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What You Need to Know About Changes in Fee Consent and Lack of Independence Regulations

FFNS

In recent years, financial advisory firms have been under scrutiny for harming their customer bases in a variety of ways, including fees for no service and providing inadequate guidance, especially in circumstances where a conflict of interest exists between advisers and their clients’ best interests.

A Royal Commission into these activities has introduced new recommendations in order to enact a fair balance between the two parties, keeping the regulatory burdens on advisers and superannuation industries, whilst also ensuring customers will receive appropriate, relevant guidance geared to benefit their position. As of 1 July 2021, advisers are obligated to follow the instructions laid down in the Advice Fee and Independence Act. These include:

  • The introduction of ongoing fee arrangements to be renewed by the client on a yearly basis, and preventing Australian Financial Services (AFS) licensees to withdraw ongoing fees without consent
  • The responsibility of AFS licensees to disclose to clients that they are not ‘independent, impartial or unbiased’ (as defined under section 923A of the Corporations Act)
  • The limitation of advice fees being deducted from superannuation accounts

Changes to Financial Advisor Ongoing Fee Arrangements

AFS licensees are now obligated to submit to their clients a Financial Disclosure Statement (FDS) each year, and within 60 days of what is now known as their ‘Anniversary Day’. This new term will take the place of previously used designations, such ‘Renewal Notice Day’ and ‘Disclosure Day’. It will refer to the date you first provide a client with an FDS post July 1, 2021 if they are an existing client, and if they are new, it will refer to the date you initiate the ongoing fee arrangement.

The FDS must outline the services to be received by the client and the fees set to be paid throughout the year, as well as a clear statement that, should the client fail to renew the ongoing fee arrangement within 120 days of their Anniversary Day, it shall be terminated. This is crucial, as the new rules also state fees must not be deducted without the client’s consent, which expires 150 days after their next Anniversary Day. For consent to be obtained via the FDS sent to the client, it must contain detailed information outlining why consent is needed, the accounts fees will continue to be deducted from, and the options for the client to withdraw their consent.

Should a client wish, they have the right to terminate an ongoing fee arrangement at any moment within the 12 months. Should termination occur, then it is the obligation of the Fee Recipient to contact the client and provider of the financial product within 10 days of the termination date. Should the Fee Recipient fail to do this, then it will be considered a civil penalty provision.

The Need for Financial Advisers to Disclose Lack of Independence

To ensure clients receive unbiased services, financial advisers must issue Financial Service Guides (FSG) outlining they are not acting independently on the front page. The term ‘independent’, according to Section 923A of the Corporations Act, is restricted for use unless advisers cans meet a list of stringent criteria. Most advisers cannot identify as independent, given they operate under certain practices, such as collecting insurance commissions, being limited to the products they are able to recommend, or owning/being owned by product providers.

FSG documents issued must not only state whether advisers are operating in a manner that is not independent, impartial or unbiased, but must also explain why. ASIC has taken a firm stance that they will not outline what firms should include within this disclosure document. This places each firm with the duty to disclose the operating model upon which they do business, but also affords them with the flexibility to describe their offerings in a consumable fashion for the current and prospective clients.