Significant Reforms to Advice Fee Arrangements

The Financial Sector Reform (Hayne Royal Commission Response No. 2) Act 2021 contains significant reforms to advice fee arrangements.

The reforms impact both ongoing fee arrangements, and other arrangements triggering advice fees.

This blog focuses on aspects of the reforms relating to ongoing fee arrangements.

The definition of an ongoing fee arrangement will remain unchanged however the reforms impact:

• the nature of the disclosures about an ongoing fee arrangement contained in a fee disclosure statement (more information is required, including forward looking information such as information about the services and fees applicable for an upcoming year)
• when ongoing fee arrangements must be renewed (annual renewal will be necessary, subject to some transitional arrangements)
• how renewals are sought (separate renewal notices will no longer be required; instead renewal statements must appear in annual fee disclosure statements and be collected annually)
• the payment of advice fees (a retail client must consent for an adviser to arrange for the deduction of ongoing advice fees from a third party account like the retail client’s superannuation account and the consent must be shared with the third party account provider; and ongoing advice fees are prohibited for MySuper products ).  

The legislative reforms are supported by a number of ASIC instruments, in particular, ASIC Corporations (Consent to Deductions – Ongoing Fee Arrangements) Instrument 2021/124 which is relevant to ongoing fee arrangements where some or all of the ongoing advice fees are able to be deducted from a superannuation account.  ASIC’s instrument sets out in more detail how consents to arrange deductions must be obtained including required disclosures which may be combined with fee disclosure statements.

As is the case with many legislative reforms the industry is grappling with at the moment, the reforms to the advice fee arrangements illustrate that implementation very much depends on the context, and should only occur after considering all other relevant obligations.

For example, while elections to renew an ongoing fee arrangement and consents to the deduction of advice fees must be in writing and ‘writing’ might include electronic forms of communicating agreement to an arrangement and its fees, it is important (to ensure there is ‘informed’ decision making and to reduce the risk of misleading impressions) that it is clear to a retail client that renewing the ongoing fee arrangement and consenting to the deduction of advice fees from a third party account are two separate matters.  A retail client might agree to continue an ongoing fee arrangement but change their mind about how the advice fees are paid.

While ASIC has facilitated the collection of ongoing advice fee renewals and advice fee deduction consents at the same time, whether this is a practical approach might depend on other factors including the nature and complexity of the ongoing advice fee arrangement.  For example, ongoing advice fee arrangements that cover both superannuation and non-superannuation advice services might be better dealt with via separate consent arrangements so that required ‘consent information’ held by an adviser can be more readily shared with a third party account provider (the superannuation trustee) without triggering other issues (eg. privacy issues).  Also, as ongoing fee arrangements may capture fees other than fees labelled as ‘advice fees’, including other remuneration or benefits flowing to an adviser (or certain others, for example, the adviser’s principal or employer) that might be considered ‘conflicted remuneration’ unless ‘given’ (ie authorised) by the retail client, careful consideration should be given to the way in which disclosures about ongoing fee arrangements are formulated, and how ongoing fee arrangement renewals and consents to deductions are collected.

Finally, the prohibition against ongoing advice fees in MySuper products triggers some interesting implementation issues which appear (already) to be generating some debate.  The prohibition is sometimes referred to as a prohibition against charging ongoing advice fees to a MySuper interest (this language is also present in the relevant explanatory memorandum).  This isn’t necessarily reflective of the new requirement.  The prohibition is given effect to by amendments to the MySuper fee rules.  These rules define which kinds of fees that may be charged in relation to a MySuper product, as well as how they may be charged.  While advice fees can be charged in relation to a MySuper product, the charging rules stipulate that advice fees may only be charged ‘in relation to the MySuper product during a period if it satisfies one of the charging rules set out in this section in relation to that period ‘.

The charging rule applicable specifically to advice fees (as amended), amongst other generally applicable charging rules, stipulates that the advice fee charged to a member who holds a MySuper product must be paid in accordance with an arrangement that is not an ongoing advice fee arrangement.

This new prohibition does not appear to be limited to preventing the deduction of advice fees from MySuper interests only and may impact ongoing advice fees being charged to MySuper members (that is members who hold both a MySuper and choice product) more broadly, particularly where the advice fee is calculated by reference to a member’s total account balance.

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