BILLS DIGEST NO. 72, 2011–12, 8 November 2011

Corporations Amendment (Future of Financial Advice) Bill 2011

Margaret Harrison-Smith
Law and Bills Digest Section

Date introduced:  13 October 2011

House:  House of Representatives

Portfolio:  Treasury

Commencement:  Sections 1–3 on the day of the Royal Assent; Schedule 1 on 1 July 2012.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill's home page, or through http://www.aph.gov.au/bills/. When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.

Purpose

The purpose of the Corporations Amendment (Future of Financial Advice) Bill 2011 (the Bill) is to:

•       require providers of financial advice to obtain client agreement to ongoing advice fees

•       enhance the requirement for disclosure of fees and services associated with ongoing fees, and

•       enhance the ability of the Australian Securities and Investments Commission (ASIC) to supervise the financial services industry, through proposed amendments to its licensing and banning powers for financial advisers.

Background

Australian financial services regulation

The ‘fundamental policy settings’ of the Australian financial services regulation regime reflect the principles underpinning the 1997 Financial System Inquiry Report (known as the Wallis Report).[1] These principles were based on:

... a belief that markets drive efficiency and that regulatory intervention should be kept to a minimum to allow markets to achieve maximum efficiency.[2]

This belief has ‘shaped both the financial services regulation regime and ASIC’s role and powers’.[3]

Under the Corporations Act 2001 (Corporations Act), financial service regulation is largely self‑executing, with ASIC’s role limited to the oversight and enforcement of conduct and disclosure requirements imposed by the Act on Australian Financial Services Licence (AFSL) holders.[4]  These requirements are directed at:

•       ensuring financial advisers behave with honesty, fairness, integrity and competence, and with respect to the settlement of disputes between market participants and investors, and

•       countering the unequal bargaining powers of advisers and investors by requiring disclosure of information needed by investors to make informed decisions, and to promote transparency in financial markets.[5]

Parliamentary Joint Committee inquiry and report

This regulatory approach was considered in 2009 by the Parliamentary Joint Committee (PJC) in its inquiry into financial products and services in Australia.[6]

The inquiry focussed on non-superannuation products and services, and followed in the wake of a number of significant financial product and services provider collapses. The collapse of two providers, Storm Financial[7] and Opes Prime[8], are referred to extensively by the PJC in its report.[9]

The bi-partisan report of the inquiry released by the PJC in November 2009 included 11 recommendations, the following of which are considered most relevant in the context of the Bill and the commentary provided in this Bills Digest:

•       recommendation 1: that the Corporations Act be amended to explicitly include a fiduciary duty for financial advisers operating under an AFSL, requiring them to place their clients' interests ahead of their own

•       recommendation 3: that the Corporations Act be amended to require advisers to disclose more prominently in marketing material restrictions on the advice they are able to provide consumers and any potential conflicts of interest

•       recommendation 6: that section 920A of the Corporations Act be amended to provide extended powers for ASIC to ban individuals from the financial services industry

•       recommendation 8: that sections 913B and 915C of the Corporations Act be amended to allow ASIC to deny an application, or suspend or cancel a licence, where there is a reasonable belief that the licensee ‘may not comply’ with their obligations under the licence, and

•       recommendation 11: that ASIC develop and deliver more effective education activities targeted to groups in the community who are likely to be seeking financial advice for the first time.[10]

Government response to PJC report

FOFA 1

The Government’s first response to the PJC’s report—The Future of Financial Advice (FOFA 1)[11]—in April 2010, foreshadowed a range of reforms to the finance product and services industry, including:

•       reduction of key conflicts in adviser remuneration affecting the quality of advice, with financial advisers being required to have their own ‘product neutral’ charging structure[12]

•       a statutory fiduciary requirement for advisers to act in the best interests of their retail clients, and in so doing, to explicitly place their client’s interest before their own[13], and

•       supplementation of the powers of the Australian Securities and Investments Commission (ASIC) to act against unscrupulous operators.[14]

Consultation

Having given its immediate response to the PJC report, the Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen, MP, announced the commencement of consultation on the Future of Financial Advice reforms with key industry and stakeholder groups.[15]

The purpose of the consultation was to provide sufficient detail to allow for the drafting of the legislation to give effect to the reforms.[16]

FOFA 2

A further Government response to the PJC report in April 2011 (FOFA 2)[17], included proposed modifications to the reforms outlined in FOFA 1 in light of feedback from stakeholders on the first exposure draft Bill.

FOFA 2 indicated that:

After extensive consultation with stakeholders, the Government has decided to amend the opt‑in policy, so that retail clients will have to agree (by opting in) to ongoing advice fees every two years from 1 July 2012.

This will be supplemented by an intervening annual disclosure notice to be provided to the client detailing fee and service information for the previous and forthcoming year, informing the client of their right to ‘opt-out’ at any point in time to an ongoing advice contract.[18]

FOFA 2 also reaffirmed the Government’s earlier commitment to strengthening ASIC’s licensing and banning powers.[19]

Regulatory impact statement for the Bill

The Regulation Impact Statement (RIS) is said to reflect the policies announced by the Government in FOFA 1 and FOFA 2.[20] 

During Senate Estimates on questioning of a Department of Treasury representative by Senator Cormann it emerged that, among other things, subsequent changes to the proposed opt-in reforms advised in FOFA 2 had not been the subject of a RIS and were therefore ruled by the Office of Best Practice Regulation (OBPR) to be ‘non-compliant’.[21]

Exposure draft Bills

Introduction of the current Bill into the Parliament was preceded, in August 2011, by the release of an exposure draft Bill for consultation purposes.[22]  The exposure draft included the proposed first tranche amendments to the Corporations Act outlined in FOFA 1, including:

•       a best interests obligation for financial advisers requiring them to act in the best interests of their clients and to place the interests of their clients ahead of their own when providing personal advice to retail clients (best interests obligation)

•       a requirement for providers of financial advice to obtain client agreement to ongoing advice fees and enhanced disclosure of fees and services associated with ongoing fees (charging ongoing fees to clients)[23], and

•       enhancement of the ability of the ASIC to supervise the financial services industry through changes to its licensing and banning powers.[24]

The Explanatory Memorandum to the exposure draft Bill foreshadowed the release of a further exposure draft including a ban on conflicted remuneration, including commissions, volume payments and soft-dollar benefits.[25]

In September 2011, the Government released an exposure draft of a second Bill—Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011[26] including the following features:

•       a ban on conflicted remuneration (including product commissions), where licensees or their representatives provide financial product advice to retail clients

•       a ban on volume-based shelf-space fees from asset managers or product issuers to platform operators[27], and

•       a ban on asset-based fees on geared funds.[28]

Origins of proposed opt-in provisions

In contrast to proposed provisions to strengthen ASIC’s licensing and banning powers, the proposed reforms foreshadowed in FOFA 1 with respect to renewal notices and disclosure statements, were not the subject of specific recommendation in the report of the PJC. 

Treasury has suggested that the proposed provisions are, nevertheless, consistent with the PJC report in so far as the PJC ‘did address the issue of getting people more engaged with their investment activities’.[29]  Perhaps relevantly, in its submission to the PJC inquiry, the Industry Super Network proposed that:

…clients should opt-in, on an annual basis and in writing, to receive and pay for financial advice. This is typical in client-professional adviser relationships and ensures that consumers are only paying for advice that they desire and receive.

Therefore, while a product provider can facilitate payment of the advice fee directly from the client‘s account; this must be based on a written authority from the client, with an annual renewal.[30]

Omission of best interests obligation from the current Bill

Provisions in the first exposure draft Bill requiring advisers to act in the best interests of their clients do not appear in either the Bill currently before the Parliament, or the second exposure draft Bill.  The provisions on this topic, which were included in the first exposure draft of the Bill, were the subject of extensive stakeholder comment.

For example, the following comments were made by the Law Council of Australia (LCA):

… it is essential that the best interests obligation define with specificity and certainty the precise ambit of an adviser’s obligations. Alternatively put, the proposed legislation (as currently drafted) stands to create considerable uncertainty because it would be unclear whether or not any of the jurisprudence concerning ‘best interests’ which has evolved in the trustee context is intended to be imported and applied in the context of this new ‘best interests’ duty for advisers.[31]

The Australian Financial Markets Association (AFMA) also raised concerns with the proposed provisions:

AFMA is concerned that the combined effects of the additional liability and burden on individual advisers, the compliance costs associated with testing, assurance plans, and the capture and maintenance of client information, and the resultant pricing impacts that will be created under the best interests obligation as currently drafted may drive conservative industry behaviour, which could result in less advice being provided to retail investors, and a shift towards non-advice/execution only services. This is not consistent with the objectives the Government is hoping to achieve through the reforms.[32]

Basis of policy commitment

On 26 April 2010, the then Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen, MP, released FOFA 1, the Government’s initial response to the PJC Report.[33]

On 28 April 2011, the current portfolio Minister, Bill Shorten, MP, issued FOFA 2, a further response by the Government to the PJC Report.[34]

The Bill currently before the Parliament seeks to implement the first tranche of amendments detailed in FOFA 1, as updated by FOFA 2, with the exception of the proposed statutory best practice obligation framework outlined in FOFA 1.

Committee consideration

At its meeting of 13 October 2011, the House of Representatives Selection Committee referred the Bill to the Joint Committee on Corporations and Financial Services for inquiry and report.[35]

At the time of writing this Bills Digest, the report of that inquiry was not available.[36]

Policy position of non-government parties/independents

The Coalition has indicated its support for ‘sensible financial advice reforms which increase transparency, consumer choice and competition’, but has said that:

… any reforms in this area need to strike the right balance between appropriate levels of consumer protection and ensuring the availability, accessibility and affordability of high quality financial advice… .[37]

In particular, the Coalition has indicated its in principle support for ‘the proposed “statutory best interests duty” for financial advisers, subject to seeing the detail in the legislation’.

The Coalition has also said that it ‘will not support Bill Shorten’s push to force Australians to re-sign contracts with their financial advisers on a regular basis’.[38]  Such a requirement, the Coalition has said, would just make the current regulatory system ‘more complex and more expensive for everyone’.[39]

The Coalition has also sought to highlight information provided recently by Treasury officials during Senate Estimates that the proposed amendments in the Bill, including the opt-in provisions, are non‑compliant with OBPR best practice principles.[40]

Position of major interest groups

Financial Planning Association of Australia (FPA)

The FPA has indicated its opposition to the Bill’s opt-in provisions:

With respect to Opt-In the AFA strongly disagrees with this proposal and in terms of the draft legislation is extremely disappointed that what has been proposed is significantly more complex than was possible or expected. ... These changes will result in a high level of complexity and uncertainty. From an adviser’s perspective, the current proposal will result in a significant increase in red tape that will cause significant additional administrative effort and cost.[41]

The FPA has indicated that it will not support the Bill. The FPA is opposed to the Bill’s opt-in approach, and to the fee disclosure statement requirement for all existing clients:

In addition to administrative burdens, costs and negative impacts to consumers, the FPA highlights the inconsistency of these provisions, with Opt-In affecting only new clients and the disclosure statement affecting all clients.[42]

Additionally, the FPA has expressed concern:

...that should a consumer not sign an advice renewal certificate, they could be left without financial advice at their most vulnerable time – for example, pre-retirement and when markets are volatile. This kind of legislation is not in place anywhere else in the world. Further, it is redundant if ‘best interest’ and a ban on conflicted remuneration is introduced.[43]

The FPA has also expressed concern at suggestions during Senate Estimates, that aspects of the Bill may breach the Governments own best practice requirements.[44]

Industry Super Network (ISN)

The ISN has indicated its support for reforms to the financials products and services sector to prohibit the payment of conflicted remuneration to financial advisers, to institute an effective ‘best interest’ test, and ‘to institute effective “opt-in” provisions for ongoing advice fees to ensure they don’t replicate trail commissions and consumers are not paying for advice which isn’t being provided’.[45]

The ISN has also stated that:

Given the potential for ongoing fees to replicate the ill effects of commissions and other conflicted forms of remuneration, the renewal requirement and the annual disclosure requirement are both critically important to the FOFA reforms. In particular the renewal requirement is the only safeguard to specifically ensure that consumers who are paying ongoing advice fees continue to receive advice services, to minimise the potential for fees to be passively earned by advisers and to protect against the erosion of the client’s superannuation and other assets. Indeed, it is inconceivable that currently an adviser does not have to provide any disclosure of ongoing fees to their client beyond the initial engagement …[46]

Choice

Choice has indicated its support for the proposed opt-in reforms:

The reforms contain a critical measure to ensure consumers who are disengaged or not aware they are paying fees out of their investments, or are not receiving an ongoing service for the fee, will get important reminders—the so called opt-in fee agreement.

Opt-in is a fee agreement which must be renewed every two years. Upfront fee agreements are standard business practice across the economy. Trades people, lawyers, migration agents, service providers disclose their charges upfront and seek consent usually by way of a signature before undertaking work. It is quite remarkable that this simple measure has become such a contested reform.[47]

Further stakeholder comments on the Bill are located in the ‘Key Provisions’ section of this Bills Digest.

Financial implications

The Explanatory Memorandum states that the Bill would not have a significant impact on Commonwealth expenditure or revenue.[48]

Main issues

No stakeholder has sought to eschew increased transparency on the part of financial advisers with their clients.  However, a key issue that has emerged during consultations on the Bill, and the earlier exposure draft Bill, is a concern amongst some stakeholders that the proposed opt-in and disclosure statement reforms will place too high an administrative burden on financial advisers. 

These stakeholders have suggested that these proposed measures are unnecessary in light of other proposed reforms, not included in this Bill, relating to conflicting interests, and the institution of a statutory best interest obligation for financial advisers.

In response to such concerns, other stakeholders have argued that up-front fee agreements are the norm in other service areas.  These stakeholders have also pointed to the collapse of companies such as Storm Financial and Opes Prime, which they consider indicate that there is a compelling need to ensure that retail investors can make fully informed decisions about their ongoing investment arrangements. 

There is also concern amongst some stakeholders that ASIC’s proposed licensing and banning powers lack sufficient definition in the Bill.[49]

Key provisions

Charging ongoing fees to clients

The Explanatory Memorandum to the Bill explains the context of these proposed amendments,[50] provides a summary of the proposed new law[51] and sets out a comparative table of key features of the proposed new law and the current position under the Corporations Act.[52]

The Regulation Impact Statement (RIS) for the Bill indicates that one of the Government’s objectives in proposing these amendments is to ‘enable consumers to understand the fees they are paying for advice and the services that they are paying for’.[53]

Item 10 inserts proposed Part 7.7A—Best interests obligations and remuneration into the Corporations Act.  Within the new Part 7.7A lies proposed Division 3—Charging ongoing fees to clients which contains three separate subdivisions.

Proposed Subdivision A defines what constitutes an ongoing fee arrangement, and distinguishes such an arrangement from other sorts of arrangements.

Proposed subsections 962A(1) and (2) provide that an ongoing fee arrangement exists where a financial service licensee, or their representative, provides personal advice to a person as a retail client; where the client enters into an arrangement with the licensee or their representative; and under the terms of the arrangement, a fee is to be paid during a period of 12 months or more.

According to the Explanatory Memorandum:

The types of ongoing fee arrangements intended to be captured are those ongoing fees that are being charged for personal financial advice (including where the client is not actually receiving ongoing advice but still paying a fee to an adviser).[54]

Ongoing payments of insurance premiums, or product fees prescribed by regulation, are not intended to be captured (proposed subsections 962A(4) and (5)).[55]

Proposed subsection 962A(3) sets out six conditions which, if present, would mean that an arrangement would not be an ongoing fee arrangement.  Having regard to these six proposed excluding conditions, the Explanatory Memorandum states that:

Where a person is making ongoing payments to a fee recipient via instalments for advice that has already been provided by a fee recipient before the arrangement is entered into, for example a ‘payment plan’, such an arrangement [would not be] characterised as an ongoing fee arrangement. This ensures that a client cannot opt-out of paying a fee they genuinely owe in respect of services already rendered by the fee.[56]

Proposed Subdivision B applies only to future clients (proposed section 962D), that is, to people who become clients after the Bill’s proposed commencement on 1 July 2012.

Termination

Proposed subsection 962E(1) provides that it is a condition of an ongoing fee arrangement that the client may terminate the arrangement at any time.  This is consistent with the terms of proposed subsection 962A(3) which lists those arrangements which do not fall within the description of ongoing fee arrangement.

The Explanatory Memorandum states that:

This is intended to prevent clients being locked into fixed term ongoing fee arrangements as a result of the new disclosure and renewal notice obligations. It also reflects a right that clients currently enjoy as a matter of common practice within the financial planning industry.[57]

Proposed subsection 962E(2) would:

… effectively prohibit[s] fee recipients from applying an ‘exit’ or ‘penalty’ fee to clients that choose to exercise their right to terminate an ongoing fee arrangement. However, this would not prevent a fee recipient from recovering monies already owed by the client (for example, for services already rendered). ‘Exit’ fees remain permissible to the extent that they represent no more than a cost-recovery fee incurred as a result of the termination, which in most situations is likely to constitute only a modest sum.[58]

Disclosure statements

Proposed subsection 962G provides that the current fee recipient for an ongoing fee arrangement must provide the client with a written fee disclosure statement (proposed subsection 962H(1)), within 30 days, beginning on the disclosure day for the arrangement.[59]  An exception may be made to this requirement by regulation in a particular situation (proposed subsection 962H(2)). 

Proposed section 962J defines disclosure day as the anniversary of the day on which the arrangement was entered into, or the anniversary of the day of the provision of the last statement.

Where a fee recipient does not provide the required disclosure statement within the specified time, the client is not liable to continue paying the ongoing fee (proposed subsection 962F(1)).  However, where the client continues to pay the fee in these circumstances, they would not be taken to have waived their rights, or to have entered into a new agreement (proposed subsection 962F(2)).

Where a client makes a payment after the failure of the fee recipient to provide the required disclosure statement, the fee recipient is not required to refund the payment in full (proposed subsection 962F(3)).  The Explanatory Memorandum explains that this is because to provide otherwise ‘would … potentially result in a disproportionate and unjust result at the expense of the fee recipient’, where for example:

…one single accidental breach by a fee recipient could result in the forced refund of advice fees over a number of years, regardless of whether the client continued to access the services... .[60]

Where a civil penalty provision terminates for any reason, the current fee recipient is liable to a civil penalty if they continue to charge an ongoing fee (proposed section 962P).

Item 13 inserts proposed section 1317GA which provides that where the fee recipient has knowingly or recklessly contravened proposed section 962P, or where it is reasonable in all the circumstances to make the order, the client (or ASIC) may apply to the Court for a refund order.

The contents of fee disclosure statements are outlined in proposed subsection 962H(2).  Proposed paragraph 962H(1)(g) would enable regulations to prescribe additional matters for inclusion in fee disclosure statements. 

Proposed paragraphs 962H(3)(a) and (b) would permit the exclusion of, or require the provision of more detailed information, either in a particular situation or generally.

Renewal notices—the opt-in process

If an ongoing fee arrangement is to remain in place for longer than 24 months, the fee recipient is also required by proposed subsection 962K(1) to provide the client with a renewal notice and a fee disclosure statement within 30 days, beginning on the renewal notice day for the arrangement.  Proposed subsection 962L(1) defines renewal notice day as the second anniversary of the day on which the arrangement was entered into, or the second anniversary of the day of the provision of the last renewal notice.

Proposed subsection 962K(2) requires the renewal notice to be in writing, to indicate that the client may renew the ongoing fee requirement (proposed paragraph 962K(2)(a)) and set out what will happen if the client does not renew the arrangement (proposed paragraph 962K(2)(b)).

A 30 day response period is proposed from the date of the receipt by a client of a renewal notice (proposed section 962L(2) defines the term renewal day).  If the client does not respond in writing[61] within this time, indicating their wish to renew the arrangement, they will be taken to have elected not to renew the arrangement (proposed paragraphs 962K(2)(c) and (d)).

Impact of proposed reforms

The impact of proposed reforms described above is likely to be significant.  This is reflected in the following observations set out in the RIS. 

The RIS states that:

Advisers who will be most impacted will be the businesses that rely substantially on ongoing trail commissions and do not maintain an existing ongoing client relationship. There is no available data on the number of businesses who might fall into this category.[62]

The RIS also states that:

It is a new model for the industry where fees paid for a product must be transparently distinct from the fees paid for advice. This will alter the financial services industry over the long term. However, the grandfathering of existing contracts means that changes to the industry will be more gradual and will occur over time. The grandfathering of existing contracts means that existing fee arrangements (prior to the commencement of the ban) can continue. For example, this means where a person is already invested in a product (prior to the ban) and the adviser is remunerated by commissions; the product provider can continue to pay the adviser the ongoing trail commission and the adviser can continue to receive it.[63]

Additionally, the RIS observes that:

There is an expectation that some person will exit the industry, as with any major reform. The number of persons who may exit the industry is unknown. It is further expected that there will be consolidation of the industry, with larger institutionally owned dealer groups (licensees) acquiring a number of smaller dealer groups to grow their adviser numbers and achieve economies of scale. While this means there will be fewer participants in the market, it does not necessarily represent a reduction in competition and will drive overall efficiency improvements of financial advisory groups.[64]

The RIS also acknowledges that some advisers will need to make substantial changes to their disclosure documentation, and that there will be annual costs associated with providing disclosure statements, and termination statements.[65]

The Explanatory Memorandum states that:

Because fee recipients will be required to provide a fee disclosure statement at the same time they provide a renewal notice to the client, the fee disclosure statement will also assist the client in deciding whether they should agree to renew the ongoing fee arrangement.[66]

The impact of some of the proposed reforms may be able to be minimised. For instance, the Explanatory Memorandum suggests that where a fee recipient is required to provide both these documents to the client at the same time:

…it is expected that fee recipients will be able to satisfy both of these requirements by providing one comprehensive notice containing all the requisite information.[67]

Additionally:

It is envisaged that the fee disclosure statement and renewal notice could take simple forms.  Provided they required information is contained in those notices, fee recipients have flexibility in how they present the documents.[68]

Stakeholder comment

Despite the Government’s attempts to emphasise the flexibility that would be available to financial advisers in complying with these proposed new requirements, some stakeholders, have continuing concerns.  For instance, the Association of Australian Financial Advisers Ltd has suggested that, in practice, the proposed disclosure statement and renewal notice requirements will be administratively complex:

When you take into account that an adviser will have some clients that are considered pre-commencement and others that are impacted by Opt-In, all with different disclosure dates, all of which are likely to change from one year to the next and clients responding by multiple mechanisms, it is highly likely that there will be significant administrative complexity for advisers and an increased risk of unintentional administrative errors. In the context of the high level of penalties, this will pose a sizable distraction for the adviser that in no way achieves a better outcome for clients.[69]

AFMA has also expressed concern at the amount of time proposed between the likely passage of the Bill and the commencement of the new obligations:

AFMA is concerned about the very short time frame to allow for changes to processes and procedures to accommodate the new obligations. While it is the case that industry has been generally aware for some time that these new obligations were to come into existence, it is not possible to put in place effective compliance and business process arrangements without knowing the precise details of the obligations. These will not be known with a sufficient level of certainty to justify significant business expenditure until after the legislation is passed.[70]

During Senate Estimates, in response to questions on this general issue, Treasury indicated that:

… in the intervening period between 2009 and 2011 there has been extensive consultation by Treasury with the industry. Transition periods are put in when there is major change in business practices or in the licensing of people. With this, you have to take account of the gestation period. There has been a lot of consultation, discussion and exposure drafts and all that type of thing.[71]

There has also been some concern amongst stakeholders at how the time requirements for the provision of disclosure statements and termination notices would operate in practice.

Other stakeholders have pointed to the significant benefits to consumers of the proposed opt-in and disclosure statement provisions:

These renewal notice and fee disclosure statement requirements are crucial for the protection of retail clients. The renewal notice requirement ensures that disengaged clients do not pay fees for little or no service. The fee disclosure statement ensures that clients are aware of the fees they are paying and the services they receive in return for those fees; in this sense it is like an annual invoice or statement of account. Importantly, the fee disclosure statement provides clients with information they do not receive from the Financial Services Guide (FSG) or the Statement of Advice (SOA).[72]

The Joint Accounting Bodies (JAB) have also indicated their support for the proposed opt-in provisions, noting that:

…some clients are paying ongoing fees and receive little or no service while others who do receive service may be unaware of the precise magnitude of the actual fees they are paying.[73]

JAB suggests that the application of the proposed opt-in provision should be extended to all retails clients subject to ongoing fee arrangements.[74]

Anti-avoidance

Item 10 of the Bill inserts proposed section 965 which makes it a civil penalty offence for a person entering into a scheme if the sole or dominant purpose was to avoid the application of proposed Part 7.7A.

Items 11 and 12 insert proposed paragraphs 1317E(1)(jaac)–(jaae) and proposed subsections 1317G(1E)–(1G) respectively, which establish civil penalties for charging an ongoing fee after the termination of an arrangement contrary to proposed section 962P; failure to give a fee disclosure statement under proposed section 962A; and anti-avoidance under proposed section 965.

The Explanatory Memorandum states that the Bill:

… establishes a lower maximum civil penalty of $50,000 for an individual and $250,000 for a body corporate (for example, if a fee recipient charges an ongoing fee after termination or fails to give a disclosure notice). The lower maximum fees reflect the fact that a breach of the ongoing fee or disclosure requirements are relatively minor compared to other breaches of civil penalty provisions in the Corporations Act. However, contravention of the anti-avoidance provision will be subject to the standard maximum penalties of $200,000 for an individual and $1 million for a body corporate.[75]

Licensing and banning powers

Proposed amendments to ASIC’s licensing powers

Items 2 and 4 make proposed amendments to paragraphs 913B(1)(b) and 915C(1)(aa) of the Corporations Act respectively, to enable ASIC to refuse to grant, to suspend or to cancel an Australian Financial Services Licence (AFSL) where it considers that a person is likely to contravene its obligations as a licensee under section 912A[76], rather than, as currently, that they will do so.

The Explanatory Memorandum states that the current test ‘has tended to a view that ASIC is required to believe, as a matter of certainty, that the person will contravene the obligations in future’.[77] The proposed new standard is intended ‘to ensure that ASIC can more appropriately account for the likelihood or probability of a future contravention’.[78]

Item 3 makes a proposed amendment to paragraph 913B(4)(a) of the Corporations Act to provide that conviction, within 10 years of the date of a person’s application for a licence, for an offence involving dishonesty punishable by imprisonment for at least three months, would have to be taken into account by ASIC in determining whether there is reason to believe that a person is not of good fame or character.  This is lower threshold than the current threshold of conviction, within 10 years of the application, for serious fraud.

Proposed amendments to ASIC’s banning powers

Items 5 and 7 make proposed amendments to paragraphs 920A(1)(ba) and 920A(1)(f) of the Corporations Act respectively, to enable ASIC to make a banning order against a person where it considers that they are likely to contravene their obligations as a licensee under section 912A, rather than, as currently, that they will do so.  The reasons for these proposed amendments mirror those for the proposed amendments in items 2 and 4 of the Bill as set out above.[79]

Item 6 inserts proposed paragraphs 920A(1)(d) and (da) which provide new tests of fame or character, and competence, including inadequate training to provide financial advice, on the basis of which ASIC may make a banning order against a person.

Item 9 inserts proposed subsection 920A(1A) which sets out the matters that ASIC must take into account when determining whether a person is not of good fame or character.  The matters are consistent with those with respect to licensing.[80]

Item 8 inserts proposed paragraphs 920A(1)(f) and (g) which would enable ASIC to ban a person who has been involved in the contravention of a financial services law by another person, or where ASIC has reason to believe that the person is likely to become involved in the contravention of such a law by another person.  The Explanatory Memorandum states that this would enable ASIC:

…to take into account conduct where the person is not under a legal responsibility to comply with the legislation themselves but they contributed or caused another person to breach the legislation. Where the licensee is, for example a body corporate, then any contravention of the law will necessarily be the result of an act or omission of a natural person, such as a director or employee. The amendments clarify that ASIC can take into account conduct of these persons where they have been involved in a contravention of the financial services law, in deciding whether or not these individuals should be banned. The amendment also applies in circumstances where the licensee is a natural person, but an employee of the licensee was involved in a contravention of the licensee’s obligations under law.[81]

Stakeholder comments on proposed ASIC powers

The AFA has noted that ‘no definition has been provided of “likely to contravene” or “likely to breach”’.  AFA ‘believes that more guidance is required from the Government or from ASIC in this regard, in order to ensure that industry participants fully understand the implications’.[82]  Similar concerns have been expressed by the FPA.[83]

The LCA has said that:

… there should be some standard of proof around the concept in sections 913B(1)(b), 915C(1)(aa), 920A(1)(ba) and 920A(1)(f) of "likely to contravene". If there is no standard prescribed, then it is not clear on what basis the assessment would be made. For example, would the assessment be made on past behaviour? Given the consequences that can flow, we submit that the concept should be made more clear.[84]

The JAB have suggested that, in view of the potential lack of uncertainty, ASIC be ‘required to set out in a practice statement how it intends to used the new powers’.[85]

Concluding comments

This Bill represents the first tranche of a larger reform program seeking to improve the quality of advice, strengthen investor protection and underpin trust and confidence in the financial planning industry. 

Despite this, the reforms proposed in the Bill are, in themselves, significant, and, as indicated in the RIS, would have a significant impact on the financial services industry, both in cost and compliance terms. 

However, this must be weighed against the spectacular collapse of a number of financial product and services providers, collapse which saw financial ruin for many small investors. The far-reaching recommendations by the PJC in its report reflect the gravity of the situation with which it was confronted.

Although the PJC did not specifically recommend them, the opt-in and the disclosure notice requirements contained in the Bill are consistent with the tenor of that report, and with the views expressed in many of the submissions to the inquiry. Significantly, these proposed reforms represent a positive and non-litigious way of encouraging greater transparency and accountability on the part of financial advisers to their retail clients.

To allay the concerns of some stakeholders at the perceived administrative complexities associated with the proposed reforms, it is suggested that ASIC institute clear guidelines, and maintain an active education program, to explain to advisers what it is that is required of them.  The educational program should operate in the months before and after the commencement of the proposed reforms.

Guidelines should also be developed by ASIC with respect to its proposed new licensing and banning powers. As with all new regulatory powers, the operation of the proposed reforms should be reviewed within a reasonable period, specified prior to the commencement of the proposed reforms.

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.

© Commonwealth of Australia

Creative Commons

With the exception of the Commonwealth Coat of Arms, and to the extent that copyright subsists in a third party, this publication, its logo and front page design are licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia licence.

In essence, you are free to copy and communicate this work in its current form for all non-commercial purposes, as long as you attribute the work to the author and abide by the other licence terms. The work cannot be adapted or modified in any way. Content from this publication should be attributed in the following way: Author(s), Title of publication, Series Name and No, Publisher, Date.

To the extent that copyright subsists in third party quotes it remains with the original owner and permission may be required to reuse the material.

Inquiries regarding the licence and any use of the publication are welcome to webmanager@aph.gov.au.

Disclaimer: Bills Digests are prepared to support the work of the Australian Parliament. They are produced under time and resource constraints and aim to be available in time for debate in the Chambers. The views expressed in Bills Digests do not reflect an official position of the Australian Parliamentary Library, nor do they constitute professional legal opinion. Bills Digests reflect the relevant legislation as introduced and do not canvass subsequent amendments or developments. Other sources should be consulted to determine the official status of the Bill.

Feedback is welcome and may be provided to: web.library@aph.gov.au. Any concerns or complaints should be directed to the Parliamentary Librarian. Parliamentary Library staff are available to discuss the contents of publications with Senators and Members and their staff. To access this service, clients may contact the author or the Library‘s Central Entry Point for referral.

ISSN 1328-8091

[1].               S Wallis (Chairman), Financial System Inquiry, Final report, Commonwealth of Australia, Canberra, March 1997, viewed 1 November 2011, http://fsi.treasury.gov.au/content/FinalReport.asp

[2].               Australian Securities and Investments Commission, Submission to the Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into financial products and services in Australia, August 2009, p. 4, viewed 23 October 2011, http://www.aph.gov.au/Senate/committee/corporations_ctte/fps/submissions/sub378.pdf

[3].               Ibid.

[4].               Section 911A of the Corporations Act provides that ‘a person who carries on a financial services business in this jurisdiction must hold an Australian financial services licence covering the provision of the financial services’. Although representatives of licence holders are not themselves required to hold a licence, they must comply with the conditions set out in section 911B of the Corporations Act.

[5].               Details of the regulation of the financial services industry under the Corporations Act is contained in the Regulation Impact Statement which is included in the Explanatory Memorandum to the Bill, p. 27.

[6].               Senate Joint Committee, Submissions and final report made by the Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into financial products and services in Australia, 28 April 2010, viewed 27 October 2011, http://www.aph.gov.au/Senate/committee/corporations_ctte/fps/index.htm

[7].               Australian Broadcasting Commission, ‘Storm financial sacks 115 staff’, ABC News, 15 January 2009, viewed 27 October 2011, http://www.abc.net.au/news/2009-01-15/storm-financial-sacks-115-staff-closes-doors/267632

[8].               R Urban, ‘Fallout from collapse difficult to quantify’, The Australian, 27 March 2011, p. 29, viewed 27 October 2011, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2FB4AW6%22

[9].               Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into financial products and services in Australia, Commonwealth of Australia, Canberra, November 2009, viewed 27 October 2011, http://www.aph.gov.au/Senate/committee/corporations_ctte/fps/report/index.htm. Chapter 3 of the PJC Report addresses the collapse of Storm Financial. The collapse of Opus Prime is addressed in Chapter 4 of the report.

[10].               Ibid., pp. 150 – 151, [7.10].

[11].               C Bowen (Minister for Human Services, Financial Services, Superannuation and Corporate Law), The Future of Financial Advice, Information pack, 26 April 2010, viewed 26 October 2011, http://ministers.treasury.gov.au/Ministers/ceba/Content/pressreleases/2010/attachments/036/Future_of_Financial_Advice_Information_Pack.pdf

[12].               Ibid., p. 5. This election on the part of the client has subsequently been referred to as the ‘opt-in’ approach.

[13].               Ibid.

[14].               Ibid., p. 6.

[15].               C Bowen (Minister for Human Services, Financial Services, Superannuation and Corporate Law), Rudd Government announces consultation on Future of Financial Advice Reforms, media release, 17 May 2010, viewed 31 October 2011, http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2010/054.htm&pageID=003&min=ceba&Year=&DocType=0

[16].               Information about the consultation process is available on the Future of Financial Advice website: http://futureofadvice.treasury.gov.au/content/Content.aspx?doc=home.htm

[17].               Treasury, Future of Finance Advice 2011, Information pack, Commonwealth of Australia, Canberra, 28 April 2011, viewed 31 October 2011, http://ministers.treasury.gov.au/Ministers/brs/Content/pressreleases/2011/attachments/064/064.pdf. This response also took account of the collapse of Trio Capital. For further details of this collapse see: N Hasham, ‘Retirees fear for nest egg after Trio Capital’s collapse’, Illawarra Mercury website, 16 March 2010, viewed 26 October 2011, http://www.illawarramercury.com.au/news/local/news/general/retirees-fear-for-nest-egg-after-trio-capitals-collapse/1776935.aspx. See also: Australian Associated Press, ‘Government to probe Trio Capital collapse’, News, Business website, 1 July 2011, viewed 26 October 2011, http://www.news.com.au/business/government-to-probe-trio-capital-collapse/story-e6frfm1i-1226085651293

[18].               Ibid., p. 8.

[19].               Ibid., p. 17.

[20].               Explanatory Memorandum, op. cit., p. 28.

[21].               J Murphy (Department of Treasury), ‘Evidence to Economics Legislation Committee’, Senate Estimates, Hansard, 19 October 2011, pp. 102-105, viewed 28 October 2011, http://www.aph.gov.au/Hansard/senate/commttee/s386.pdf

[22].               B Shorten (Assistant Treasurer and Minister for Financial Services and Superannuation), Future of Financial Advice Reforms – draft legislation, media release, no. 127, 29 August 2011, viewed 30 October 2011, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressrel%2F1040178%22The text of the Exposure Draft of Corporations Amendment (Future of Financial Advice) Bill 2011, the relevant Explanatory Memorandum and the submissions in response to those documents can be viewed at: http://futureofadvice.treasury.gov.au/content/Content.aspx?doc=consultation/corporations_amend/default.htm

[23].               This encompasses what was subsequently termed the ‘opt-in’ policy.

[24].               Explanatory Memorandum, Exposure Draft of Corporations Amendment (Future of Financial Advice) Bill 2011, p. 3, viewed 28 October 2011, http://futureofadvice.treasury.gov.au/content/consultation/corporations_amend/downloads/t1_em.pdf

[25].               Ibid.

[26].               Exposure Draft of Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, viewed 28 October 2011, http://futureofadvice.treasury.gov.au/content/consultation/corporations_further/downloads/FOFA_T2_Bill.pdf

[27].               This would mean that licensees and platform operators would be precluded from accepting volume-based fees the purpose of securing ‘shelf-space’ on an adviser’s or platform’s product list.

[28].               Explanatory Memorandum, ‘Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011’, Exposure Draft, p. 3, viewed 28 October 2011, http://futureofadvice.treasury.gov.au/content/consultation/corporations_further/downloads/FOFA_T2_Bill_EM.pdf This proposed ban would mean that financial advisers would not be able to charge asset based fees (fees dependent upon the amount of funds held or invested) to a retail client to the extent that their funds were ‘borrowed’ or ‘geared’.

[29].               J Murphy (Department of Treasury), ‘Evidence to Economics Legislation Committee’, op. cit., p. 104.

[30].               Industry Super Network, Submission to the Joint Standing Committee on Corporations and Financial Services, Inquiry into financial products and services in Australia, November 2009, p. 18, viewed 30 October 2011, http://www.aph.gov.au/Senate/committee/corporations_ctte/fps/submissions/sub380.pdf

[31].               Law Council of Australia, Submission to Treasury, ‘Corporations Amendment (Future of Financial Advice) Bill 2011’, Exposure Draft, 16 September 2011, p. 2, viewed 30 October 2011, http://futureofadvice.treasury.gov.au/content/consultation/corporations_amend/submissions/Law_Council_of_Australia.pdf

[32].               Australian Financial Markets Association, Submission to Treasury, ‘Corporations Amendment (Future of Financial Advice) Bill 2011’, Exposure Draft, 16 September 2011, p. 3, viewed 28 October 2011, http://futureofadvice.treasury.gov.au/content/consultation/corporations_amend/submissions/AFMA.pdf

[33].               C Bowen (Minister for Financial Services, Superannuation and Corporate Law), The Future of Financial Advice, Information pack, 26 April 2010, op. cit.

[34].               B Shorten (Assistant Treasurer and Minister for Financial Services and Superannuation), Future of Financial Advice prioritises consumers, media release, no. 64, 28 April 2011, viewed 31 October 2011, http://assistant.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/064.htm&pageID=003&min=brs&Year=&DocType=0

[35].               Selection Committee, Report No. 36, House of Representatives, Canberra, 13 October 2011, viewed 31 October 2011, http://www.aph.gov.au/house/committee/selc/reports/43rd_parliament/report_36.pdf

[36].               Details of the terms of reference, Submissions to, and final report by the Joint Committee on Corporations and Financial Services can be viewed at: http://www.aph.gov.au/Senate/committee/corporations_ctte/future_fin_advice/index.htm

[37].               M Cormann (Assistant Treasurer and Shadow Minister for Financial Services and Superannuation), Higher costs, red tape and less choice for consumers in FOFA II, media release, 28 April 2011, viewed 30 October 2011, http://www.liberal.org.au/Latest-News/2011/04/28/FOFA-II.aspx

[38].               M Cormann, (Assistant Treasurer and Shadow Minister for Financial Services and Superannuation), Why does Bill Shorten still not act on Ripoll Inquiry recommendations?, media release, 13 October 2011, viewed 25 October 2011, http://www.liberal.org.au/Latest-News/2011/10/13/Why-does-Bill-Shorten-still-not-act-on-Ripoll-Inquiry-recommendations.aspx

[39].               Ibid.

[40].               M Cormann, (Assistant Treasurer and Shadow Minister for Financial Services and Superannuation), FOFA changes breach best practice regulation requirements, media release, 20 October 2011, viewed 25 October 2011, http://www.mathiascormann.com.au/media/2011/FOFA%20changes%20breach%20best%20practice%20regulation%20requirements%2020102011.pdf

[41].               Association of Financial Advisers Ltd, Submission to Treasury, ‘Corporations Amendment (Future of Financial Advice) Bill 2011’, Exposure Draft, 24 September 2011, p. 9, viewed 28 October 2011, http://futureofadvice.treasury.gov.au/content/consultation/corporations_amend/submissions/AFA.pdf

[42].               Financial Planning Association of Australia, Financial Planning Association rejects FoFA Bill, media release, 13 October 2011, viewed 27 October 2011, http://www.fpadifference.com.au/default.asp?action=article&ID=22562

[43].               Ibid.

[44].               Financial Planning Association, FoFA’s opt-in fails Government’s compliance benchmark, media release, 20 October 2011, viewed 27 October 2011, http://www.fpadifference.com.au/default.asp?action=article&ID=22564

[45].               Industry Super Network, Ban on Conflicted Remuneration a win for consumers, media release, 28 September 2011, viewed 27 October 2011, http://www.industrysupernetwork.com/wp-content/uploads/2011/09/ISN-Media-Release-FoFA-2nd-Tranche-280911.pdf. See also: Industry Super Network, "Opt-in" necessary to protect super savings, media release, 13 October 2011, viewed 27 October 2011, http://www.industrysupernetwork.com/wp-content/uploads/2011/10/286O1610.pdf and Industry Super Network, Financial planners must disclose their fees to clients, media release, 17 October 2011, viewed 27 October 2011, http://www.industrysupernetwork.com/wp-content/uploads/2011/10/290O1002.pdf

[46].               Industry Super Network, Submission to Treasury, ‘Corporations Amendment (Future of Financial Advice) Bill 2011’, Exposure Draft, p. 9, [42], viewed 28 October 2011, http://futureofadvice.treasury.gov.au/content/consultation/corporations_amend/submissions/Industry_Super_Network.pdf

[47].               Choice, MPs must opt-in for key financial advice reforms, media release, 13 October 2011, viewed 27 October 2011, http://www.choice.com.au/media-and-news/media-releases/2011%20media%20releases/mps-must-opt-in-for-key-financial-advice-reforms.aspx

[48].               Explanatory Memorandum, op. cit., p. 4.

[49].               For example, RBS Morgans, Submission to Treasury, ‘Corporations Amendment (Future of Financial Advice) Bill 2011’, Exposure Draft, 15 September 2011, viewed 31 October 2011, http://futureofadvice.treasury.gov.au/content/consultation/corporations_amend/submissions/RBS_Morgans.pdf

[50].               Explanatory Memorandum, op. cit., pp. 5, 6, [1.2–1.6].

[51].               Ibid., p. 6, [1.7 – 1.9].

[52].               Ibid., pp. 6, 7.

[53].               Regulation Impact Statement, Explanatory Memorandum, op. cit., p. 36, [3.46].

[54].               Explanatory Memorandum, op. cit., p. 8, [1.16].

[55].               The Explanatory Memorandum states that because of the diversity and complexity of the financial services industry, the proposed provision for the prescription by regulation of product fees is necessary to enable the Minister to exclude certain arrangements that this obligation is not intended to apply to, including arrangements that may not currently exist. Ibid., p. 8, [1.17].

[56].               Ibid., [1.13].

[57].               Ibid., p. 14, [1.50].

[58].               Ibid., [1.51].

[59].               The term ‘fee recipient’ is defined in proposed section 962C as a financial services licensee, or a representative of a financial services licensee, who has entered into an ongoing fee arrangement and has not assigned his or her rights under the arrangement to another person.

[60].               Ibid., p. 10, [1.27].

[61].               The requirement for the response to be in writing can be ‘administered flexibility and by using a range of mediums and technologies…including by facsimile, email, SMS, or through an online facility’: Explanatory Memorandum, op. cit., p. 14, [1.47].

[62].               Explanatory Memorandum, op. cit., p. 46.

[63].               Ibid., p. 43, [3.79].

[64].               Ibid., p. 43, [3.80].

[65].               Ibid., p. 46.

[66].               Ibid., p. 11, [1.32].

[67].               Ibid., [1.33].

[68].               Ibid., [1.34].

[69].               Association of Financial Advisers Ltd, Submission to Treasury, ‘Corporations Amendment (Future of Financial Advice) Bill 2011’, Exposure Draft, op. cit., p. 7.

[70].               Australian Financial Markets Association, Submission to Treasury, ‘Corporations Amendment (Future of Financial Advice) Bill 2011’, Exposure Draft, op. cit., p. 3.

[71].               J Murphy (Department of Treasury), ‘Evidence to Economics Legislation Committee’, op. cit., p. 106.

[72].               Joint Consumer Submission (Choice, COTA, Consumer Action Law Centre, Australian Investors Association, NICRI), Submission to Treasury, ‘Corporations’ Amendment (Future of Financial Advice) Bill 2011’, Exposure Draft, p. 3, [7], 16 September 2011, viewed 30 October 2011, http://futureofadvice.treasury.gov.au/content/consultation/corporations_amend/submissions/Joint_Consumer_Groups.pdf. The provision to an investment client of an FSG and an SOA are existing requirements under the Corporations Act.

[73].               Joint Accounting Bodies, Submission to Treasury, ‘Corporations Amendment (Future of Financial Advice) Bill 2011’, Exposure Draft, 16 September 2011, p.2, viewed 30 October 2011, http://futureofadvice.treasury.gov.au/content/consultation/corporations_amend/submissions/Joint_Accounting_Bodies.pdf

[74].               Ibid.

[75].               Explanatory Memorandum, op. cit., pp. 17-20, [1.2-1.6].

[76].               Section 912A of the Corporations Act sets out general obligations which a financial adviser must comply with.

[77].               Explanatory Memorandum, op. cit., p. 22, [2.22].

[78].               Ibid.

[79].               Ibid., p. 24, [2.30].

[80].               Section 913B, Corporations Act.

[81].               Ibid., pp. 24-25, [2.37].

[82].               Association of Financial Advisers Ltd, Submission to Treasury, ‘Corporations Amendment (Future of Financial Advice) Bill 2011’, Exposure Draft, op. cit., p. 8.

[83].               Financial Planning Association of Australia, Submission to Treasury, ‘Corporations Amendment (Future of Financial Advice) Bill 2011’, Exposure Draft, op. cit., p. 6,

[84].               Law Council of Australia, Submission to Treasury, ‘Corporations Amendment (Future of Financial Advice) Bill 2011’, Exposure Draft, op. cit., p. 1.

[85].               Joint Accounting Bodies, Submission to Treasury, ‘Corporations Amendment (Future of Financial Advice) Bill 2011’, Exposure Draft, op. cit., p. 6.