Ongoing advice fees - confirming client consent
Through the course of the Royal Commission, a consistent theme identified was ‘fees for no service’ – where a financial service licensee was still receiving remuneration from a product provider but was not providing the impacted member with any service for that fee. This included cases where fees were charged for ‘access’ to services or for an ‘offer’ of services as well as legacy arrangements which were subject to inertia, where relationships had ended but the authority for the payment of fees endured.
To combat this, Hayne made several recommendations, including:
- the removal of grandfathered commissions, which is legislated to take effect from 1 January 2021
- the removal of advice fees from MySuper products, and
- a requirement that all ongoing fee arrangements should be annually renewed by the client.
To implement the changes to advice fees, in January 2020 the Government released for comment exposure draft legislation which reform how ongoing advice fees operate. Whilst originally intended to be legislated by 1 July 2020, the impact of COVID-19 has resulted in the Government deferring its legislative implementation of the royal commission recommendations by six months.
At time of writing, legislation has yet to be introduced to Parliament, so it is important to understand the actual changes are still subject to change. The exposure draft also contained technical issues which resulted in the policy intent not being met, as well as a tangled nightmare of administration for advisers – so whilst this article considers the intent behind the proposed changes, it will be important for advisers to continue to keep up to date as this topic progresses.
The estimated state of play
The broad result of the exposure draft legislation is to bring all clients into an annual cycle of providing ‘consent’ to continue the deduction of fees. In effect, the changes intend to bring the ongoing fee changes and related disclosure requirements in line with the original Future of Financial Advice (FoFA) reforms.
In its original form, FoFA was to require that in addition to providing a fee disclosure statement (FDS) every 12 months, clients would also need to ‘opt in’ to continue their advice fees annually. However, the legislation exempted existing clients from the renewal requirement, and only requires impacted clients to opt in every two years.
The exposure draft links the advice fee opt in and FDS timeframes, requiring these documents to be prepared every 12 months. In addition, a new ‘consent’ document would be required to be prepared, signed by the client and provided to product providers as a ‘second check’ against ongoing fees continuing indefinitely by default. The fee consent must be prepared, provided and signed within a maximum period of 120 days after the last renewal period, which provides a window of time where fees are able to be deducted whilst the renewed consent is sought. However, at the end of this window or if the client revokes their consent the adviser has five business days to cease the deduction of any fees before breaching the new law.
The form of consent will be subject to direction from ASIC, who have also released a consultation paper on both the consent form, as well as proposed regulatory guidance on this new world of ongoing advice fees.
Amongst more generic information, the proposed consent form requires:
- An explanation why the adviser is seeking consent – with an example provided by ASIC being ‘I am seeking your consent so that I can arrange to deduct ongoing advice fees from your superannuation account’
- Information about the services the client will be entitled to receive under the arrangement
- The frequency, amount and time of payment of frees, or a reasonable estimate if the exact frequency, time is not known – including an explanation of the method used to prepare the estimate
- A breakdown of which accounts the fees will be paid from, if multiple accounts are being subject to a fee
- A statement confirming the consent can be revoked at any time.
When is this changing?
The exposure draft legislation included a commencement date of 1 July 2020, with a transition period of up to 12 months for existing clients. This date has come and gone, with the only public statement from the Government being the deferral of their legislative agenda in implementing the royal commission reforms for six months.
Based on that statement, the industry is presuming a ‘worst case’ scenario of the dates simply being moved back six months – so there is potential for these changes to be effective 1 January 2021, with a transition period of up to 12 months for existing clients.
An additional issue is at time of writing, ASIC expect to finalise the consent form closer to December. So even once we see the final legislation, we may still not have confirmation as to what form and information the new consent must take.
Does this achieve the desired result?
The introduction of the consent creates a positive confirmation from clients for fees to continue to be deducted, and so the proposed changes remove the issue of inertia in relation to ongoing advice fees.
However, at its core Hayne’s problem was with the deduction of fees for no service, and whilst the termination of ongoing fees when a client does not provide consent does not explicitly mean a fee for no service situation could apply. The new rules do not include any explicit requirement for either advisers or product providers to positively assess that the fees paid by a client have resulted in the delivery of adequate services.
Between the FDS, renewal notice and explicit consent the client should be well aware of not only what fees they are paying, but what they are expecting to receive going forward, as well as what is was delivered (and the fee charged) for the previous 12 months and should have all the information at hand to assess their position. Feedback we have received is that clients are paying more attention to disclosure and fees since the royal commission – and are more enquiring as to what they are getting for their money.
But it is not possible to completely remove the risk of fees being paid without the provision of a service.
Providing flexibility for advisers
The future of advice fees is under significant change. The timeframes and context of these changes are still unknown, however, we know advisers are looking at ways they can re-align their business practices to better address the issues of receiving fees without any service being provided.
To this end, we have recently launched a new advice fee type – a fixed term advice fee – on our Pursuit platform and will have equivalent functionality on our eXpand and Essentials product suite in the next couple of months. This new fee allows a client and adviser to nominate a fixed period of up to 12 months, during which a fee will be paid. At the end of the 12-month period, the fixed term fee will automatically cease, although an adviser could enter a new fixed term fee for a subsequent period. Advisers will need to consider their own licensee requirements in relation to the deduction of fees as to how they may use this new fee type, but if fixed term fees are something your business is considering, IOOF products are in a position to support your practice.