Proposed changes to ongoing advice fees

ByJosh Rundmann, Technical Services Manager

An important recommendation from the Financial Services Royal Commission was a requirement that ongoing advice fees should be re-authorised every 12 months. The recommendation was for fees to be re-authorised between the adviser and the client for continued service, as well as with the product provider to confirm continued payment of advice fees.

In order to satisfy this recommendation the Department of the Treasury (Treasury) has released exposure draft legislation outlining their intended implementation. As an exposure draft, it’s reasonable to expect the specifics may change before it’s introduced to Parliament, where further amendments may then be put forward. This means it’s important to keep in mind that the following analysis of the proposed changes may not reflect what is eventually legislated. Accordingly, it’s important you follow your licensee guidelines and remember that these changes are only proposals at this stage.

Proposed changes

At a high level, the proposed changes replace the current bi-annual renewal requirement with an annual consent requirement and incorporates future services and expected costs into the fee disclosure statement (FDS) process. The new FDS would not only be required to show services offered and provided for the fees collected in the previous 12 months, but to provide detail on the services to be provided and fees to be charged for the next 12 months. Where the amount of the future fee is unknown at the time, for example, if the fee is based on a percentage of assets, a reasonable estimate must be provided, as well as an explanation as to how the estimate was calculated.

The draft legislation also proposes that clients will need to give consent to all ongoing fee arrangements each time an FDS and renewal notice is provided to them. This consent is in addition to the existing renewal notice and FDS documents. ASIC will be given the power to stipulate what the requirements are for a valid consent. Advisers need to retain copies of the valid consent for five years. Failure to do so will be a criminal offence. If the ongoing fee is being deducted from a financial product provided by a third party, the adviser will have to provide a copy of the consent to the product provider to allow the provider to continue to pay the fee.

The consent only endures until 60 days after the next annual FDS and renewal notice is given to the client. In total this allows a maximum window of 120 days from the renewal anniversary to when consent is deemed to cease, as advisers have 60 days from the renewal anniversary to prepare the statement and renewal notice and then 60 days from when the statement is prepared to when consent is deemed to cease. After this period an adviser cannot accept payment of a fee or arrange the deduction of a fee without an updated valid consent. Product providers are also prohibited from paying ongoing fees after the renewal timeframe has passed.

Additionally, the client can withdraw or vary the consent at any time. If a client withdraws consent, the adviser has five business days to provide a copy of the withdrawal or variation of consent to any product provider paying the adviser an ongoing fee.

The proposed commencement date is 1 July 2020, however, existing clients who have ongoing fee arrangements with advisers are subject to a transition window with the timing dependent upon whether:

  • the client is currently receiving bi-annual opt in renewal notices, if they are, then the new requirements are proposed to apply from 1 July 2021
  • the client was grandfathered from the bi-annual opt in renewal requirement, if they are, then the new requirements are proposed to apply from 1 January 2021.

If the draft legislation is passed in its current form, advisers would need to consider the following:

  • The existing FDS process dates are replaced by renewal dates under the proposed legislation. Currently, FDS dates are structured to require re-disclosure based on a fixed 12-month period from the date covered by the previous FDS. The renewal timeframes reset based on the date the client renews their agreement each year. This causes an issue where an FDS may not be able to cover the full period elapsed since the previous FDS, resulting in gaps in disclosure. This is a technical issue with the legislation.
  • Advisers will need to change their FDS document and process to show both future services and their associated fees which will be deducted. Where advisers apply a percentage fee, this must include an estimate which shows how the estimate was calculated.
  • Product providers will need to obtain the renewal date for each investor, to determine the period to which the client has consented to advice fees. This may necessitate the provision of additional information to product providers during the transition period. Please note, the renewal date is related to the adviser-client relationship, over which the product provider is unlikely to have any visibility.
  • The draft legislation specifically states the adviser must provide the signed consent to the product provider, it cannot be provided via the client.
  • These requirements are in addition to the existing corporations law requirements around clear and specific instructions for the deduction of advice fees.

Attempting to guess the future decisions of the Government comes with substantial risk. The below dates are important when attempting to understand the potential for this proposal to pass into law:

  • The current exposure draft consultation period closes on 28 February 2020.
  • The next time both houses sit after this date is 23 to 26 March 2020 – which is the earliest time we would expect legislation to be introduced to Parliament.
  • Neither house sits in April, with the next sitting after 23 to 26 March being 12 to 14 May, and this is when attention will be focused on the Federal Budget.

What else is happening in relation to the Hayne Royal Commission recommendations?

Treasury have also released exposure draft legislation on other Royal Commission recommendations, including:

  • updates to the financial services guide requirements to include statements of ‘lack of independence’ where an adviser is not independent as measured by whether they could use restricted terms, such as independent under existing law
  • enhanced breach reporting requirements
  • requirements for AFSL holders to share information in relation to employees and enhanced reference checking requirements
  • removing the ability for super fund trustees to deduct advice fees from MySuper products
  • removing hawking exemptions for insurance and superannuation products
  • changes to life insurance application and disclosure requirements to limit when an insurer can avoid the contract
  • legally enforceable industry codes of conduct
  • super trustees are to hold no other role or office.

The proposed commencement of the majority of this draft legislation is 1 July 2020, however, transitional arrangements may apply, and changes may be made during the consultation period or when bills are introduced to Parliament.

As the proposals are not yet legislated it’s important that advisers should continue to follow licensee guidelines until updated ones are provided.

More information

If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.

The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.