Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon J. B. Hockey MP)

Chapter 2 Ongoing fee arrangements

Outline of chapter

2.1 Schedule 1 to the Bill amends Part 7.7A of the Corporations Act 2001 (Corporations Act) to:

•

remove the renewal notice obligation for fee recipients;

•

make the requirement for providers to provide a fee disclosure statement only applicable to clients who entered into their arrangement after 1 July 2013; and

•

extend the time period within which fee disclosure statements must be provided to a client.

Context of amendments

2.2 The Government has committed to provide certainty and reduce compliance costs for small business and financial advisers, whilst maintaining the quality of advice for consumers who access financial advice. See Outline for further information.

Removal of the 'opt-in' requirement

2.3 The current law provides that licensees or representatives ('fee recipients') who have an ongoing fee arrangement with a retail client whose ongoing fee arrangement commenced after 1 July 2013 must obtain their client's agreement at least every two years to continue the ongoing fee arrangement, for new clients. If, after receiving the renewal notice, the client decides not to renew or fails to respond to the fee recipient's renewal notice, the ongoing fee arrangement terminates.

2.4 The Government has committed to remove the requirement for fee recipients to obtain their client's approval at least every two years in order to continue an ongoing fee arrangement (known as the 'opt-in' requirement) on the basis that the current law imposes unnecessary costs.

Changes to fee disclosure statements

2.5 The current law provides that licensees and representatives must give all retail clients who have an ongoing fee arrangement a fee disclosure statement which shows the fees paid by the client, the services the client received, and the services the client was entitled to receive, in the previous 12 months.

2.6 The Government has committed to making the annual fee disclosure statements prospective only. In other words, a fee disclosure statement only needs to be sent to clients charged an ongoing fee during a period of 12 months or more where the ongoing arrangement was entered into after 1 July 2013. It is not required for arrangements entered into prior to 1 July 2013.

2.7 The current law requires a fee disclosure statement to be provided to a retail client within 30 days of the anniversary of the day the ongoing arrangement was entered into (the client's anniversary date). The statement must also relate to the period of 12 months that ends on the day no more than 30 days before when the statement must be given.

2.8 The Government has committed to: extend the time period in which a fee disclosure statement is required to be sent to a client to 60 days after the client's anniversary date; and amend the statement period, so that it applies to the period of 12 months that ends on the day no more than 60 days before when the statement must be given.

2.9 This is on the basis that retrospectively applying the annual fee disclosure statement imposes large costs on industry, with minimal benefit, and that the previous 30 day time period for providing a fee disclosure statement was too short.

Clarification of intra-fund advice

2.10 The current law does not define intra-fund advice. The Government has committed to clarifying this term in the FOFA legislation.

Summary of new law

2.11 The Bill provides that, where an ongoing financial advice relationship exists between a licensee or representative (the 'fee recipient') and a retail client which involves the charging of an ongoing advice fee (however described), the adviser is no longer required to:

•

provide a renewal notice for fee recipients; and

•

provide a fee disclosure statement to clients who entered into their ongoing fee arrangement before 1 July 2013.

2.12 Fee recipients still need to provide an annual fee disclosure statement to all other clients (that is, post-1 July 2013 clients)

2.13 The Bill extends the time period in which a fee disclosure statement is required to be sent to a client to 60 days after the client's anniversary date. The statement must relate to the period of 12 months that ends on the day no more than 60 days before when the statement must be given.

2.14 The Bill defines the term 'intra-fund advice'.

Comparison of key features of new law and current law

Detailed explanation of new law

Removal of the renewal notice 'opt-in' requirement

2.15 Under the current law, where an ongoing financial advice relationship exists between a licensee or representative (the 'fee recipient') and a retail client which involves the charging of an ongoing advice fee, the fee recipient is required to obtain their client's agreement at least every two years to continue the ongoing fee arrangement by way of a renewal notice, for clients who entered into an ongoing fee arrangement from 1 July 2013.

2.16 An ongoing fee arrangement exists where a retail client is given personal advice and charged an ongoing fee during a period of more than 12 months.

2.17 The renewal notice is required to contain information indicating that the client may renew the ongoing fee arrangement, as well as information setting out what will happen if the client elects not to renew the arrangement, or if they do not respond to the renewal notice, in particular, that the arrangement (including the provision of advice and the ongoing fee) will terminate.

2.18 The renewal notice must to be sent to the client within 30 days of the end of the two-year period. The client then has 30 days to agree to renew the arrangement.

2.19 If, after receiving the renewal notice, the client decides not to renew or fails to respond to the fee recipient's renewal notice, the ongoing fee arrangement terminates. This means that the fee recipient is not obligated to provide ongoing financial advice to the client, and the client is not obligated to continue paying the ongoing fee.

2.20 The current law provides that licensees or representatives may not be subject to the renewal notice obligation if they are bound by an ASIC approved code of conduct that obviates the need for the opt-in requirement.

2.21 The new law removes the obligation for a fee recipient to provide a renewal notice to a client. [Schedule 1, items 3-5 and 17, 18, 19, 20, 21, Subdivision B of Division 3 of Part 7.7A (heading), sections 960, 962CA, 962K, 962L, 962M and 962N and subsections 962F(1), (2) and (3)]

2.22 Therefore, under the new law, an 'opt-out' system applies where any ongoing fee arrangement continues to exist unless the arrangement is terminated by either the client or the fee recipient.

Changes to fee disclosure statements

3.23 Under the current law, where an ongoing financial advice relationship exists between a licensee or representative (the 'fee recipient') and a retail client which involves the charging of an ongoing advice fee (a fee for a period longer than 12 months), the fee recipient is required to give all retail clients a fee disclosure statement which shows the fees paid by the client, the services the client received, and the services the client was entitled to receive, in the previous 12 months.

2.24 The fee disclosure statement must be provided: before the end of a period of 30 days beginning on the 12 month anniversary of the day the arrangement was entered into; or, if a fee disclosure statement has been given to the client since the arrangement was entered into, before the end of a period of 30 days beginning on the 12 month anniversary of the day immediately after final day of the year for which disclosure was provided in the last fee disclosure statement.

2.25 The statement must relate to the period of 12 months that ends on the day no more than 30 days before when the statement must be given.

2.26 The new law removes the requirement to provide a yearly fee disclosure statement to clients who entered into their ongoing arrangement prior to 1 July 2013, restricting the requirement for licensees to provide a fee disclosure statement to clients who entered into their ongoing arrangement after 1 July 2013. [Schedule 1, items 22, 39 and 40, Subdivision C of Division 3 of Part 7.7A, table item 22 of subsection 1317E(1) and subparagraph 1317G(1E)(b)(v)]

2.27 The new law also extends the time in which a fee disclosure statement must be provided to the client: the fee disclosure statement will need to be sent within 60 days of the client's anniversary date. The statement must also relate to the period of 12 months that ends on the day no more than 60 days before when the statement must be given. [Schedule 1, items 20A and 20B, subsection 962G(1) and subparagraph 962H(1)(b)(i)]

2.28 The obligations for providing a fee disclosure statement to post-1 July 2013 clients-set out in Subdivision B of the Corporations Ac t-remain unchanged.

2.29 The result is that the obligation to provide a fee disclosure statement applies to fee recipients in situations where they:

•

provide personal advice to a retail client; and

•

the client is charged an ongoing fee during a period of 12 months or more; and

•

the arrangement was entered into after 1 July 2013.

2.30 Judgment needs to be used to consider what constitutes a new ongoing arrangement. As discussed below, a significant alteration of the arrangement between the fee recipient and the client might constitute a new arrangement; a small alteration in the terms might not.

2.31 Generally speaking, alterations in the terms such as a simple alteration of an existing fee, an alteration in the duration of the arrangement, or where the fee recipient merged or was taken over by another company but the existing arrangement did not otherwise change, would not constitute a new ongoing fee arrangement.

Example 2.1: Changes to an existing ongoing arrangement

YPT Financial Planners have recently been taken over by ABC Incorporated.

Previous YPT clients have had their pre-takeover ongoing fee arrangements continued under the new company, and the particulars of the arrangements have not changed.

This would not constitute new ongoing fee arrangements for YPT clients.

Example 2.2: Changes to an existing ongoing arrangement

Ellen, a financial adviser, works for Sky Limited Financial. Her clients have ongoing fee arrangements with Sky Limited. When Ellen moves on from Sky Limited, she passes her clients to another Sky Limited employee, Phil.

As Ellen's clients have ongoing arrangements with Sky Limited, Ellen leaving Sky Limited would not constitute a new ongoing fee arrangement.

If Phil then negotiates with a particular client to alter the terms of their arrangement, depending on the changes, this may constitute a new ongoing fee arrangement.

2.32 However, if the fee recipient substantially alters the terms of an agreement with a client-for example, through the changing of the advice from insurance only to a much broader ambit, or a change in the structure of the fees paid-it might be considered that a new ongoing arrangement has been entered into.

2.33 Provisions in Part 7.7A of the Corporations Act which support the fee disclosure statements to post-July 2013 customers (such as those outlining what information must be included in the fee disclosure statement, and what happens when the fee recipient does not comply with the requirement to provide a fee disclosure statement within the specified time) remain unchanged.

Clarification of intra-fund advice

2.34 Under the current law, the term intra-fund advice is not expressly defined.

2.35 The Bill inserts a note into section 963B to clarify that the term intra-fund advice refers to a type of financial product advice provided to a member of a regulated superannuation fund by a trustee of the fund, or by persons under an arrangement with the trustee of the fund.

2.36 The note links the commonly used term with the rules under section 99F of the Superannuation Industry (Supervision) Act 1993, which deal with the subject area.

2.37 In particular, the note clarifies that intra-fund advice is not advice of the kind the cost of which is prohibited from being collectively levied under section 99F of the SIS Act. [Schedule 1, item 29, section 963B (note)]

2.38 The ban on conflicted remuneration is intended to capture benefits intended to influence the advice or product choice recommendation provided to retail clients.

2.39 Where remuneration structures relating to the provision of intra-fund advice are unlikely to materially influence the intra-fund advice provided to members, for example the levying of administration or management fees by trustees or fee for service type payments to third party advice providers, it is not intended that these arrangements would be captured by the ban on conflicted remuneration.

Application and transitional provisions

Removal of 'opt-in' requirement

2.40 The removal of the 'opt-in' requirement applies in relation to ongoing fee arrangements with renewal notice days (the renewal notice day being either the second anniversary of the day on which the arrangement was entered into or, if the arrangement had previously been renewed, the second anniversary of the last day on which the arrangement was renewed) that occur on or after the day after the Royal Assent. [Schedule 1, item 43, sections 1531A and 1531C]

2.41 The current renewal notice obligations compulsorily apply to clients who entered into an ongoing fee arrangement after 1 July 2013. Fee renewal notices become due within 30 days of 1 July 2015. As such, no renewal notice days occur prior to the removal of the opt-in provision.

2.42 However, FOFA was optional from 1 July 2012. For those fee recipients who chose to comply with FOFA early, the renewal notice obligations apply to clients who entered into an ongoing fee arrangement after the fee recipient's opt-in date. As such, fee renewal notices could become due earlier than 1 July 2015 for these fee recipients.

2.43 The removal of the opt-in provisions apply from the earlier of the day after the regulations are registered, or the time outlined above.

Limitation of fee disclosure statement

2.44 The removal of the requirement to provide a fee disclosure statement to clients who entered into their ongoing fee arrangement before 1 July 2013 applies in relation to an ongoing fee arrangement for those disclosure days for the arrangement that occur on or after the day after the Royal Assent. [Schedule 1, item 43, sections 1531A and 1531D]

2.45 The current requirement to provide clients with a fee disclosure statement continue to apply until the new law is in place or new regulations are made.

2.46 Further, the extension of the time in which a fee disclosure statement must be provided to a client would apply in relation to an ongoing fee arrangement for those disclosure days for the arrangement that occur on or after the day after the Royal Assent.