Although it’s popular to dismiss the core of ASIC’s report on ongoing service as the inevitable consequence of vertical integration, inadequate resourcing and legacy issues, the perceived complexity of the disclosure and engagement processes introduced by FOFA played a part.
Although competent Licensees and capable advisers embraced and operationalised these requirements, they still have questions.
Here are five of the most frequently asked questions (and a 2021 update).
What’s the purpose of the Fee Disclosure Statement?
According to the Replacement Explanatory Memorandum, the intent of the obligation was to capture ongoing fee arrangements and impose a disclosure obligation (supported by a requirement for active renewal) that would “protect disengaged clients from paying ongoing financial advice fees where they are receiving little or no service”.
Given that good advisers embrace value and the need for ‘free, informed and prior’ consent, they often consider the legal imperative as simply supporting their moral and professional obligation. The Fee Disclosure Statement provided a disclosure tool that was intended to nudge the industry closer to professional practice.
It’s important to recognise that the obligation to provide a Fee Disclosure Statement does not apply to short-term arrangements. Despite the alarmist views endorsed by conservative commentators, the law and regulatory policy is clear
An ongoing fee arrangement exists when an AFS licensee or its representative gives personal advice to a retail client and the client enters into an arrangement with the licensee or representative, the terms of which provide for the payment of a fee during a period of more than 12 months”
What needs to be included in a Fee Disclosure Statement?
The ongoing service arrangement between the adviser and the client prospectively outlines the key elements of the contracted services. The Fee Disclosure Statement is a backward looking document that has both a more limited scope and some mandated inclusions. The FDS must include the following information :
- the amount (in Australian Dollars) of each ongoing fee paid by the client under the ongoing fee arrangement in the previous year. Please note that the FDS must disclose dollar amounts and not, for example, a percentage of funds under advice or management;
- information about the services that the client received under the arrangement in the previous year; and
- information about the services that the client was entitled to receive in the previous year. (including from any previous AFS licensee or representative under the client’s ongoing fee arrangement).
Although not explicit, the requirements and the declared legislative intent suggest that the FDS should provide a clear and accurate comparison of the ‘contracted services’ against the ‘provided services’. Unfortunately, some Fee Disclosure Statements seem to have, to their detriment, overlooked this expectation.
When does an FDS need to be provided?
Under the law (s962G and s962S) clients must be provided with an FDS within 60 days of the ‘disclosure day’.
The introduction of the ‘disclosure day’ seems to have caused some confusion but, for simplicity, the ‘disclosure date’ is either the date the ongoing service arrangements commenced OR the date of the last FDS provided to the client.
Disclosure dates can be reset – but only by being brought forward.
Bear in mind these requirements from 1 July 2022. From that date, ‘Disclosure day’ was replaced the ‘Anniversary day’. The Anniversary Day is the date, after 1 July 2021, that the ongoing service arrangement was ‘entered into’ [refer s962G(3)].
What if an FDS isn’t provided?
Failure to comply with the content requirements for an FDS results in the termination of the ongoing fee arrangement:
In addition, a civil penalty may be sought if ongoing fees are charged after the arrangement has terminated.
Of course, these obligations are not applicable if the ongoing fee arrangement relates to instalment payments of the original advice fee or if it does not relate to “a period of more than 12 months:
Why don’t FDS’ work (well)?
“The fee disclosure statement is plainly a backward-looking document, looking back at what services the client was entitled to receive, and what services were provided. Neither the definition of ongoing fee arrangement in section 962A(2) nor any other provision of the Corporations Act appears to require an adviser to identify prospectively with any degree of specificity what services the client will be entitled to receive, and what services will be provided. ”
— Final Report, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, p 160
One of the key deficiencies of the FDS regime, beyond the limitations of disclosure, is that neither the Ongoing Service Agreements, industry practices nor the Corporations Act provide “any degree of specificity [about the] services the client will be entitled to receive, and what services will be provided”. In the Commissioner’s view. “a financial adviser who enters into an ongoing fee arrangement with a retail client should be required to provide to the client – every time the ongoing fee arrangement is made or renewed – a statement of the services that the client will be entitled to receive under the arrangement during the coming year.”
Historically, financial advisers would have vocally opposed increased disclosure obligations. It is perhaps an indication of the growing professionalism of the advice industry (and the reducing influence of conflicted and indirect remuneration) that many Licensees have chosen to adopt more rigorous consumer protection mechanisms that, in addition to better engaging clients, will no longer require them to provide Fee Disclosure Statements.
They will, for reasons of commercial and contractual certainty, probably provide a similar document but one more likely to be more accessible and engaging.
Simply, these licensees have, in the absence of a regulatory catalyst, chosen to implement fee arrangements that are renewed annually, paid in arrears or instalments, and supported by detailed and specific contractual terms. These initiatives are entirely consistent with Commissioner Hayne’s ‘central changes’ (Recommendation 2.1 – Annual renewal and payment for financial advice) and in advance of the Implementation Roadmap that promises that enabling legislation will “be consulted on and introduced by 30 June 2020”.
To be clear, moving to annual engagement is not an avoidance strategy but a consumer-first strategy that will enable clients to easily “determine whether they are receiving service commensurate to the fees they have paid.”
We hope this helps you but if you have additional questions, please contact us and let us know.
We’re sure we can help you.
In November 2019, ASIC released REP 636 “Compliance with the fee disclosure statement and renewal notice obligations “. The Report reiterated the FDS requirements and, based on ASIC’s review of thirty Licensees, suggested widespread non-compliance.
read asic’s report 636
2021 Update
Legislative and regulatory reform has delivered some significant changes to ongoing service arrangements (and Fee Disclosure Statements).
Essentially, from 1 July 2021:
- An adviser must disclose in writing each year the services that the client will be entitled to receive and the total of the fees that are to be charged (prospective costs) and the services that the client was entitled to receive and did receive as well as the total of the fees that were charged (retrospective costs);
- An adviser may neither permit nor require payment of fees from any account held for or on behalf of the client except on the client’s express written authority to the entity that conduct that account given at, or immediately after, the latest renewal of the ongoing fee arrangement;
- A client’s ongoing service agreement and consent must be renewed annually;
- Superannuation Trustees (and some platform providers) will require formal evidence of consent before approving the payment of advice service fees.
There are additional nuances, complications and implications that need to be considered, so we recommend that you also read:
Amended timeframes
In addition to the flexibility provided by the transition period, and the replacement of the “disclosure date” with the “anniversary date” there are some key changes to your disclosure timeframe.
Once you’re in the new regime, the Anniversary Date becomes the foundation for all your obligations.
- The Enhanced FDS and Ongoing Service Agreement needs to be provided within 60 days of the anniversary date.
- The Ongoing Service Agreement (and consent) needs to be confirmed or renewed within 120 days of the anniversary date.
- The Consent to deduct/receive fees expires 150 days after the anniversary date.
For example, if your client signed the Ongoing Service Agreement on 1 August 2021 then 1 August becomes the Anniversary Date.
You’ll need to provide your client with an FDS and a Renewal and Consent by 30 September 2022.
The original Service Agreement will expire on 29 November 2022 and the consent will expire on 29 December 2022.
