The Government recently released draft legislation to implement 22 recommendations from the Banking Royal Commission. Early feedback indicates many in the industry remain concerned about the impact the new legislation will have on profitability of firms, particularly as they will increase the administrative and compliance burden for many firms. The critics main refrain can be summed up as “more red-tape for nothing.”
The main parts of the legislation that concern advice are recommendations 2.1 (regarding enhancing the existing ongoing fee arrangement provisions) and 2.2 (which requires entities who are authorised to provide personal advice to a retail client to disclose in writing to the client where they are not independent and why that is so).
In practice, Recommendation 2.1 will require financial advisers to renew client fee arrangements every 12 months instead of the two-year period to renew client fee arrangements. The annual opt-in requires advisers to disclose in writing past and future fees for 12 months, as well as obtain written consent for fees to be deducted from the client’s account.
The proposed independence disclosure rule (Recommendation 2.2) means advisers will have to give written disclosure of their “lack of independence” to their clients if they accept insurance commissions. The rule would impact most advisers who offer insurance advice as this is predominantly remunerated via commissions. Many advice firms would qualify to call themselves independent but for insurance commissions and there are fears firms may reassess and potentially abandon insurance advice based on commissions because of the disclosure rule.
The two Bills give advice practices just five months to amend their compliance systems and documentation by 1 July 2020, however it does include transitional arrangements that extend the provisions to 1 January 2021.
The FPA responded to the release of the draft legislation by saying it closely aligns to the Recommendations outlined in the Royal Commission, but warned if implemented, it will further increase the time and the administration burden on financial planners helping their clients.
“The FPA agrees financial advisers should be required to periodically review and renew ongoing fee arrangements, document them and seek the consent of their clients for any fees to be charged,” FPA Chief Executive Officer De Gori said.
“However, we believe requiring this to be conducted annually without any modification to the laws around when an ongoing fee arrangement can be renewed rather than reset, adds considerable time and cost pressures on financial planning practices. It is not practical and will be too much of an administrative burden for many practices.”
De Gori continued “This legislation will require business practice changes, administration changes, disclosure changes and financial planners need to be thinking about this sooner rather than later.”
Critics of the proposals say that the legislation will do little to improve advice for the average client and will simply provide more opportunity for clients to sever their relationship with the adviser and that it has the potential to negatively impact advice business valuations.