AFA News 22 September 2020. Yesterday ASIC announced relief, via a no action position for FDS and Opt-in obligations, for advice businesses where they are solely, or a substantial part of the business, is located in Victoria. You can read the announcement under the heading “What is ASIC doing to assist financial advice businesses that are impacted by the restrictions in Victoria” on their “COVID-19 information for financial advisers and advice licensees” webpage.
We are pleased with this announcement as we have been working closely with ASIC, the Government, the FSC and the FPA to find a solution for what we expect will be a growing issue with non-compliance with the FDS and Opt-In obligations during lockdown in Melbourne and more broadly in Victoria. With advisers and their staff working from home in some cases, or being unable to work due to system issues or childcare responsibilities, it would not be surprising that a number of advisers have missed the FDS and Opt-In deadlines for some of their clients.
Below we’ve explained the current obligations and ASIC’s no-action position to assist you with servicing ongoing fee clients.
Understanding the FDS and Opt-In Obligations
The obligations for FDSs and Opt-In vary in important ways between those clients who are pre FoFA (1 July 2013) and post FoFA. We have addressed each separately.
Pre FoFA Clients
For pre-FoFA clients, an adviser must issue an FDS every year within 60 days of the disclosure date (anniversary of the ongoing fee arrangement). Whilst a failure to issue the FDS on time is a breach of the law, it does not lead to a termination of the ongoing fee arrangement.
ASIC No Action Position – Pre FoFA Clients
ASIC have announced that they will not take action against a Victorian financial adviser who has missed an FDS deadline for a pre-FoFA client between 2 August 2020 and 26 October 2020, provided they issue the FDS by 7 December 2020. This is a good outcome and hopefully, with the end of the lockdown approaching, this will enable businesses to issue these FDSs within that window and everything will return to normal for these clients.
Post FoFA Clients
For post-FoFA clients, the adviser must issue an FDS each year within 60 days of the disclosure (anniversary) date. Every second year the adviser must issue both an FDS and an Opt-In Notice together and within 60 days of the second anniversary of when the renewal notice was last signed (renewal notice day). However, given that the FDS timing is also dictated by the disclosure date, which comes before the renewal notice day, it is the disclosure date that typically sets the timeframe and deadline.
There is one important legal difference for post-FoFA clients. Any failure to meet the obligations, including the following, leads to the automatic termination of the ongoing fee agreement:
- Failing to issue the FDS or failing to issue it on time.
- Incorrect information, including the amount of fees in the FDS.
- Failing to issue an FDS with the Opt-In Notice.
- The client not responding to the Opt-In notice within 30 days.
ASIC No Action Position – Post FoFA Clients
ASIC do not have the powers to provide an exemption for either the FDS or Opt-In obligations and therefore cannot alter the fact that a failure to meet the FDS or Opt-In obligations for a post FoFA client leads to the unavoidable and automatic termination of the ongoing fee arrangement. Neither do clients have any ability to waive this obligation or the outcome. A fix to this issue, in the COVID-19 context, will require the intervention of the Treasurer, through a regulation or the utilisation of the COVID-19 relief powers that he has.
What ASIC have provided is a no action position with respect to post FoFA clients where the FDS or Opt-In obligations are not met in the period between 2 August 2020 and 26 October 2020. This means that they will not take regulatory action, however, it does not change the fact that the ongoing fee arrangement will be terminated and that the adviser will need to take action to notify the client and to recommence the arrangement.
An FDS/Opt-In Recovery Plan
Any adviser facing this situation will need to carefully analyse the exposure that they have, and then prioritise the work that needs to be done to recover the situation. This will vary from practice to practice, however some key things to consider are as follows:
- The ongoing fee arrangement for post FoFA clients is terminated from the date of non-compliance, so to recommence fees, post FoFA clients are likely to be the priority.
- Depending upon your licensee’s rules, an ongoing fee arrangement can be recommenced by the issue of an engagement letter that sets out the services to be provided and the fees to be charged. The client needs to agree to this, however this can be done by electronic means.
- Where the ongoing fee arrangement has been terminated for post-FoFA clients, there is technically no need to provide the FDS and the Opt-In notice is now irrelevant (ie it is a new arrangement). Advisers may still choose to issue the FDS.
- With pre FoFA clients, as there is no termination of the arrangement, and an extension has been provided until 7 December 2020, these cases might be better to address after the post-FoFA clients have been resolved.
It is important to note that ASIC makes it clear that this no action position does not prevent legal action being taken by clients or third parties, however we think that this is unlikely.
Conclusion
In this instance, ASIC have done everything that they can within the limits of the law to find a solution for Victorian based financial advisers impacted by FDS/Opt-In non-compliance due to the COVID-19 lockdown. Broader relief measures are in the hands of the Government and we have communicated with them to explain the difficulties confronting financial advisers and to suggest potential solutions.
Please provide any feedback on this matter to policy@afa.asn.au.
