On January 31, Treasury released a swathe of consultation papers relating to reforms recommended by the Hayne Royal Commission. It is easy to miss the the impact of these reforms amidst the flood of draft bills, regulations and consultation papers. In this month’s Industry Insights we’ll take a close look at the detail of some of the most significant changes heralded by these consultations.
A broad brush
Treasury’s consultations contain more than a dozen draft bills and regulations. Some of the consultations that are pertinent to financial advice are:
- Ongoing fee arrangements and declaring a lack of independence
- Advice fees in superannuation
- Strengthening breach reporting
- Enforceability of financial services codes of conduct
The discussion below focuses on ongoing fee arrangements, independence and advice fees in superannuation. That said, the enforceability of financial services codes of conduct has the ability to have a major impact on advisers and licensees. How large of an impact depends on how many provisions in the various codes of conduct are declared by ASIC to be enforceable, and how this enforcement is aligned with the as-yet-unidentified central disciplinary body.
Ongoing fee arrangements
The headline reform from the ongoing fee arrangements consultation is the requirement for clients to opt in to ongoing service arrangements annually, as opposed to every two years.
That said, there is much more buried in the detail of the bills.
The changes related to ongoing fee arrangements are drafted to take effect from July 1, 2020, with a limited transition period around seeking consent for clients that are in an ongoing service arrangement before that date.
Consent to deduct fees
Currently, advisers are not required to gain specific client consent to deduct ongoing fees from a product or account under an ongoing service arrangement after the initial agreement. The draft legislation would require such consent to be obtained annually, and before any fees are deducted.
Such consent contains a few tricks and traps, particularly when deducting fees from third party or joint accounts.
Where a fee is deducted from a product or account controlled by a third party, the third party must be provided with a copy of the client’s written consent to have the fees deducted. This proposed change is supported by reforms contained in the consultation on advice fees in superannuation that require a super fund to receive a copy of the client’s consent before allowing advice fees to be deducted from their account.
Where a fee is deducted from a jointly-held account, consent must be obtained from ALL the account holders before the fee can be deducted. This is the case regardless of whether the other account holders received any advice.
Under the draft legislation, having ongoing fees deducted from a third-party or joint accounts will require significantly more administrative discipline than using an account held solely by the client or having the client pro-actively pay the ongoing fee.
End of grandfathering
Currently, there are no opt in requirements where the adviser or licensee has been providing advice to the client since before July 1, 2013. The draft legislation would end this grandfathering and the opt in requirements would apply to all clients.
Fee disclosure statements
Fee disclosure statements under the draft legislation would need to include information about proposed services and costs for the coming year, as well as those services received, and fees paid, by the client in the year passed. Currently fee disclosure statements only look backwards.
No more code exemptions
One feature of the current ongoing fee arrangement regime is that advisers may be exempt from the Corporations Act requirements if they subscribe to an approved industry code of conduct.
One example of such a code of conduct is that created by the Financial Planning Association of Australia (FPA). Under the FPA’s code, clients need only opt in to an ongoing service arrangement every three years, not two.
The draft legislation would remove such code exemptions from the Corporation Act, effectively creating one set of rules for all advisers.
Note – Searches conducted on the FPA’s public register of code subscribers would suggest this won’t impact many advisers.
No more advice fees from MySuper
Under the draft legislation, charging advice fees in MySuper products would be prohibited (with the exception of intra fund advice fees). As mentioned above, the charging of ongoing advice fees from non-MySuper products would require a copy of the client’s consent to be provided to the fund’s trustee annually.
Under the same consultation as ongoing fee arrangements, Treasury issued a draft bill that would require advisers to declare a lack of independence through the Financial Services Guide (FSG). This change would also take effect from July 1, 2020.
A tough definition of independence
The draft legislation uses the definition of independence in section 923A of the Corporations Act, and it is a tough school.
Whether an adviser can claim independence basically comes down to how clients and product providers pay that adviser, and the relationships between the adviser and product providers.
An adviser with a relationship or association with a product provider that could reasonably be expected to create a conflict of interest and exert influence on their decisions would not be considered independent. This would rule out all advisers with institutional licensing or ownership arrangements.
Of those remaining, any adviser who receives commissions or volume-based payments (even on life insurance) is also not be considered independent. This applies even if it is the adviser’s employer, or an entity on whose behalf the adviser provides a financial service, who receives the payment.
Finally, any adviser who is restricted in the products they can recommend is also not considered independent. ASIC has released a statement on how it views Approved Product Lists (APLs) in light of this rule. The key factor is` how hard it is to recommend a product off-APL. If it is too hard, the adviser cannot claim themselves to be independent.
These rules leave a startlingly small number of advisers who can claim to be independent. Most advisers in Australia currently would not be considered independent and would be required to make the statement outlined below in their FSG should the bill be passed unchanged.
The declaration of non-independence
If an adviser and/or licensee is not one of the very few who meet the Corporations Act’s definition of independence, they are required to include the following information in their respective FSGs:
- A statement affirming that the adviser and/or licensee is not independent, impartial or unbiased, and
- The reasons why the adviser and/or licensee does not qualify as having any of these qualities.
ASIC has the ability to require specific wordings to be used in these declarations so, in practice, licensees and their advisers may have no discretion over how this information is presented to clients.
Speak now or forever hold your peace
A Treasury consultation is the meaningful starting point for many major reforms, and Treasury is accepting submissions on these consultations until February 28 (see the links at the top of this article). That said, once the consultation is complete, the legislative process is likely to move rapidly, with many reforms having a slated commencement date of July 1, 2020. These changes are likely to have a serious impact on the industry and you will need to move quickly to have your voice heard.