High level summary of key changes 5 min read
On 9 December 2020, the Government introduced the Financial Sector Reform (Hayne Royal Commission Response No. 2) Bill 2020 (Bill) into Parliament.
The Bill follows the similarly named Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 (summarised in our November update here), and aims to implement the Hayne Royal Commission recommendations in relation to changes to ongoing advice fee arrangements, superannuation trustees passing on advice fees and requiring AFSL holders or authorised representatives (providing entity) to disclose a lack of independence when providing personal advice to retail clients.
The Bill makes a number of key changes from the Exposure Drafts for consultation released in February and this update gives a brief summary of those changes.
The key substance of this part of the Bill remains unchanged since the Exposure Draft. The Bill will amend the Corporations Act 2001 to require ongoing fee arrangements (OFAs) to be renewed annually (rather than every two years as is the case currently), to require fee disclosure statements (FDS) to be forward-looking in respect of fees and services and to require written consent to be obtained before advice fees are deducted under an OFA.
However, the Bill has been updated to remove the requirement to obtain consent in relation to deductions from basic deposit products or accounts linked to a credit card. The Explanatory Memorandum accompanying the Bill justifies this as clients generally have more visibility of amounts being deducted from these accounts (the Government has obviously not seen my mother's attempts at online banking…).
Another key change from the Exposure Draft is the removal of the requirement for advisers to separately give clients a renewal notice. This will be replaced with an enhanced FDS, which must:
- include the fees that will be charged in the upcoming 12 month period;
- outline the services which the client is entitled to receive in that period; and
- seek annual renewal from clients for the OFA.
A new concept of 'anniversary day' has also been introduced into the updated Bill, with many of the key requirements in relation to renewal and consent being linked to this concept. The 'anniversary day' is the anniversary of the day on which the relevant OFA was entered into. The 'renewal period' within which clients renew the OFA is a period of 120 days beginning on the anniversary day and FDSs must now be given to clients within the first 60 days of this 120 day period. A client's consent to the OFA will terminate, generally, at the end of a period of 150 days commencing on the anniversary date.
This final concept, of consent expiry, was previously difficult to establish with certainty under the Exposure Draft Bill and the change will likely make the process of seeking and renewing client consent to an OFA simpler and easier to administer.
The commencement date of the Bill has also (mercifully) been updated to 1 July 2021 for OFAs entered into on or after that date and there are transitional provisions applying until 1 July 2022 in relation to OFAs in force immediately before 1 July 2021.
The key change in the Bill from the Exposure Draft is the update to remove the complete prohibition on charging any advice fee to a member's MySuper interest. Instead, the Bill now removes the ability for fees charged under an OFA to be deducted from a MySuper interest. This is quite a change, and means that subject to the trustee's other duties, and to ensuring that the member's consent has been obtained to the deduction, a non-ongoing advice fee may be deducted from a member's MySuper interest.
This change reflects the Government's belief that having different rules for deducting advice fees from MySuper and choice products may have prevented MySuper members from accessing advice or could have created incentives for members to move from MySuper to choice products in order to facilitate the payment of advice fees.
The requirement to obtain consent to the deduction of an advice fee from either a MySuper or choice product is unchanged from the Exposure Draft. The draft instrument released by ASIC in March prescribing the requirements for this consent has not yet been updated following the introduction of the Bill into Parliament.
The definition of 'activity fee' in the SIS Act has also been amended to prevent a fee which meets the definition of advice fee in the charging rules instead being treated as an activity fee, in order to ensure that the law operates as intended.
Similar to recommendation 2.1, the commencement date of this part of the Bill has been moved to 1 July 2021 for fees payable under an arrangement entered into on or after that date, with a transitional period applying until 1 July 2022 in relation to any existing arrangements entered into before 1 July 2021.
The proposed requirements in the Bill in relation to disclosure of a lack of independence by a providing entity is essentially unchanged from the Exposure Draft.
Broadly, the Bill will require providing entities who are not acting independently (ie. those who would contravene section 923A of the Corporations Act) to give a retail client a written statement in a form prescribed by ASIC which discloses their lack of independence before providing personal advice to a client. This must be included in the Financial Services Guide (FSG).
The only change of any substance is an update to the commencement date to 1 July 2021 for FSGs provided to new clients on or after that date. A transitional period applies where an FSG has been given to the client before 1 July 2021 and the financial services are to be provided on or after 1 July 2021, which will require an updated FSG or Supplementary FSG that contains the disclosure to be provided to the client before the financial services is provided.