These amendments include de-criminalising these requirements, so they have the same penalty as the "best interests" duty.
The draft Bill also includes an obligation on licensees to take reasonable steps to ensure their representatives' compliance with the "best interests" duty. However, an exemption will apply for authorised representatives, so they do not breach the obligations if the breach resulted from reasonable reliance by the authorised representative on information or material provided by the licensee.
If a financial adviser is to charge an ongoing fee to a retail client, then the adviser will be required to send:
- a renewal ("opt-in") notice every 2 years to new clients; and
- an annual fee disclosure statement to all clients.
The opt-in will apply to new clients from 1 July 2012.
How may advisers invite clients to opt in?
Advisers are expected to be given considerable flexibility about how to discharge the opt-in obligation. Advisers who charge on-going fees but who do not have regular face to face meetings with their clients will be able to use electronic channels such as phone or internet and could potentially use a record of advice to record the renewal. For example, the client could fill a short form online and clicking a button to send the email.
What if clients don't opt in?
If the client does not renew the adviser's services by "opting-in" to the renewal notice, then the client will be assumed to have opted out. In that case, the adviser can no longer charge the client an advice fee.
The client will also be entitled to recoup any ongoing fees that are charged if the adviser does not send either a fee disclosure or renewal notice. Only those advisers intending to charge ongoing advice fees to retail clients need to provide the notices.
If an adviser continues to charge an ongoing fee after a fee arrangement ends as a result of the renewal notice obligation (either after a client chooses not to renew, or does not respond to the renewal notice), then the adviser will be subject to a civil penalty. Because a breach of the opt-in duty is likely to be less serious than a breach of the "best interests" duty, it is:
- subject to a lower maximum penalty ($50,000 for an individual and $250,000 for a body corporate); and
- would be proportionate (to the extent any action is taken at all).
The draft Bill enhances ASIC's ability to supervise the financial services industry through changes to its licensing and banning powers. These amendments include:
- a change to the licensing threshold so that ASIC can refuse, cancel, or suspend a licence if a person is likely to contravene its obligations. This sets a higher standard than the current threshold which is that ASIC can refuse, cancel, or suspend a licence if a person does not comply with their obligations;
- an extension to the statutory tests so that ASIC can ban a person who is not of good fame and character or not adequately trained or competent to provide financial services (in essence they are not a fit and proper person);
- a change to the banning threshold so that ASIC can ban a person if they are likely to contravene a financial services law. This sets a higher standard than the current threshold which is that ASIC can ban a person if they do not comply with a financial services law; and
- a clarification that ASIC can ban a person who is involved, or is likely to be involved, in a contravention of obligations by another person.
- ban on risk insurance commissions - will apply to commissions on group life insurance in all superannuation products, and to commissions on any life insurance policies in a default or MySuper product from 1 July 2013;
- ban on soft dollar benefits - Mr Shorten said that, with broad agreement among stakeholders that the ban on soft dollar benefits should include life insurance outside superannuation, he had decided to extend the ban in order to provide increased consumer protection and certainty for business;
- stockbroking - traditional remuneration models in the stockbroking industry "will not be unduly impacted" as a result of the reforms, the Assistant Treasurer said. For example, stamping fees or similar payments relating to capital raising will be permitted in order "to preserve an important channel for companies to continue accessing the retail investor market in order to raise capital". If brokers undertake financial planning activities, then the ban on product commissions will still apply;
- transition to ban on commissions - the ban on conflicted remuneration (including the ban on commissions) will not apply to existing contractual rights of an adviser to receive ongoing product commissions. This means that, in relation to trail commissions on individual products or accounts, any existing contract under which the adviser has a right to receive a trail commission will continue after 1 July 2012, or in the case of certain risk insurance policies in superannuation, 1 July 2013;
- "financial planner" restricted term - Treasury will release a public consultation paper by the end of the year on restricting the term "financial planner" in the Corporations Act 2001.
The FOFA reforms were originally announced on 26 April 2010 in response to the Ripoll Review. Further details and refinements were announced on 28 April 2011.
Source: This article was first published in Thomson Reuters' Weekly Tax Bulletin. To subscribe to Weekly Tax Bulletin, or for more information, pleaseLTA.Service@thomsonreuters.com