House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)

Chapter 1 - Ongoing fee arrangements (recommendation 2.1)

Outline of chapter

1.1 Schedule 1 to the Bill amends the Corporations Act to require financial services providers that receive fees (fee recipients) under an ongoing fee arrangement to:

•

provide clients with a single document each year which outlines the fees that will be charged and the services which the client will be entitled to in the following 12 months and which seeks annual renewal from clients for all ongoing fee arrangements; and

•

obtain written consent before fees under an ongoing fee arrangement can be deducted from a client's account.

1.2 These amendments implement the Government's response to recommendation 2.1 of the Financial Services Royal Commission.

Context of amendments

Existing law

1.3 Division 3 of Part 7.7A of the Corporations Act sets out the requirements for charging ongoing fees.

1.4 Section 962A of the Corporations Act provides that an ongoing fee arrangement exists if:

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a financial services licensee or their representative gives personal advice to a person who is a retail client;

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that person enters into an arrangement with the financial services licensee or a representative of the financial services licensee; and

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under that arrangement a fee is to be paid during a period of more than 12 months.

1.5 Section 962B of the Corporations Act provides that an ongoing fee is any fee which is payable under an ongoing fee arrangement.

Disclosure obligation

1.6 Sections 962G, 962H (for ongoing fee arrangements entered into on or after 1 July 2013) and 962S (for all other ongoing fee arrangements) of the Corporations Act provide that where there is an ongoing fee arrangement, the fee recipient must provide the client with a fee disclosure statement within 60 days of the disclosure day for the arrangement.

1.7 Section 962H of the Corporations Act provides that the fee disclosure statement is a backward looking document which includes details about the services provided to the client, any services that the client received and was entitled to receive and the amount of any fees charged during the previous 12 month period. Under the existing law the fee disclosure statement does not include any information about the services or fees being paid for the upcoming 12 month period.

1.8 Section 962F of the Corporations Act provides that an ongoing fee arrangement entered into on or after 1 July 2013 terminates if the fee recipient does not comply with the disclosure obligations in section 962G of the Corporations Act.

Renewal notice

1.9 Section 962K of the Corporations Act provides that a fee recipient must give the client a renewal notice and fee disclosure statement in relation to the ongoing fee arrangement before the end of a period of 60 days beginning on the 'renewal notice day' for the arrangement.

1.10 To renew the ongoing fee arrangement, the client must elect in writing to renew it within 30 days of being given the renewal notice and fee disclosure statement. If the client notifies the fee recipient that they do not wish to renew the ongoing fee arrangement, then the arrangement terminates and no further advice will be provided to the client and no further fees will be charged under the ongoing fee arrangement. If the client does not notify the fee recipient whether or not they wish to renew the ongoing fee arrangement, then the arrangement terminates 30 days after the end of the renewal period.

1.11 ASIC also has the power to exempt a person, or class of persons, from compliance with the requirement to provide a renewal notice if they are subject to a code of conduct approved by ASIC.

1.12 Section 962E of the Corporations Act provides that a client may, at any time, terminate the ongoing fee arrangement, and cannot be required to pay any amount that is more than the amount accrued under the ongoing fee arrangement at the time of termination and any other costs incurred by the fee recipient as a result of the termination.

1.13 Section 962F of the Corporations Act provides that the ongoing fee arrangement terminates if the fee recipient does not comply with the renewal notice obligation in section 962K.

1.14 Ongoing fee arrangements entered into before the Future of Financial Advice reforms that took effect from 1 July 2013 are not currently required to comply with renewal requirements, but are required to comply with the fee disclosure statement requirements.

Financial Services Royal Commission

1.15 The Financial Services Royal Commission highlighted problems with clients being charged for services that were not provided, especially in relation to clients who were provided services under ongoing fee arrangements.

1.16 Commissioner Hayne considered that major causes of the fees for no service being charged included the desire for profit, the uncertain content of what was promised and the capacity to deduct fees invisibly. He considered that changes to the ongoing fee arrangement framework should address these causes by focussing on:

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the information that an adviser must give a client about the services to be provided under such arrangement;

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the frequency with which clients must opt in to these arrangements; and

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the mechanism by which advisers should be permitted to charge ongoing fees to clients so that fees can no longer be charged 'invisibly'.

1.17 On that basis, Commissioner Hayne recommended three changes to the ongoing fee arrangement framework that should apply to any ongoing fee arrangement, whenever made:

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the client should be required to opt-in to the arrangement annually;

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the client should receive a forward looking summary of the services they are entitled to receive and the fees payable for those services (in addition to the existing disclosure of fees and services); and

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the client's express written authority should be obtained prior to the deduction of fees from accounts held for or on behalf of the client, and this authority must be renewed annually.

1.18 Commissioner Hayne considered that these changes would reduce the likelihood of ongoing fee arrangements giving rise to the 'fee for no service' issue that was the subject of evidence before the Financial Services Royal Commission. These changes would provide clients with more frequent opportunities to assess whether the services they were receiving were commensurate with the ongoing fees they were paying, and provide greater visibility around the nature and amount of fees being deducted automatically from their accounts.

Industry feedback

1.19 Industry stakeholders raised concerns that Commissioner Hayne's proposal to amend the requirements for ongoing fee arrangements would give rise to a degree of duplication and unnecessary legislative complexity that may result in higher compliance costs for the financial advice industry and potentially adverse impacts on the affordability of advice.

Summary of new law

1.20 The new law implements the Government's response to recommendation 2.1 of the Financial Services Royal Commission. The Corporations Act is amended to require all financial services providers that receive fees (fee recipients) under an ongoing fee arrangement to:

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provide clients with a fee disclosure statement during the same period each year which:

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includes the fees that will be charged in the following 12 month period;

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outlines the services that the client is entitled to receive in the following 12 month period;

-

seeks annual renewal from clients for all ongoing fee arrangements; and

•

obtain written consent before fees under an ongoing fee arrangement can be deducted from a client's account.

1.21 Extending the annual renewal requirement to all ongoing fee arrangements means that regardless of when an ongoing fee arrangement was entered into, an annual renewal is required for the ongoing fee arrangement to continue.

1.22 Fee recipients are required to detail in writing the fees that will be charged under an ongoing fee arrangement and the services that will be provided under the ongoing fee arrangement. This gives clients a greater understanding of what they are paying for.

1.23 Fee recipients need to obtain written consent from a client before fees can be deducted under an ongoing fee arrangement and this consent cannot last longer than 150 days after the next 'anniversary day'. This ensures that clients are providing consent to the fees being deducted each year, and that the consent is informed by the information in the fee disclosure statement about fees previously charged and those that will be charged for the following year.

Comparison of key features of new law and current law

Detailed explanation of new law

New and existing ongoing fee arrangements to be renewed annually

1.24 Previous exemptions that applied for ongoing fee arrangements entered into prior to the Future of Financial Advice reforms are removed. These ongoing fee arrangements are subject to the application of the new provisions. A fee recipient with an existing ongoing fee arrangement must also seek a client's renewal of an ongoing fee arrangement annually, rather than every two years and will not need to give the client a separate renewal notice. [Schedule 1, items 7, 20 and 24, sections 962D, 962L and sections 962R to 962X of the Corporations Act]

1.25 The ability for a person or class of persons to be exempted from the requirement to give a renewal notice is also removed. [Schedule 1, item 4, section 962CA of the Corporations Act]

Enhanced fee disclosure statements

Removing the requirement to provide a renewal notice

1.26 Under the new law a fee recipient is no longer required to provide a client with a renewal notice. The client must 'opt-in' or renew the arrangement every year but this process is now outlined in the enhanced fee disclosure statement. The provision of one document, the fee disclosure document, with all of the relevant information about fees, services and renewal, decreases the administrative burden on fee recipients. [Schedule 1, item 19, section 962K of the Corporations Act]

'Anniversary day' and 'renewal period'

1.27 To reduce complexity and increase certainty for both fee recipients and clients, fee disclosure statements must be provided to a client during the same period each year. That is, the fee recipient must provide the client with a fee disclosure statement within the first 60 days of the renewal period each year.

1.28 The renewal period is a period of 120 days which begins on the anniversary day for the arrangement. The anniversary day is the anniversary of the day on which the arrangement was entered into. For example, if a client entered into an arrangement with a fee recipient on 1 July 2021 then the renewal period for that arrangement begins on 1 July in 2022 and each year after that. [Schedule 1, items 1, 3, 9, 10, 11 and 20, sections 962G, 962H and 962L of the Corporations Act]

1.29 If a fee recipient fails to provide a client with a fee disclosure statement within the first 60 days of the renewal period for the arrangement then the fee recipient is subject to a civil penalty. [Schedule 1, item 10, section 962G of the Corporations Act]

Disclosure of fees to be charged and services available during the upcoming 12 month period

1.30 A fee recipient must provide a client with an annual fee disclosure statement that, in addition to the prescribed information in the existing law, includes the following information in relation to the upcoming year:

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information about the services the client is entitled to receive under the ongoing fee arrangement;

•

the amount of each ongoing fee that the client will be required to pay, including any fees payable after the end of the upcoming year; and

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any other prescribed information.

[Schedule 1, items 11, 12, 13, 15 and 16, section 962H of the Corporations Act]

1.31 This ensures that clients are aware of the services that they are entitled to receive under ongoing fee arrangements and the fees payable for those services. The services that clients are entitled to receive are the services that the client pays for under the ongoing fee arrangement. The requirement to include any fees that the client will be charged after the end of the upcoming year ensures that clients are aware of all fees and that there are no time gaps in the disclosure requirements. [Schedule 1, items 10, 15, and 16, sections 962H and 962G of the Corporations Act]

1.32 Fee disclosure statements must express the fee amounts in Australian dollars, unless an alternative is provided in the regulations. Where the amount of an ongoing fee cannot be determined for the upcoming year, the fee disclosure statement must include a reasonable estimate of the fees and an explanation of the method used to work out the estimate. This supplements, rather than replaces, the existing fee disclosure statement regime. [Schedule 1, items 14, 16 and 17, section 962H of the Corporations Act]

1.33 A reasonable estimate should be based on all of the relevant information available to the fee recipient at the time of the estimate, and reflect their most accurate account of the client's position at that time. Fee recipients should factor in information known to them at the time of providing the estimate such as employer contributions that are expected to be made throughout the year to a client's superannuation fund, additional investments that may be made by a client based on the advice provided and any known large withdrawals, such as an asset-based fee that the client is being charged.

Statements about renewing an ongoing fee arrangement

1.34 The fee disclosure statement must also provide the client with the following statements in relation to renewing the agreement:

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a statement that the client may renew the arrangement by giving the fee recipient notice in writing;

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a statement that the arrangement terminates and no further advice will be provided and no further fees will be charged, if the client does not renew the arrangement;

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a statement that the client is deemed not to have renewed the arrangement if the client does not give notice in writing before the end of the renewal period; and

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a statement that the renewal period is a period of 120 days beginning on the anniversary day. [Schedule 1, item 24, section 962H of the Corporations Act]

Written consent for the deduction of fees under ongoing fee arrangements

1.35 Fee recipients must obtain the client's express written consent to deduct, arrange to deduct, or accept an amount for payment of, fees under an ongoing fee arrangement. The consent requirement applies to deductions from accounts that are not a credit card or an account which falls within the definition of basic deposit product in section 761A of the Corporations Act. 'Credit card' takes its ordinary meaning. Deductions made from credit card accounts and basic deposit accounts are not subject to the consent rules because clients generally have more visibility of amounts being deducted from these accounts.

1.36 Where the fee recipient is the account provider of the account to be debited, the consent of the client must be obtained prior to making the deduction. Where the account to be debited is provided by a third party account provider, the fee recipient must obtain express written consent to arrange the deduction and have provided a copy of that consent to the third party prior to, or as part of, arranging the deduction. For example, an authorised representative cannot arrange for a licensee to deduct ongoing fees without the consent of the client, nor can a licensee arrange for an authorised representative to deduct fees without consent. Generally the account provider is the product issuer.

1.37 It is expected that any third party arranging a deduction on behalf of the fee recipient is an agent of the recipient and the third party must only arrange the deduction if the client has consented to it. This means that where the fee recipient is an authorised representative of a financial services licensee and the client has given consent to the fee recipient to arrange a deduction, the licensee can act as an agent for the fee recipient and rely on the fee recipient's consent.

1.38 Where an account is held jointly, the fee recipient must satisfy the consent requirements for all account holders, not only the client. This requirement ensures that the amount and deduction of fees is visible to all account holders. Where a fee recipient does not comply with the consent requirements, the ongoing fee arrangement terminates. [Schedule 1, item 10, section 962FA of the Corporations Act]

1.39 A fee recipient does not contravene section 962S(5) or section 962S(6) of the Corporations Act if they repay an amount accepted in contravention of those sections into the account holder's account within 10 business days from the day on which the payment was accepted.

1.40 The Court may order that the fee recipient refund amounts deducted without consent. [Schedule 1, item 25, section 1317GB of the Corporations Act]

1.41 Ongoing fee arrangements are not permitted to include conditions that require the client to give consent to deduct fees, nor commitments relating to the variation or withdrawal of consent. Any conditions to that effect are void. [Schedule 1, item 24, section 962W of the Corporations Act]

1.42 Where ASIC has determined requirements for giving consent to deductions in a legislative instrument, the instrument may require a specific form or the form of words that must be used for giving consent, and may also require that the consent include specified information. [Schedule 1, item 24, section 962T of the Corporation Act]

1.43 An account holder may withdraw or vary the consent at any time by providing notice to the fee recipient in writing. If the fee recipient receives notice from the account holder withdrawing or varying the consent, then the fee recipient must:

•

give written confirmation to the account holder that notice was received within 10 business days; and

•

if the consent was provided to an account provider, the fee recipient must also give the account provider a copy of the notice within 10 business days.

1.44 A contravention of this requirement is subject to a civil penalty provision. [Schedule 1, item 24, section 962U of the Corporations Act]

1.45 The amendments repeal section 962K (the previous requirement to provide a renewal notice) and any associated references, and section 962J (the definition of disclosure day), as these provisions are now not needed. Section 962G requires fee recipients to provide a fee disclosure statement which includes information about renewing an arrangement annually. [Schedule 1, items 2, 4, 5, 6 and 13, sections 962F(1), (2) and (3), 962K, and 962J of the Corporations Act]

1.46 A client's consent ceases to have effect if the ongoing fee arrangement is terminated, or at the end of 30 days after the end of the first renewal period after consent is given for the ongoing fee arrangement.

1.47 Under the new law, a 150 day period to the expiry of consent commences on the anniversary day of the arrangement each year. During this period, a fee recipient is required to again seek the client's written consent for deductions of ongoing fees. It is expected that fee recipients seek the client's consent at the same time that they provide the client with a fee disclosure statement. The new consent operates from the date that it was obtained, and the previous consent automatically terminates at the end of 30 days after the end of the renewal period. In other words, a consent given by a client expires 150 days after the next anniversary day to occur after giving the consent. [Schedule 1, item 24 section 962V(1) of the Corporations Act]

1.48 If the consent ceases to have effect because it has expired or because the ongoing fee arrangement terminates, the fee recipient must notify the account provider of the cessation within 10 business days of the cessation. If the fee recipient fails to give notice of the cessation, they are subject to a civil penalty provision. [Schedule 1, item 24, sections 962V(2) and 962V(3) of the Corporations Act]

1.49 Where a fee recipient wishes to provide fee disclosure statements or receive consent from clients electronically, the general rules for electronic financial services disclosure apply. For example, a fee recipient is able to provide the documents to the client via email if the client has provided the fee recipient with their email address.

Record-keeping requirements

1.50 Fee recipients must keep appropriate records to show their compliance with Division 3 of Part 7.7A. These records must be kept for five years and a failure to do so is a criminal offence with a penalty of up to five years imprisonment. Further records may be specified in the regulations. [Schedule 1, item 24, section 962X of the Corporations Act]

Consequential amendments

1.51 The definition of civil penalty order is amended to insert a reference to section 1317GB and to include in the definition penalties in relation to the deduction of ongoing fees without consent, arrangement of the deduction of ongoing fees without consent or acceptance of such deductions, and the confirmation of receipt of variation or withdrawal of consent for deductions of ongoing fees. This means that a contravention of those rules is a civil penalty provision. [Schedule 1, items 27, 28 and 29, section 9 of the Corporations Act]

1.52 The definitions of renewal notice, renewal notice day, disclosure day and the table item referring to the repealed civil penalty provision for section 962S, are repealed. [Schedule 1, items 1, 3, 4 and 30, sections 960 and 1317E(3) (table item dealing with section 962S(1)) of the Corporations Act]

1.53 The amendments provide new table items in section 1317E(3) so that the following provisions are civil penalty provisions:

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a fee recipient failing to comply with the requirement to obtain consent to deduct ongoing fees from an account;

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a fee recipient failing to comply with the requirement to obtain consent to arrange for deductions of ongoing fees from an account;

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a fee recipient failing to comply with the requirement not to accept payment of ongoing fees resulting from a deduction from an account without consent;

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a fee recipient failing to comply with the requirement to confirm receipt of a variation or withdrawal of consent for deductions of ongoing fees; and

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a fee recipient failing to comply with the requirement to give written notice to an account provider that an ongoing fee arrangement has ceased to have effect.

[Schedule 1, items 31 and 32, section 1317E(3) of the Corporations Act]

1.54 Where a civil penalty order is made, the court must give preference to and have regard for any refund amounts payable to persons who suffer damage as a result of a contravention of the provisions. [Schedule 1, items 32 and 33, sections 1317QF(2)(a)(ii) and 1317QF(3)(b) of the Corporations Act]

1.55 A court may provide relief from liability for a contravention of a civil penalty provision where a person meets the requirements of section 1317S. This means that a court may provide relief from a civil penalty provision in this Chapter if the person has contravened a civil penalty provision but has acted honestly and having regard to all of the circumstances, the person ought fairly to be excused. [Schedule 1, item 32, section 1317S(1) of the Corporations Act]

1.56 The amendments insert a reference to section 962X into the table in Schedule 3 of the Corporations Act so that it is a criminal offence provision with a maximum penalty of five years imprisonment. [Schedule 1, item 35, Schedule 3 to the Corporations Act]

Application and transitional provisions

Existing ongoing fee arrangements

1.57 The transitional provisions apply to ongoing fee arrangements which are in force immediately before 1 July 2021. [Schedule 1, item 26, section 1673B of the Corporations Act]

1.58 For all ongoing fee arrangements that are in force immediately before 1 July 2021, the transitional provisions provide that from 1 July 2021 until 30 June 2022, section 962G applies in relation to the ongoing fee arrangement as if it were replaced with section 1673C(3). This section requires a fee recipient to give the client a fee disclosure statement in relation to the ongoing fee arrangement before the end of the 12 month transition period. The day that fee recipient provides the client with a fee disclosure statement during this period is the anniversary day for that arrangement in each subsequent year. [Schedule 1, item 26, sections 1673 and 1673C of the Corporations Act]

1.59 Where an obligation exists under section 962G or section 962K before 1 July 2021 that was not discharged before that date, the obligations cease on 1 July 2021, however fee recipients are required to comply with the fee disclosure statement requirements during the transition period. This means that only one fee disclosure statement needs to be provided between 1 July 2021 and 30 June 2022. [Schedule 1, item 26, sections 1673D and 1673E of the Corporations Act]

1.60 The fee disclosure statement which is provided to the client during the transitional period must include information about the fees charged and services provided to the client before the day that the fee disclosure statement was given to the client if that information was not included in the last fee disclosure statement provided to the client. This ensures that there are no gaps in the disclosure to clients because of the change in timing for the provision of fee disclosure statements. The fee disclosure statement must also include information about the fees to be charged and services to be provided to the client for the coming year and the prescribed statements about renewal. [Schedule 1, item 26, sections 1673D and 1673E]

1.61 The requirement for a fee recipient to obtain consent for the deduction of fees applies from 1 July 2022. If the client provides the fee recipient with consent for the purposes of the new Subdivision C prior to 1 July 2022, then sections 962U and 962X apply from the date the consent is given. [Schedule 1, item 26, section 1673F of the Corporations Act]

1.62 The transitional provisions provide that section 1350 of the Corporations Act does not apply to the operation of Subdivision B of Division 3 of Part 7.7A, in respect of the ongoing fee arrangement. [Schedule 1, item 26, section 1673C(7) of the Corporations Act]

1.63 The rules for keeping records of a fee recipient's compliance with the requirements in Division 3 of Part 7.7A of the Corporations Act apply to all ongoing fee arrangements from 1 July 2021. [Schedule 1, item 26, section 1673G of the Corporations Act]

1.64 Fee recipients must comply with all of the rules under the new law from 1 July 2021 in relation to ongoing fee arrangements entered into on or after 1 July 2021.