Breaking News – Annual Renewal – Legislative Problem
AFA News 26 May 2021. Following our Member Webinar on Annual Renewal on 20 April 2021, and as a result of some of the excellent questions that were raised, we identified what appeared to be a key problem with the Annual Renewal legislation as it relates to your obligations to provide a Fee Disclosure Statement (FDS) during the transition year (1 July 2021 to 30 June 2022). The fundamental issue is that the legislation requires an adviser to provide an FDS during the transition year that covers a 12-month period up to the day immediately before the day the FDS is provided. In essence, you would have one day to issue an FDS. This compares with 60 days to issue an FDS both before and after the reform comes into force.
Technical Details of the Issue
For those who are technically minded, we refer you to the definition of transition day in Section 1673 of the Corporations Act and the requirement for what the FDS must include during the transition year in Section 1673C(4):
transition day, for an ongoing fee arrangement, means the earlier of:
(a) the day when a fee disclosure statement is given for the arrangement in accordance with subsection 1673C(3); and
(b) the last day of the 12-month transition period.
(4) A fee disclosure statement for an ongoing fee arrangement and a transition day is a statement in writing that:
(a) includes the information and statements required under this section; and
(b) relates to:
(i) the period of 12 months (the previous year) ending immediately before the transition day for the arrangement; and
(ii) the period of 12 months (the upcoming year) starting on the transition day for the arrangement.
Is it Possible to Provide an FDS in One Day?
We have been very adamant that it is simply not possible to provide an FDS in one day and have equally been clear that it is inappropriate to take the risk, as any breach in terms of the content of an FDS or getting the amount wrong would result in the Ongoing Fee Arrangement being terminated.
Some of the obvious reasons for why this is impossible are as follows:
- There is often a delay in fees being processed into the remuneration systems.
- It is not possible to precisely predict in advance the amount for asset-based fee clients.
- FDSs are important disclosure documents and should be subject to careful checking.
- ASIC expect advisers to manually check FDS amounts against product systems (ASIC Report 636).
- Advice businesses like to do FDSs in batches and, putting aside everything else, this would make it impossible to check them all in the time available.
- Importantly this is the first year where the services and the fees for the next 12 months must be included in the FDS, and this will be extra complicated for asset-based fee clients, where you need to prepare an estimate and explain the basis of the estimate.
What Have We Done to Fix This?
Since we became aware of this potential issue, we have engaged with ASIC and Treasury to ascertain whether our understanding was correct. Once it was confirmed that we were correct, we have then proceeded to raise this issue with the Government and to submit a request to ASIC that they take a facilitative compliance approach during the transition year. We did this letter jointly with the FPA.
It is important to understand that ASIC does not have the powers to provide relief. They can only take a facilitative compliance approach, where they would agree not to take any regulatory action where breaches occur. An ASIC no action position or facilitative compliance approach would not stop ongoing fee arrangements from being automatically terminating if you breach the FDS requirements. This also does not prevent other parties from taking action. Ultimately this issue can only be solved by legislative change, however this is unlikely in the time left before commencement on 1 July 2021.
What do You Need to Do?
Financial advisers are allowed to provide the first FDS for a client under the new regime at any stage during the transition year (1 July 2021 to 30 June 2022). You can defer providing FDSs until much later in the transition year, in order to allow time for this issue to be resolved. The complication is that the anniversary day for future years is set on the basis of the day you actually provide the FDS to the client in the transition year. That means if you provide an FDS to a client on 1 April 2022, then the next anniversary day would be 1 April 2023, and all future FDSs would need to cover the period 1 April to 31 March. In future, the only way to change an anniversary day is to terminate the arrangement and put a new arrangement in place.
We are conscious that some practices would prefer to issue all or many of their FDSs to cover the period 1 July 2020 to 30 June 2021. To continue with this period going forward, the FDS would need to be provided on 1 July 2021, which would set the anniversary day as 1 July and allow future FDSs to cover the period 1 July to 30 June. Obviously, it is impossible to get all of these FDSs out in just one day. Other than getting a quick regulatory fix there seems to be no other obvious solution.
Given the consequences of an ongoing fee arrangement being terminated if an FDS is provided that is late or incorrect, advisers are discouraged from issuing FDSs unless you are very confident of getting it correct. If an ongoing fee arrangement is terminated as a result of a breach, you will need to terminate the ongoing fee and put a new ongoing fee arrangement in place.
Advisers are also reminded of the situation where they have a client who has a disclosure day that arises less than 60 days before 30 June 2021, and they need to decide whether they will provide an FDS before 30 June 2021, or allow the obligation to cease, but be required to cover this period in the FDS that they provide during the transition year. It might make sense to get these FDSs done and issued before 30 June 2021, and therefore remove the requirement to provide this information at a later point.
It is clear that both licensees and advisers have important decisions to make in coming weeks.
Other Annual Renewal Issues
In addition to the problem that we have discussed above, the other key issue with the Annual Renewal legislation is the inability to change the Anniversary day in the absence of cancelling the arrangement and commencing a new arrangement. This prevents a renewal from occurring early.
This reform is being implemented quickly and there is a lot of complexity with the transition arrangement. There is also a lot of work that will need to happen in this short period of time in making system changes and preparing for the new obligations.
We will work hard to keep members informed on the requirements with this reform, including when any new information becomes available.
We will continue to work with ASIC and the Government on finding a workable solution. ASIC are also working on guidance for advisers, which they will release as soon as possible.
We understand that this position might be disturbing for our members and the broader financial adviser community. We have chosen to update you on this issue now, as the deadline is getting tight, and it is important to be well prepared for how you are going to respond. We will continue to advocate in your interests and to find a workable solution.
For any questions on this matter please email firstname.lastname@example.org
Issued 26.05.2021. AFA Policy & Education Update