31/08/2011

The Government's FOFA Reform is panning out with the release of the draft of the first tranche of the proposed legislation.  This article summarises the important proposals under the first tranche and some of the process design that may be undertaken to meet the proposed effective date of 1 July 2012.  However, at this stage, the proposed legislation is an Exposure Draft and changes may be made as a result of consultation and the Parliamentary process.

The time table for the reforms are currently as follow.

TIME TABLE

1. Released  first tranche of draft legislation
   (Exposure Draft:  Corporations Amendment (Future of Financial Advice) Act 2011
   The first tranche draft legislation covers:  Opt-in requirements and mechanism, best interest duty and ASIC’s powers to enforce new elements of the reforms.
   Written submissions close:  16 September 2011
   Proposed effective day:  1 July 2012
   
2. Second tranche of draft legislation to be released shortly
   The second tranche draft legislation covers:  ban on conflicted remuneration including commissions, volume payment, soft dollar benefits; definition of intra-fund advice.  The replacement of the accountant’s exemption will be covered in the second tranche.
   Proposed effective day:  1 July 2013
   
3. Treasury will release a public consultation paper by the end of this year on restricting the term “financial planning” in the Corporations Act 2001.

There are two important aspects to the first tranche of the draft legislation which has just been released, namely, the compulsory active renewal obligations under the new opt-in regime and the obligations under the codified best interest duty.

HOW THE OPT-IN RENEWAL REGIME WORKS

It has to be noted that in addition to the documentary requirements, financial services licensees will also have to design a process of how the renewal notice will be sent and received.  The EM to the proposed legislation has indicated that this can be “administered flexibly”.

Application

The new obligation will only apply to financial advice based on ongoing fees and new clients from 1 July 2012.  Importantly, existing services agreements will be grandfathered.

Obligations

Under the proposed new rules, the advisor must provide:

(1)    a fee disclosure statement if an ongoing fee is to be charged for a period of longer than 12 months; and

(2)    a renewal (‘opt-in’) notice to continue charging fees for a period longer than 24 months.

1.     Fee disclosure statement 

• The fee disclosure statement must be provided at least 30 days before the 12 month anniversary of the day the arrangement was entered into; and
• Must include fee and service information about the previous and forthcoming 12 months.
  

2.    Renewal (‘opt-in’) notice

• The advisor must provide the fee recipient with a renewal notice at least 30 days before the 24 month anniversary of the day the arrangement was entered into.
  
• The notice must contain information indicating that the client may renew the ongoing arrangement and what will happen if the client elects not to renew the arrangement.
• The renewal notice and the annual fee disclosure statement can be made simultaneously if a renewal notice is due.
  

It is also stated that the form of the notices can be flexible as long as it contains the required information and need not be longer than one page.

Termination of the ongoing fee arrangement

Importantly under the opt-in requirements, the fee arrangement will be terminated if:

1. the client communicates to the fee recipient in writing within the renewal period that they do not wish to renew the ongoing fee arrangement; or
   
2. if the client does nothing.
   Under both the above situations, the fee arrangement terminates at the end of the additional 30 days after the renewal period.  Any ongoing fee paid after the failure to comply with the disclosure obligation must be refunded on the request of the client.
   

How renewal notice can be communicated

There is a degree of flexibility in this respect which is worthwhile noting.

1. Initially, it is possible to provide the notices in advance of prescribed periods to satisfy the respective obligations sooner than is actually required.
2. The EM provides that a range of mediums and technologies may be used including facsimile, email, SMS or through an online facility (including for example, through a client’s account login on a product provider’s website).
3. It is also possible to have a face-to face meeting with the client (in advance) and obtain the client’s agreement to renew. 

Where an advisor continues to charge a fee after a fee arrangement terminates will be subject to a maximum penalty of $50,000 for an individual and $250,000 for a body corporate.

THE BEST INTEREST OBLIGATION

The draft legislation makes the following provisions.

1. It imposes a statutory obligation for individuals who provide personal advice to act in the best interests of the client and to give priority to the interests of the client in the event of a conflict of interest.
   
2. It imposes a statutory obligation on licensees to take reasonable steps to ensure their representatives comply with their obligations.
   
3. In the priority of interests, the provider must not only give priority to the interests of the client in situations where there is a conflict of interest, but must also do so where the provider knows, or reasonably ought to know, there is a conflict of interest between the client and the licensee or authorised representative of whom the provider is an employee.
4. It does not mean that the provider can never pursue their own interests or the interests of the licensee.  However the provider will breach this obligation if, in pursuing their own interests or the interests of another party, the provider fails to give priority to the interest of the client if there is a conflict.  This places a stringent duty on institutions that are both product issuers and financial advisors to meet this obligation in a manner that is in the best interest of the client, while pursuing their own interest.
   
5. In situations where the obligations imposed have been contravened by an individual adviser, penalties following from that breach will rest with the relevant licensee or authorised representative.  The individual adviser who contravenes the obligation may face administrative action in the form of a banning order.
   
6. There is also a direct obligation on the licensee to take reasonable steps to ensure their representatives comply with their obligations.
   
7. The maximum penalty for breach of the obligations is $250,000 for individuals and $1 million for corporate entities.
   
8. Advisers in relation to ‘basic banking products’ must act in the best interests of the client but to do so need only ascertain the client’s ‘objectives, financial situation and needs’, identify the subject matter of the advice requested by the client and make further enquiries if insufficient information has been provided.
   

For assistance in the above areas, please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS Tel (02) 8296 6222.