AFA Recommendations to Government on Annual Renewal Legislation deliver material improvement
AFA News 3 February 2021. On 9 December 2020, the Government tabled legislation in the House of Representatives to address the Royal Commission recommendations on Annual Renewal, disclosure of lack of independence and charging advice fees from superannuation accounts. The most important part of this legislation for the AFA was the Annual Renewal requirement. The Government had listened to feedback from the advice profession and made a number of important improvements to the legislation. The changes, which we had sought, provide greater flexibility and rationalisation. The proposed requirements are as follows:
- The new process will apply consistently to both pre and post FoFA clients (i.e. 1 July 2013).
- The Fee Disclosure Statement (FDS) and the Renewal or Opt-In notice will be merged into a single document.
- The FDS will be expanded to not only include fees and services for the last year, but also the services and fees to be paid in the following year. Where the fees are an estimate, the basis for the estimate must be explained.
- As previously required, the FDS must be issued within 60 days of the anniversary day.
- The Renewal Period, following the anniversary day, is a period of 120 days.
- Where a client does not provide consent within the Renewal Period, the fees need to be turned off within a further 30 days (a total of 150 days since the anniversary).
- Consent must be provided to product providers on an annual basis (other than for basic banking products and credit cards).
The proposed commencement date for these changes is 1 July 2021, however there will be a 12 month transition period, that provides some flexibility but also complexity.
Whilst this does place additional requirements on advisers in terms of the frequency of renewal and the additional information that must be provided, which will certainly add to the already increasing cost of providing financial advice, the benefit is greater time to get the client to sign the agreement and rationalisation of the FDS and Opt-In documents into one document. There is also a client consent form that will need to be provided to product providers every year. We are certainly not suggesting that it is a good outcome, however it could have been a lot worse.
Whilst we were pleased with the material improvements that were built into this Bill in comparison with the draft legislation that was released in January 2020, there are still a number of important issues that we would like to see addressed:
- The legislation will not allow an adviser to move the date of renewal forward, without commencing a totally new arrangement. This flexibility must be provided.
- The legislation does not address the fundamental problem with the existing FDS regime, where ASIC expects FDSs to reflect the exact amount and timing of when fees are taken out of the client’s account and not when it is paid to the licensee/adviser. Financial advisers can only produce FDSs on the basis of their remuneration systems, and ASIC’s suggestion in Report 636 that you should manually check the product systems to ensure that the amounts are correct is unworkable. This is a fundamental flaw in the current model that must be fixed in the new legislation.
- The New Anniversary date, which triggers the start of the new 12-month period, is based upon the date that an FDS is given to the client in the transition year, not the last day of the previous FDS period.
- Where the client is paying fees on an asset-based approach, the requirements for an estimation of the costs for the next 12 months should be high level and not expected to be detailed and precise.
- With the issues above, that still need to be resolved, including how the provision of consent forms to product providers can be automated, we have suggested that the commencement date should be pushed back to 1 January 2022.
Please provide any feedback on this Bill or our recommended changes to email@example.com.
Issued 03.02.2021. AFA Policy & Education Update