Changes to advice fee arrangements

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (‘Royal Commission’) highlighted several areas of concern relating to the provision of financial advice. One of the main issues identified was ongoing advice fee arrangements, particularly where clients were charged fees for advice that was not provided. To increase consumer protection, the Royal Commission recommended amending the law in relation to advice fees with a particular focus on the renewal of ongoing fee arrangements, fee disclosures and the payment of advice fees from superannuation accounts.

A Bill implementing these recommendations was tabled in Parliament on 9 December 2020. The changes are proposed to apply from 1 July 2021, subject to a 12-month transitional period for existing arrangements. Financial services professionals should be aware of these changes, as business processes may need to be updated to comply with the new advice fee requirements. 

Renewal of ongoing fee arrangements

An ongoing fee arrangement arises where a financial services licensee, or their representative, provides personal advice to a retail client and enters into an arrangement where a fee is payable for a period of more than 12 months. Currently, an ongoing fee arrangement entered into on or after 1 July 2013 is required to be renewed by the client every two years via a separate renewal notice. For some clients, the renewal period varies from year to year depending on when they were last provided with a renewal notice.   

Under the proposed changes, all ongoing fee arrangements, including those commenced prior to 1 July 2013, will need to be renewed by the client annually.  The renewal period will begin on the same day each year. For new arrangements, this will be the anniversary of when the client entered into the agreement. For existing ongoing fee arrangements, the anniversary day will be the day the fee recipient provides the client with a fee disclosure statement during the transition period.

A separate renewal notice will no longer be required, and the renewal of ongoing fee arrangements will be incorporated into the fee disclosure statement for the client (see below).

Disclosure of fees

Where a financial services licensee, or their representative, enters into an ongoing fee arrangement, they are required to give the client an annual fee disclosure statement (FDS) in relation to the arrangement. The FDS is required to include details of:

• any ongoing fees the client has paid in the previous 12 months
• the services the client was entitled to receive under the arrangement during the previous year, and
• the services the client actually received during that period.  

The proposed amendments expand the information required in the FDS to include details of upcoming ongoing fees and services. In addition to information relating to the previous year’s fees and service, the FDS will need to outline:

• the services to be provided for the next 12 months, and
• any ongoing fees payable for those services, including fees payable after the end of the 12-month period.

Where the amount of an upcoming ongoing fee cannot be determined, the FDS must include a reasonable estimate of the fee and an explanation of the method used to determine the estimate.

The FDS will also need to incorporate specific information relating to the renewal of the client’s ongoing fee arrangement, including a statement that the arrangement will terminate if it is not renewed in writing within 120 days beginning on the anniversary day. 

Payment of ongoing advice fees

It is relatively common practice for clients to elect to pay their advice fees directly from an investment or superannuation account. The Royal Commission noted there was ‘no reason in principle why licensees should not be permitted to continue to deduct fees from investment accounts (other than superannuation accounts)’¹ provided the deduction was expressly authorised by the client. In relation to ongoing advice fees paid from a superannuation account, the Royal Commission noted that these payments should be subject to tighter controls than fees paid from non-superannuation accounts (this is discussed further below).²

Under the proposed changes, fee recipients (generally financial services licensees or their representatives), must obtain written consent from their client prior to deducting, or arranging for the deduction of, fees for ongoing advice from the client’s account (other than an account linked to a credit card or a basic deposit product). If the account is jointly held, then written consent must be obtained from all account holders. A copy of the client’s consent, together with the consent of any other account holders, must be given to the account provider, where the account is provided by a third party.

The client may withdraw, or vary, their consent for fees to be deducted from their account at any time by giving written notice to the fee recipient. The client’s consent ceases 150 days after the anniversary day for the ongoing fee arrangement, unless the ongoing fee arrangement is terminated earlier, or the client provides new consent in relation to the ongoing fee arrangement.

The fee recipient must not accept payment of an amount deducted from the client’s account once the client’s consent has been withdrawn or ceased, or if the consent has been varied and no longer allows for the deduction to be made.

Advice fees in superannuation

The Royal Commission’s Final Report affirmed that only fees for advice relating to actual or intended superannuation investments, including account consolidation, fund or product selection and asset allocation within a fund, may be properly paid for from superannuation. Payment of fees for broad financial advice from a superannuation account is not permitted as it is inconsistent with the ‘sole purpose test’ prescribed in the superannuation law.³

Whilst the Royal Commission noted that the law already limits the nature of advice fees that can be paid for from superannuation, it recommended imposing additional restrictions where advice fees are deducted from a client’s superannuation account.

Under the proposed changes, a trustee of a superannuation fund is prohibited from directly, or indirectly, passing on fees for financial product advice (other than intra-fund advice) to fund members, unless certain conditions are met.  Broadly, the fee must be charged in accordance with an arrangement that the member has entered into, and the member must have given written consent to being charged the fee. The trustee must have the consent, or a copy of the consent.

These requirements apply in relation to any advice fee that is to be deducted from a member’s choice or MySuper account. However, under these changes, trustees will only be able to deduct non-ongoing advice fees from MySuper accounts. Fees for ongoing advice must not be paid from a MySuper account.

What is the impact for advisers?

The changes to ongoing fee arrangements, fee disclosures and the payment of advice fees apply from 1 July 2021 for arrangements entered into on or after that date. A 12-month transitional period applies for arrangements entered into before 1 July 2021 and these arrangements will generally need to comply with the new rules from 1 July 2022. 

With less than five months until the requirements come into effect for new advice fee arrangements, financial services professionals should be starting to plan, if they haven’t already, how these changes can be implemented within their businesses. Action may need to be taken to update business procedures relating to the renewal of ongoing fee arrangements and the provision of fee disclosure statements. Processes will also need to be in place to ensure client consent is obtained before advice fees can be deducted from a client’s account.

Financial services professionals should also be aware that product providers, particularly superannuation funds, may have their own requirements in relation to capturing client consent for advice fees.  

Further information

Financial Sector Reform (Hayne Royal Commission Response No. 2) Bill 2020

Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Final Report, February 2019) vol 1

¹Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Final Report, February 2019) vol 1, 162.

²Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Final Report, February 2019) vol 1, 242.

³Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Final Report, February 2019) vol 1, 240.