The Corporations Amendment (Future of Financial Advice) Bill 2011 was introduced into the House of Representatives yesterday. There are significant differences between the Bill and the Exposure Draft of the Bill released on 29 August 2011.
The three noteworthy differences are:
- Best interests obligations: The Bill does not include the best interests obligations for providers of personal advice (which included the statutory best interests duty, the steps and the duty of priority). We assume that these provisions will be introduced in a later Bill, presumably with some amendment.
- Ongoing fee arrangements: While the core obligations to provide fee disclosure notices and renewal notices are substantially the same, the definition of ongoing fee arrangement has been rewritten and the grandfathering provisions narrowed.
- Anti-avoidance: The Bill introduces an anti-avoidance provision.
Ongoing fee arrangements
The obligation to give a fee disclosure statement and a renewal notice
A financial services licensee or representative (“fee recipient”) who receives fees paid under an ongoing fee arrangement entered into on or after 1 July 2012 (and where the provider has not previously provided personal advice to the client) must provide a fee disclosure statement to the client annually and a renewal notice every two years. If they don’t, the arrangement terminates and the fee recipient cannot charge the ongoing fee. These obligations are the same as they were in the Exposure Draft Bill although the timing requirement for giving the notices have changed and additional disclosure matters for the notices can now be prescribed by regulation.
A fee recipient who provided personal advice to a retail client before 1 July 2012 does not have to give the client a renewal notice. However, there is a new requirement for these fee recipients to give their client a disclosure notice every year.
There is now an express exception for fees which are agreed to be paid by instalments. However, the exception will have very limited scope to operate as it requires the personal advice to have been given before the fee arrangement is entered into.
Definition of ongoing fee arrangement
Since a fee recipient’s entitlement to receive an ongoing fee depends upon giving an annual fee disclosure notice and a renewal notice every two years (unless the grandfathering provisions apply), it is very important for licensees and representatives to identify all of their ongoing fee arrangements.
An arrangement with a financial services licensee or their representative is an ongoing fee arrangement if it satisfies three limbs (in summary):
- the licensee or representative gives personal advice to a retail client;
- the client enters into an arrangement with the licensee or representative; and
- under the terms of the arrangement a fee is to be paid during a period of 12 months or more.
While there can only be an ongoing fee arrangement with a person who has provided personal advice to a retail client, the arrangement itself could include or cover almost anything and could take any form. For example, an account holder has an arrangement with their bank, a member of a superannuation fund has an arrangement with the trustee. Notably, the fee does not have to be a fee for providing ongoing advice nor even for providing advice at all. There is also no timing requirement - the personal advice might have been given before the ongoing fee arrangement is entered into.
This means that an ongoing fee arrangement may include, among other things, product fees - including bank account fees and fees charged by trustees and responsible entities - if the product issuer is a licensee and if they or their representatives have given personal advice to a product holder as a retail client. Clearly this is not an intended result.
The table below summarises the material differences between the ongoing fee arrangement provisions in the Exposure Draft Bill and the Bill introduced into Parliament.
Click here to see table
The Bill includes a prohibition on entering into or carrying out a scheme for the sole or dominant purpose of avoiding “this Part”. This Part refers to the new Part 7.7A of the Corporations Act which will include the best interests obligation and the bans on conflicted remuneration and other payments. It is drafted very broadly and will capture a scheme entered into before the commencement of the Act. The provision is included in the Exposure Draft Bill of the second tranche of FOFA which is still open for comment.
The Bill has been referred to the Parliamentary Joint Committee on Corporations and Financial Services.