfied a condition of release, and are not taxable in the hands of the member).
These amendments to the ITAA 1997, once they come into effect, apply in relation to the 2019-20 income year and later income years (i.e. on a retrospective basis). The start date of these provisions aligns with the ATO’s power to amend the tax assessments of a superannuation entity.
These amendments are welcome in that they address some uncertainty that had arisen in relation to the characterisation of the payment of these fees from a tax perspective, which had led some trustees to strengthen the argument that advice fees are tax deductible through carefully drafted member disclosure and forms for the payment of the cost of financial advice out of the member’s superannuation account.
Superannuation fund trustees should be aware, however, that these provisions do impose some substantive and practical limitations on the deduction which is available. For example, in order for the specific deduction to be available, the trustee of the fund must have a copy of the member’s written request or consent to the payment being made by the fund, and this record must be kept for five years. Further, the specific deduction provision does not permit deductibility of these fees to the extent that they are in relation to gaining or producing exempt income or non-assessable non-exempt income. This means that the deduction may not be available, for example, to the extent that the fees are payable in respect of retirement phase superannuation income stream benefits.
Further guidance regarding how the portion of fees that are in relation to gaining or producing exempt income or non-assessable non-exempt income in this context would certainly be welcome, given some of the uncertainty which can arise on these issues. Superannuation funds may wish to consider making submissions on the Draft Bill on this point.
The superannuation industry could also consider making submissions to Treasury so that the Draft Bill also clarifies the GST treatment of adviser service fees including the reduced input tax credit percentage.
Ongoing fee arrangements
The current ongoing fee arrangements and consent rules require:
- that a client is given a fee disclosure statement (FDS) within 60 days of the anniversary day of entering into an ongoing fee arrangement
- if the arrangement is to continue for a further year, the fee recipient must obtain the client’s agreement to renew an ongoing fee arrangement within 120 days beginning on the anniversary day, and
- if the advice fees are to be paid from a financial product, the client must sign a consent form agreeing to the advice fees being deducted from their financial product within 150 days of the anniversary day each year.
The Draft Bill streamlines the consent requirements to allow for a single consent form, which can be relied on by advisers and product issuers as evidence of a client’s consent. While the Minister can approve a form for these purposes, the approved form will not be mandatory and product issuers can choose to apply different rules or practices (in addition to the legislative requirements) to the payment of ongoing fees.
The Draft Bill also repeals the requirement to give a FDS relating to ongoing fee arrangements, and includes a new consolidated and streamlined consent process when a client enters or renews an ongoing fee arrangement.
Under the new process, a client must provide written consent to an ongoing fee arrangement. The basic requirements are:
- before obtaining the consent of the client, the fee recipient has disclosed certain mandatory information to the client in writing including an explanation of the services provided and the fee proposed to be charged over the following 12 months
- the consent is given by the account holder for the fees to be deducted from their account
- the consent specifies the account holder and the other details of the account
- the consent is signed and dated by the client, and
- the fee recipient must retain the consent or keep a copy.
The rules relating to termination of an ongoing fee arrangement substantively continue the approach of the current rules.
A fee recipient may be subject to a civil penalty if an ongoing fee arrangement terminates as it is no longer covered by a written consent of the client and the fee recipient fails to give written notice of termination of the ongoing fee arrangement to the client. A fee recipient may also be subject to a civil penalty if they continue to charge an ongoing fee after the arrangement terminates.
In streamlining the regime for ongoing fee arrangements, the consent requirements for deducting ongoing fees from a financial product have also been adjusted to streamline the process. The requirements will be set out in the law and the ASIC Corporations (Consent to Deductions—Ongoing Fee Arrangements) Instrument 2021/124 will be repealed. Before obtaining the account holder’s written consent to deduct ongoing fees, the fee recipient must provide the same information, in writing, that is required to be provided to the client when entering or renewing an ongoing fee arrangement.
The amendments will apply to an ongoing fee arrangement entered into on or after 6 months after the Draft Bill commences. This transitional period will provide industry time to change their systems to accommodate the new consent process and removal of the FDS.
Consistent with our comments above, the Draft Bill does not contemplate the impact of a change in any of the parties to the consent (eg due to a change in product issuer or sale of advice business). Advice licensees should consider whether it is appropriate to include additional declarations in the consent forms to cater for these situations.
Flexibility to provide FSGs via websites
The purpose of an FSG is to provide clients with enough information to decide whether to obtain financial advice (or any other financial service) from a financial services licensee. A person who provides a financial service to a retail client must give them a FSG.
The Draft Bill modifies the law so that a provider of financial advice (ie the advice provider, who may be an authorised representative rather than the advice licensee) can choose whether to continue providing a FSG in accordance with the current law or alternatively provide the FSG on their website. To rely on the website option, certain requirements must be met:
- the financial service provided to the client must be personal advice
- at the time the advice is provided, the client has not requested a copy of the FSG and the information that would have been in the FSG is available on the provider’s website, and
- at the time the advice is provided, each web page displaying the information is readily accessible, up to date and records the date the page was prepared or last updated. If the provider fails to ensure the web page on which the information is available is kept readily accessible by the public and is kept up to date, the provider is subject to a civil penalty provision.
A client who wants a FSG can still request one regardless of whether the information is on the provider’s website or not. Failure to give an FSG to a client at their request is also a civil penalty provision.
These provisions commence on the commencement of the legislation and there are no transition provisions as the website option is an alternative option to the current FSG requirements.
Conflicted remuneration – changes to exceptions for benefits paid by retail clients
The definition of conflicted remuneration in section 963A of the Corporations Act would be amended to expressly provide that monetary and non-monetary benefits given by a retail client in relation to financial product advice will not be conflicted remuneration (ie the exclusion for client given benefits would be moved to the definition itself, rather than being found in the list of exclusions). For these purposes the benefit would need to be paid by the retail client or on behalf of the client (including from financial products in which the client has a beneficial interest). The amendment is stated to seek to achieve the intended purpose of the conflicted remuneration provisions, to ban benefits given by a product issuer rather than by a retail client. This is different to the original stated intention that was to exclude “any fee for service paid by the retail client, whether the benefit is given directly by the retail client or is given by another party at the direction, or with the clear consent, of the retail client”.
The existing exceptions relating to monetary benefits given by a retail client would be removed including the exception for benefits given by a retail client in relation to the issue or sale of a financial product.
In addition, the Draft Bill expands the list of items that are not conflicted remuneration in section 963B of the Corporations Act. Under the Draft Bill, benefits paid to a licensee by a superannuation trustee in relation to personal advice to a retail client, about the client’s interest in the fund, where the benefit is charged against the client’s interest in the fund, or against the interests of other members of the fund, will not be conflicted remuneration. The proposed exception does not apply to non-superannuation trustees.
Product issuers will need to review payments to financial advisers that rely on current exemptions for benefits being given by clients. For example, they would need to review the forms they currently rely on the satisfy the client directed exception.
The Draft Bill also implements QAR Recommendation 3.4 to remove the exception for benefits given in relation to advice that is at least 12 months old, and QAR Recommendation 3.5 to remove the exceptions to conflicted remuneration for agents and employees of Australian ADIs.
These provisions would commence on the commencement of the legislation and there are no transition provisions.
Standard consent requirements for certain insurance commissions
The Draft Bill retains the current exceptions and arrangements in relation to life insurance commissions, general insurance commissions and consumer credit insurance commissions.
However, in response to the findings in the QAR that the prospect of receiving a commission creates a conflict for the adviser, the Draft Bill introduces new consent requirements to provide that:
- a person who provides personal advice to a retail client about a life risk insurance, general insurance or consumer credit insurance product must obtain the client’s informed consent before accepting a monetary benefit such as a commission,
- the consent of the client must be obtained before the issue or sale of the certain insurance product,
- before the client can consent, certain information must be disclosed to the client including the rate of the commission, the frequency of payment, and the nature of the services the licensee will provide to the client.
For general insurance products, an advice provider is not required to obtain the client’s consent on the annual renewal of the insurance, provided that the provider has explained to the client before the original consent was given that the provider would be paid a commission on each occasion that the insurance is renewed.
These requirements commence 3 months after the legislation commences.
What’s not covered in the Draft Bill?
The Government’s initial response covered a number of other reforms that have not been included in the Draft Bill. For example, the Draft Bill doesn’t cover:
- the removal of safe harbour steps (QAR Recommendation 5)
- changes to the scope and collective charging of fees for intra-fund advice (QAR Recommendation 6)
- the replacement of Statements of Advice with fit for purpose advice documents (QAR Recommendation 9)
- standardising consumer consent requirements to classify a consumer as a wholesale or ‘sophisticated client’ (QAR Recommendation 11).
Further, the Draft Bill does not contain amendments to address other recommendations that the Government stated that it would consult further on, including:
- broaden the definition of personal advice
- remove the general advice warning
- allow non-relevant providers to provide personal advice
- introduce a good advice duty, and
- amend the Design and Distribution Obligations.
What next?
The Government intends to announce its final position on the outstanding recommendations of the QAR before the end of the year, with further legislation to be released in 2024.
