“On your marks – phrase used to instruct competitors in a race to prepare themselves in the correct starting position.”
— Oxford Language
There’ll be a number of significant regulatory reforms this year, but some of the biggest changes are also the most immediate.
On 1 July 2021, two of Commissioner Hayne’s more significant changes go live.
Even the better-resourced licensees may struggle with ‘business as usual’ while trying to understand, implement and embed these changes, but we’ve got your back.
Our mission is to back and support you, so, in addition to alerting you to these requirements we’ve developed a regulatory change calendar for your use and scheduled a range of webinars on the topics that will consume much of your attention (and resources) over the next year.
We’ll also continue to publish Three Hit Tuesday to provide you with topical insights and analysis.
The joys of independent living
Required Action
Review and amend your Financial Services Guide. Check for:
- Independence statement
- Removal of conflicted remuneration
- Removal of conflicted arrangements
- How your services (particularly ongoing services) are presented
- Appropriateness of updating complaints section now (RG271 commences in October)
Review your website and marketing collateral for inconsistent statements
Context
If you’ve been paying attention, you’re well aware that Commissioner Hayne recommended (Recommendation 2.2) that financial services providers that do not satisfy s923A should, explicitly, disclose in writing why they are “independent, impartial or unbiased”.
Notwithstanding the obvious limitations of disclosure, this requirement was reflected in Schedule 2 of the Financial Sector Reform (Hayne Royal Commission Response No.2) Act 2021.
Importantly, this recommendation only impacts people (Licensees or Authorised Representatives) who provide advice and services to retail clients. More important than the wholesale exemption is the fact that the obligation commences on 1 July 2021.
Defining Independence
ASIC, in Regulatory Guide 175 Licensing: Financial product advisers—Conduct and disclosure, recognised that Section 923A of the Corporations Act prohibited a financial services provider from using words and expressions, such as ‘independent’, ‘impartial’ and ‘unbiased’, if:
- They (or anyone providing a financial service on their behalf or anyone on whose behalf they are providing a financial service) receive:
- commissions (apart from commissions that are rebated in full);
- forms of remuneration calculated on the basis of the volume of business placed by the person with an issuer of a financial product; or
- other gifts or benefits from product issuers that may reasonably be expected to influence that person (s923A(2)(a)–(b));
- the provider doesn’t operate free from direct or indirect restrictions relating to the financial products in respect of which they provide financial services (s923A(2)(d)); and
- there are conflicts of interest that might arise from any relationships with product issuers and which might reasonably be expected to influence the provider (s923A(2)(e)).
As a result of Recommendation 2.2, the prohibition from claiming independence has become a positive duty to disclose the impact of the arrangements, relationships and conflicts that may influence you or the services you provide.
This means that from 1 July 2021, your Financial Services Guide must disclose your lack of “independence” and avoid using the words ‘independent’, ‘impartial’ or ‘unbiased’ (or any other similar word or phrase) unless you satisfy the requirements of s923A.
The Disclosure Requirement
This brings us to ASIC Corporations (Disclosure of Lack of Independence) Instrument 2021/125 that specifies how your FSG needs to be amended.
Despite the simple and concise explanation recommended by Commissioner Hayne, the Instrument only requires the addition of a statement that
- must appear on the first substantive page of the Financial Services Guide that contains the statement;
- must appear within a box under a bold heading that includes the phrase “Not Independent”, “Lack of Independence”, or another phrase of like import;
- must be in a font size that is at least the same font size as that predominantly used for other text (if any) in the Financial Services Guide; and
- must not appear in a footnote.
ASIC have provided a degree of flexibility on the composition, layout and wording of the disclosure but they will not accept statements that are either inconsistent with the Commission’s recommendations or likely to imply independence. They have, explicitly, rejected headings such as ‘Statement on the independence of our firm’, ‘Statement of Independence’ or ‘Independence’. Their position on this requirement is further addressed in REPORT 687 “Response to submissions on CP 329 on advice fees”
Curiously, neither the Schedule nor the Instrument expand on the obligation to explain why you are not independent. (To be fair, that’s left to s942B(2)(fa))
This may explain why ASIC have not prescribed the detail that must be included in the lack of independence disclosure statement. They have, however, suggested that you might choose to explain that you can neither assert, nor imply, independence because:
- You are receiving commissions on the sale of life risk insurance products and do not rebate these, in full, to your clients: s923A(2)(a)(i).
- You are wholly owned by an issuer of the financial products that you give personal advice on to retail clients: s923(2)(e).
- Your AFS licensee, or another authorised representative that is authorised by your AFS licensee, receives commissions, volume-based payments or other gifts or benefits: s923A(2)(a)(i)–(iii) and s923A(2)(b).
Managing Disclosure
Even in the absence of an explicit regulatory requirement, it makes commercial sense to present the disclosure in a manner likely to be understood by your clients and in a form that makes their free, prior and informed consent reasonable. (FASEA Standards 1 and 4). We’d recommend that you consider your client base and prioritise their understanding of the issue and its impact over formal disclosure.
You could, for example, use
OR
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Additional Reading
Frequently asked questions (FAQs) – Advice fee consents and independence disclosure
CP 329 Implementing the Royal Commission recommendations: Advice fee consents and independence disclosure
Report REP 687 Response to submissions on CP 329 on advice fee consents and independence disclosure
Renewals, consents and fees
Commissioner Hayne also recommended (Recommendation 2.1) that the law should be amended to provide that ongoing fee arrangements (whenever made):
- must be renewed annually;
- must disclose, in writing, the services that the client will be entitled to receive that year and the total of the fees that are to be charged; and
- 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.
The Financial Sector Reform (Hayne Royal Commission Response No.2) Act 2021 implemented the government’s response to this recommendations in Schedule 1 and Schedule 3.
These requirements apply from 1 July 2021 with a 12-month transitional period commencing 1 July 2021 for arrangements entered into before 1 July 2021.
The key impact of these changes is that, if you plan to continue to operate on an ongoing fee arrangement, you will need to update your existing FDS to include the additional content and the annual fee consent.
Although the “Enhanced FDS” may require significantly less disciplined processes than those required to support fixed term agreements, there is some complexity around transition arrangements and annual consent requirements.
The start date for the new obligations is 1 July 2021 and any client that commits to an ongoing service agreement on or after 1 July 2021, must receive an enhanced FDS (and sign an annual consent) by 1 July 2022.
If you use fixed term contracts to define your arrangements with your clients, very little has to change but you’ll need to ensure that you have adequate processes and arrangements in place to avoid slipping into an ongoing service arrangement. You’ll also need adequate processes and arrangements in place not to be seen to be avoiding the consumer protection provisions provided by an ongoing service arrangement. We appreciate this is more nuanced than some commentators suggest, but we’re happy to help you reconcile the risks and obligations.
Definitions and assumptions
Before we dive into the new requirements, it’s important to clarify the requirements. First, in accordance with s962A, an Ongoing Fee Arrangement is an arrangement for the provision of personal financial services (which may include personal advice) under which a fee (however described or structured) is to be paid during a period of more than 12 months. An arrangement under which a fee (however described or structured) is paid for 12 months or less, is not an ongoing fee arrangement. However, it’s important to appreciate that there are circumstances where your processes, or conduct, can transform a fixed term agreement into an ongoing fee arrangement.
Specific consent
Let’s start with your obligation to obtain your client’s written consent to an ongoing fee arrangement. As a fee recipient, you must obtain your client’s written consent before you can deduct, arrange to deduct, or accept the payment, of fees under an ongoing fee arrangement. There’s some flexibility in the design and language of that “clear, concise and effective” consent but it must include the following information:
- your client(s)’ name;
- the name and contact details of the fee recipient (i.e. your name and contact details);
- an explanation of why you are seeking your clients’ consent;
- information about the ongoing fees your client will pay in the upcoming year, or a reasonable estimate (including the calculation method);
- information about the frequency, and source, of the ongoing fee deductions that the account holder will pay during the upcoming year (e.g. ‘$150 per month from your platform’s cash management account’);
- a statement about how long the consent will endure;
- a statement that your client can vary or terminate their written consent at any time; and
- a date indicating when the consent was given by the account holder.
Managing consent
ASIC have published an example ongoing fee consent form that they consider meets the requirements in ASIC Corporations (Consent to Deductions—Ongoing Fee Arrangements) Instrument 2021/124.
Remember that the FDS and the written consent can, and in our view should be, be designed as a single document. This approach is not only more consistent with FASEA Standards and engagement principles, but a commercial approach that minimises duplication and improves compliance outcomes.
Written consents can be obtained digitally (website, docusign or email) and you’re unlikely to encounter regulatory issues where the consent is clear, explicit, secure and time-stamped. For example, ‘By pressing “I agree”, you consent to the charging of the ongoing fees that are set out in this document’.
Just remember that if you are drawing fees from a joint account, you’ll need the written consent of all account holders.
Although ASIC have provided significant guidance on these requirements, they’ve adopted a similarly flexible and facilitative approach on the additional content required in the enhanced FDS. Although there is a chorus of voices seeking prescription and regulatory certainty, ASIC may not do so before 1 July or even after that date, so you may be best advised to simply add the additional content (prospective costs and services) to your current FDS (retrospective costs and services)
We are working with a number of our clients to build, or refine, a combined Client Consent and Enhanced FDS template.
Superannuation Trustees and Client Consents
Even if you’re not providing ongoing service, you may have noticed that some Superannuation trustees (and some non-superannuation platform providers) require you to provide them with a member’s written consent (or a copy of the consent) before they approve the request to deduct non-ongoing fees from the member’s account.
Superannuation trustees have a legal obligation to obtain a member’s written consent or a copy of the consent before they deduct non-ongoing fees from the member’s account. Some have chosen to interpret this obligation to require a copy of the Statement of Advice and a copy of the Service Agreement to which the consent relates. This appears to be an expansive interpretation of their requirements, but one best addressed by the Licensee.
The written consent from a fund member must meet the requirements set out in the Instrument and contain, at a minimum, the following requirements:
- the name of the member
- the name and contact details of the superannuation fund
- the name and contact details of the provider of the financial product advice
- an explanation of why the member’s consent is being sought
- how long the consent will last
- information about the services that the member will be entitled to receive under the arrangement
- the costs, or a reasonable calculation of the costs, that will be deducted from the member’s account and details of the superannuation account(s) that the costs will be deducted from
- a statement to the effect that the member can withdraw their written consent at any time before the cost is passed on to the member (by contacting the fund)
- a date indicating when the consent was given by the member.
It’s important to appreciate that Superannuation Trustees have considerable discretion and are not compelled to deduct advice fees (other than fees for intra-fund advice) from a member’s superannuation account. They can choose to do so if:
- the fee or cost is in accordance with the documented arrangement to which the member has explicitly consented;
- the consent complies with the law and is documented in written form;
- the trustee has the consent, or a copy of it.
Additional Reading
Frequently asked questions (FAQs) – Advice fee consents and independence disclosure
ASIC’s Sample Written Consent Form – ongoing fees.
Explanatory Memorandum for Financial Sector Reform (Hayne Royal Commission Response No.2) Act 2021.
If you’d like our assistance, please contact help@assuredsupport.com.au.
