“Transparency increases credibility and accountability”
— Park Won-Soon, Advice-Tech Provider
The ongoing search for clarity
With so many Advisers leaving their Licensees, understandably there are a lot of questions as they begin to navigate what they have been required and requested to do, versus what the law expects and then documenting processes that align with their own understanding and risk appetite.
One of the most common questions we are asked; ‘is an FDS required when the ongoing service arrangement ceases prior to the anniversary date’?
Instead of relying on “that’s what we’ve been told”, we would encourage all Licensees and Advisers to scrutinise their understanding of existing standards and processes, to align to their own risk appetite.
ASIC provided guidance for ongoing fee arrangements through the release of Information Sheet 256 in June 2021, and in our previous article FDS: As easy as ABC we spoke about the evolution of Financial Disclosure Statements (FDS) and provided further explanation about enhanced FDS obligations.
In our view, ASIC has been practical and facilitative in addressing the industry’s confusion and uncertainty. Despite this, we believe there are times where Advisers will look to compliance professionals, like Assured Support, for further guidance in interpreting ASIC’s FAQs before implementing workflow process changes.
We believe the 2021 changes to Ongoing Fee Arrangements (OFA) may have caused some confusion in the industry, particularly with respect to a provider’s obligation when an OFA ceases, or is terminated, before the anniversary date.
There are some who suggest that if an OFA doesn’t run for 12 months (s962A), the termination imposes no obligation on the providing entity to provide a FDS. In this article, we’ll consider common responses to this scenario and offer some alternative considerations. As the providing entity, you’ll make your own determination but we’d encourage you to avoid positions that might be interpreted as a misinterpretation of s962A or seen as avoiding both the law and the intent of the law (s965).
The obligation to provide an FDS is created at the time the clients enter into an Ongoing Service Agreement; such Agreements are subject to standard contractual requirements in addition to specific requirements under the Corporations Act.
For an OFA to exist, at the time of the contract, when, the Ongoing Service Agreement was created, the parties by definition knew or intended that fees were to be paid (future tense) over a period of more than 12 months.
Section 962A(1)(c) does not require fees to actually be paid over a period of 12 months, it simply requires that “under the terms of the arrangement, a fee (however described or structured) is to be paid during a period of more than 12 months“. s962A(1)(c)
Therefore, in the event the Agreement is terminated early, have you considered whether there is still an obligation to provide a FDS to cover the term that the ongoing fee arrangement was in place?
Application and avoidance
Taking into account our learnings from s962A, let us review the below scenario:
*This scenario is post transition period, i.e. a forward looking example.
** To be clear, when we refer to an Ongoing Service Agreement (or Ongoing Fee Agreement) we’re referring to the contract between the parties that evidences the Ongoing Fee Arrangement. We appreciate it’s confusing, but advisers tend to think in terms of services and agreements rather than fees and arrangements.
Client commenced an Ongoing Service Agreement with ABC Financial Planning; client signed the Agreement 03 March 2020, meaning a FDS anniversary date of 03 March 2021. ABC Financial Planning provided the client with an FDS for the period 04 March 2020 to 03 March 2021.
Client received an inheritance and sought advice on their investment options. The Adviser provided an advice document (SoA) and a new Ongoing Service Agreement, which had been adjusted to include the increase in funds under advice. The new Ongoing Service Agreement was signed by the client 03 November 2021. This new Agreement triggered a new anniversary date, which is now 03 November 2022.
When the client entered into the initial arrangement in March 2020, the intent of that Agreement was to provide the client with an ongoing service.
Some Licensees and Advisers would take the position that, since the Arrangement ceased prior to the anniversary date, ABC Financial Planning has no obligation to provide a FDS for the fees they received and services provided to the client for the period 4 March 2021 to 2 November 2021.
This position means that nearly 8 months of fees and services are not retrospectively disclosed to the client. This begs the question, is this the intent of the law?
Working off the same scenario, if the client continues their relationship with ABC Financial Planning, the Adviser could simply vary, rather than replacing, the Ongoing Service Agreement. A variation to the existing arrangement would not trigger a new anniversary date, and most importantly, the client would have full disclosure of all the fees paid and services received by the client due to continued FDS coverage.
Many Licensees, in similar circumstances to our hypothetical example above, would require the adviser to either provide an FDS for the period or provide the client with equivalent content in a different form (such as a Fee Statement).
Their approach is reasonable but does the obligation change if the client (or Adviser) ceases the Ongoing Fee Arrangement, with no continuation of ongoing services?
What if the client moves to a new Financial Adviser after the termination of the OFA? When they inevitably discuss the previous advice they received (including fees and services), will the client be aware of the fees they have paid?
Will the client be aware of the services they received or will the perceived lack of transparency trigger a complaint or other claim?
The importance of timing
Is time something to consider?
Licensee’s may choose to introduce an FDS obligation that correlates with not only their risk appetite, but also, the ongoing service arrangement timeframe, for example:
Under 3 months
The Licensee may decide that no FDS or Fee Summary Statement is required where a client (or Adviser) ceases the ongoing arrangement within 3 months of commencement.
Under 6 months
The Licensee may decide to provide the client with a Fee Summary Statement, disclosing all fees paid to date upon termination of the ongoing service arrangement.
Over 6 months
The Licensee may determine that if the OFA operated for longer than six-months, then it’s appropriate to provide an FDS on termination of the Ongoing Fee Arrangement.
If the Licensee’s standard currently allows for ongoing fee arrangements to cease prior to the anniversary date with no FDS obligation, what measures do they have in place to ensure this does not become common practice or a strategy to avoid what some providing entities may perceive as pointless disclosures?
Some Licensee’s may insist that an FDS is only required where the Adviser ceases the arrangement. This may be an appropriate strategy to mitigate the risk of misconduct but should the obligation to provide an FDS be driven by who ceases the arrangement?
In our experience, most advisers do provide an FDS (or equivalent content) where the client (or Adviser) ceases the Ongoing Fee Agreement, with no continuation of ongoing services. The closing FDS (or equivalent content) discloses the fees received and services provided for the previous 12 months, and confirmation of the termination of the Ongoing Fee Arrangement.
All FDS’ must meet s962H requirements, ensuring the client understands the fees that have been charged for the previous 12 months, as well as the fees that will be charged in the upcoming 12 months. Our article ‘Updated questions (and answers)’ will provide a greater understanding of FDS disclosure requirements. – Editor
Intent and outcomes
Each providing entity should consider their approach to these requirements in a manner consistent with their risk appetite. There are diverse views on the requirements and a providing entity needs to consider both what they “can do” and what they “ought to do”.
If an adviser chooses not to provide FDS’ for clients that have ceased an Ongoing Fee Arrangement before the anniversary date, could this decision be interpreted as an attempt to avoid the consumer protection provisions of the law, to the clients’ detriment?
Is this approach an intended outcome of the Royal Commission and subsequent reforms?
Does this approach provide the consumer protection needed by retail clients?
If representatives have discretion is this respect, does the licensee have adequate monitoring and supervision capability to ensure their clients’ interests are protected?
We appreciate that this article may offer more questions than answers but if you would like assistance in clarifying your uncertainties or review of your Financial Disclosure Statements, please contact our Operations team via help@assuredsupport.com.au
