12 February 2020

Financial Services Royal Commission draft legislation: Ongoing advice fee arrangements and disclosure of lack of independence

This article was written by Stephen Jaggers, Peter Baker and Bronte Carlin

Released for consultation by the Treasurer on 31 January 2020, the “ongoing fee arrangements” and “disclosure of lack of independence” Schedules to the exposure draft Bill will make fundamental changes to ongoing advice fee arrangements and introduce new obligations on authorised representatives of financial service licensees to disclose their lack of independence. The Schedules are designed to implement recommendations 2.1 and 2.2 of the Financial Services Royal Commission final report.

Key takeaways

  • The amendments are proposed to take effect on 1 July 2020, leaving little time for the industry to make changes. A 6 month transition period applies in relation to ongoing fee arrangements in force immediately before 1 July 2020, unless the arrangement was in place prior to 1 July 2013 in which case a 12 month transition period applies. 

  • Despite the above transitional periods, by 1 July 2020 it might be necessary for:
    • superannuation trustees and platform operators to update their systems, procedures and controls (including to cease to deduct any advice fees from each MySuper member’s super interest and each choice member’s interest unless the trustee has the choice member’s consent (or a copy of it))
    • licensees and authorised representatives that provide personal advice to:
      • update their fee agreements
      • prepare client consents that comply with any requirements yet to be specified by ASIC
      • update their systems, procedures and controls
      • update Financial Services Guides
    • all affected licensees to train staff and other representatives on the changes

  • Ongoing fee arrangements must be renewed annually, rather than every 2 years. Before fees can be deducted, the consent of client must be obtained in a form to be prescribed.

  • The provisions of the Bill are primarily directed towards financial service providers that receive fees from clients, such as advisers (referred to as “fee recipients”). However, other entities (“account providers”) with whom the client holds an account will also need to prepare for this reform, as the amendments are relevant to the obligations of certain product issuers (particularly superannuation trustees who must ensure that payments for advice from member accounts comply with the sole purpose test and are reasonably and properly incurred, and must therefore safeguard against contraventions by advisers).

  • Fee disclosure statements must include forward-looking information regarding the fees to be charged and services to be provided in the coming year, as well as information about the previous year. This increases “fee for no service” risks if the services included in the fee disclosure statement are not actually provided.

  • Where a financial services provider who would contravene section 923A of the Corporations Act by assuming or using any of the restricted words of expressions identified in section 923A(5) (including ‘independent’, ‘impartial’ and ‘unbiased’), that provider must give to a retail client a written statement disclosing their of lack of independence before providing personal advice to the client.

The proposed changes in detail

Overview and comparison

In summary, the Bill:

  • requires ongoing fee arrangements to be renewed annually;
  • provides for a more stringent fee disclosure statement regime, including requiring information about services to be provided in the upcoming year;
  • requires express written consent from clients before fees under an ongoing fee arrangement can be deducted; and
  • requires, in certain circumstances, a written disclosure of lack of independence to be included in a Financial Services Guide.

The following table provides a high level comparison of the key features of the proposed new laws:[1]

Current law

Proposed new law

Ongoing fee arrangements must be renewed every 2 years.

Ongoing fee arrangements entered into prior to 1 July 2013 are not required to be renewed.

Ongoing fee arrangements must be renewed annually.


Ongoing fee arrangements entered into prior to 1 July 2013 are subject to the same annual renewal requirements. 

There is no ongoing requirement to obtain written consent to the deduction of fees from a client’s account after the client’s initial consent to ongoing fee arrangements.

Written consent must be obtained prior to fees being deducted under an ongoing fee arrangement and consent generally cannot be obtained for a period of more than 12 months.

Fee recipients must obtain written consent to continue an ongoing fee arrangement annually.

Fee disclosure statements are retrospective which provide a summary of the fees and services provided during the year.

Fee disclosure statements must include statements on the fees to be charged and services to be provided in the coming year, as well as information about the previous year.

No equivalent.

Providing entities who would contravene section 923A of the Corporations Act by assuming or using any of the restricted words of expressions identified in section 923A(5) (including ‘independent’, ‘impartial’ and ‘unbiased’) must give to a retail client a written statement in the form prescribed by ASIC disclosing their of lack of independence before providing personal advice to the client.

The statement must be included in the Financial Services Guide.

Ongoing fee arrangements to be renewed annually

Existing laws governing ongoing fee arrangements currently do not apply to ongoing fee arrangements entered into prior to the Future of Financial Advice (FoFA) reforms.[2]  From 1 July 2020, this exemption will no longer apply, meaning that ongoing fee arrangements entered into prior to 1 July 2013 must comply with the new laws.[3]

The frequency at which ongoing fee arrangements must be renewed will also change, with fee recipients required to seek a client’s renewal of an ongoing fee arrangement annually rather than every 2 years.[4]

The Bill also removes ASIC’s power under s 962CA of the Corporations Act to exempt a person or class of persons from the requirement to give a renewal notice if they are subject to an approved code of conduct.[5]

Consent required for deduction of ongoing fees

Fee recipients will need to obtain the client’s express written consent to deduct, arrange to deduct, or accept payment of, fees under an ongoing fee arrangement.[6]  Where an account is held jointly, the fee recipient must not arrange for deduction from the account unless all consent requirements have been satisfied for all account holders.[7]

ASIC will be given the power to, by legislative instrument, determine requirements for the giving of consent to deductions from an account.[8]  This includes requirements as to the specific form, or specified form of words, which must be used, or specific information which the consent must include.

A client will be able to withdraw or vary their consent at any time by providing written notice to the fee recipient. If the fee recipient receives such a notice, it must within 5 business days of receipt:

  • give written confirmation to the client that the notice was received; and
  • if the consent was given to an account provider, give the account provider a copy of the notice.[9]

A client’s consent to the deduction of fees will also cease to have effect if the ongoing fee arrangement is terminated, or at the end of the period of 30 days after the end of the first renewal period after consent is given for the ongoing fee arrangement.[10]

Fee disclosure statements

The Bill also introduces new requirements that are intended to supplement, and not replace, the existing fee disclosure statement regime.[11]  Put simply, a fee disclosure statement must be both backward and forward looking.

The existing requirement is for fee recipients to provide clients with an annual fee disclosure statement that details certain information relating to the previous year.  The Bill supplements this regime by also requiring the fee disclosure statement include certain information relating to the upcoming year.

Information relating to the upcoming year must include, at a minimum:

  • the services the client will be entitled to receive;
  • the amount of each ongoing fee that the client will be required to pay;
  • any additional fees payable in relation to the services described in the fee disclosure statement; and
  • information about any other prescribed matters.[12]

Where the amount of an ongoing fee cannot be determined, the fee disclosure statement must include a reasonable estimate of fees and an explanation of the method used to work out the estimate.[13]

Considerations for product issuers

Due to its broad definition, an “account provider” includes platform operators and superannuation trustees, as well as ADIs.

Although the amendments place new obligations on fee recipients with respect to obtaining express written consent prior to the deduction of fees, certain account providers could be exposed to an increased risk of involvement in contraventions arising from a fee recipient’s failure to obtain all required consents at the required intervals before fees are deducted from the account.  This may include exposure to accessorial liability where an account provider makes payment from a client’s account to the fee recipient without first receiving a copy of the client’s written consent and, for superannuation trustees, breach of trustee duties where fees are deducted from the client’s account without the services described in the fee disclosure statement having been provided by the fee recipient.

The risk of involvement in a fee recipient’s contravention is increased where the account provider does not have sufficient controls in place to ensure that fees are only deducted in circumstances where the account provider has received a copy of the client’s consent, and only where a valid ongoing fee arrangement is in place.  For example, if a client holds an account with a platform operator or superannuation trustee and the client has given their consent for the fee recipient to deduct fees from that account, then that account provider will need to have controls in place to ensure that they have received a copy of the client’s consent and the fee recipient has obtained all required consents at the required intervals before fees are deducted from the account.  This could include implementing controls that automatically turn off the deduction of advice fees from the client’s account at the relevant annual interval unless the account provider receives confirmation that a fee disclosure statement has been provided by the adviser/fee recipient, the ongoing fee arrangement has been validly renewed and a copy of the client’s renewed consent to the deduction of fees.

Record-keeping requirements

Fee recipients must keep appropriate records to demonstrate their compliance with Division 3 of Part 7.7A of the Corporations Act.[14] This includes records that demonstrate compliance with the new renewal, consent and disclosure requirements described above. These records must be kept for at least 5 years and a failure to do so will be a criminal offence.

New regulations specify additional records which must be kept in relation to ongoing fee arrangements.[15] These include:

  • each renewal notice the fee recipient has given to the client (including the date and the manner in which the notice was given);

  • each fee disclosure statement the fee recipient has given to the client (including the date and the manner in which such disclosure fee statement was given);

  • each consent for deductions in relation to the ongoing arrangement fee given by the client (including the date on which each such consent was given); and

  • communications in relation to each consent for deductions in relation to the ongoing arrangement fee given by the client, and the date on which each communication occurred.[16]

Disclosure of lack of independence

The Bill places new obligations on authorised representatives of financial licensees (“providing entity”) where:

  • the authorised services provided by the providing entity include the provision of personal advice to retail clients; and

  • the providing entity would contravene s 923A(1) of the Corporations Act by assuming or using any of the restricted words of expressions identified in section 923A(5) (including ‘independent’, ‘impartial’ and ‘unbiased’).[17]

In such circumstances, the providing entity must include a statement in the Financial Services Guide that:

  • sets out that the providing entity is not independent, impartial or unbiased in relation to the provision of personal advice, and explains the reasons why;

  • if any other word or expression has been specified as a restricted word or expression in regulations made for the purposes of subparagraph 923A(5)(a)(ii)—sets out that the providing entity is not able to assume or use the restricted word or expression in relation to the provision of personal advice, and explains the reasons why; and

  • meets any other requirements determined by ASIC by legislative instrument.[18]

Applicable from 1 July 2020

The amendments are proposed to commence on 1 July 2020.  For ongoing fee arrangements in force immediately before 1 July 2020, a 6 month transition period will apply unless the ongoing fee arrangement was in place before 1 July 2013, in which case a 12 month transition period applies.

The consultation period for all proposals ends on 28 February 2020.

Further information

Explore our Royal Commission hub to keep up-to-date, access related content and view additional resources.   

We are happy to assist you in considering the proposals and how they impact your business.  Please contact your usual KWM contact if you would like to discuss the report further.

 

[1] See Exposure Draft Explanatory Memorandum, Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2020 Measures)) Bill 2020, 8.

[2] See Corporations Act 2001 (Cth) s 962D.

[3] Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2020 Measures)) Bill 2020: FSRC rec 2.1 (ongoing fee arrangements), Schedule [2.1], item 2.  (“Ongoing Fee Arrangements Bill”)

[4] See Corporations Act 2001 (Cth) s 962L.

[5] Ongoing Fee Arrangements Bill, Schedule [2.1], item 1.

[6] Ongoing Fee Arrangements Bill, Schedule [2.1], item 19 (s 962R(2) of the Corporations Act).

[7] Ongoing Fee Arrangements Bill, Schedule [2.1], item 19 (s 962R(3) of the Corporations Act).

[8] Ongoing Fee Arrangements Bill, Schedule [2.1], item 19 (s 962T of the Corporations Act).

[9] Ongoing Fee Arrangements Bill, Schedule [2.1], item 19 (s 962U of the Corporations Act).

[10] Ongoing Fee Arrangements Bill, Schedule [2.1], item 19 (s 962V of the Corporations Act).

[11] Exposure Draft Explanatory Memorandum, Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2020 Measures)) Bill 2020, [1.24].

[12] Ongoing Fee Arrangements Bill, Schedule [2.1], item 13 (s 962H(2A) of the Corporations Act).

[13] Ongoing Fee Arrangements Bill, Schedule [2.1], item 13 (s 962H(2B) of the Corporations Act).

[14] Ongoing Fee Arrangements Bill, Schedule [2.1], item 19 (Corporations Act, s 962X).

[15] The full title of the proposed regulations is Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers) (Ongoing Fee Arrangements) Regulations 2020.

[16] Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers) (Ongoing Fee Arrangements) Regulations 2020, Schedule [2.1], item 2.

[17] Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2020 Measures)) Bill 2020: FSRC Rec 2.2 (disclosure of lack of independence), Schedule [2.2], item 5 (Corporations Act 2001, ss 942B(2)(fa) and 942C(2)(ga)).

[18] Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2020 Measures)) Bill 2020: FSRC Rec 2.2 (disclosure of lack of independence), Schedule [2.2], item 5 (Corporations Act 2001, ss 942B(2)(fa) and 942C(2)(ga)).

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