Banking royal comm. protecting consumers from banking fees
LegalCorporateFinance1/03/2021 12:00:00 AM

Company Law - Banking Royal Commission Bill protects consumers from financial fees

On 25 February 2021, the Morrison government passed the Financial Sector Reform (Hayne Royal Commission Response No 2) Bill 2020 (Bill). The Bill is yet to receive royal assent. The legislation continues the government’s implementation of the recommendations from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Commission) to protect consumers from hidden fees and unexpected expenses in relation to financial services.

Specifically, the Bill addresses the following recommendations from the Commission:

  • Recommendation 2.1 – Annual renewal and payment/Ongoing fee arrangements
  • Recommendation 2.2 – Disclosure of lack of independence
  • Recommendation 3.2 – No deducting advice fees from MySuper accounts
  • Recommendation 3.3 – Limitations on deducting advice fees from choice accounts.

The new legislation in detail

Under the new legislation, clients of financial advisers will receive an annual forward-looking sum of fees and corresponding services. This is in addition to existing disclosure obligations which requires financial advisers, who are not independent of product providers, to provide their clients with a clear and concise written disclaimer. Financial advisers will also need to obtain written consent from their clients prior to deducting fees.

The new legislation will also prohibit the deduction of ongoing advice fees from MySuper products and increase the transparency of fees to members.

The Bill amends Ch 7 of the Corporations Act, which governs financial services and markets.

Schedule 1


The issue:
The Commission highlighted issues with clients being charged for services that were not provided, especially in relation to services under ongoing fee arrangements. The Commission considered that major causes of the “fees for no service” being charged included the simple desire for profit, the uncertain context of what was promised to clients and the capacity for financial advisers to deduct fees invisibly ie by “hiding” fees in other costs.

Schedule 1 of the Bill seeks to address these issues by amending the Corporations Act to require financial services providers that receive fees (fee recipients) under an ongoing fee arrangement to:

  • provide clients with a single document each year which outlines the fees that will be charged and the services which the client will be entitled to in the following 12 months and which seeks annual renewal from clients for all ongoing fee arrangements, and
  • obtain written consent from clients before fees under an ongoing fee arrangement can be deducted from a client’s account.

New Law (sch 1):

  • Fee recipients must seek renewal of ongoing fee arrangements by clients annually.
  • The renewal period begins and ends on the same date each year.
  • Fee recipients are no longer required to provide clients with a separate renewal notice.
  • Fee disclosure statements must be provided annually and include information about the fees to be paid and services to which the client is entitled to receive in the upcoming year, in addition to the information that is already required to be provided regarding the previous year. Fee disclosure statements must also include information about renewing the arrangement.

Written consent must be obtained prior to fees being deducted under an ongoing fee arrangement and consent cannot be obtained for a period which extends past 30 days after the end of the next renewal period.

Fee recipients must obtain written consent to continue an ongoing fee arrangement annually.

Current Law:

Ongoing fee arrangements must be renewed every 2 years.

Ongoing fee arrangements entered into before 1 July 2013 are not required to be renewed.

The renewal period could begin and end on different dates to the previous renewal period depending on when the fee recipient last provided the client with a renewal notice.

The fee recipient must provide the client with a fee disclosure statement annually and a renewal notice every 2 years.

Fee disclosure statements are retrospective, providing a summary of the fees paid, services which the client received during the previous year and services which the client was entitled to receive.

There is no requirement to renew or obtain a new consent from the client in relation to the deduction of ongoing fees once the client has provided initial consent.

Schedule 2


The issue:
The Commission highlighted issues with the management of conflicts of interest and investigated whether there were better methods available to deal with this issue. One such method was to improve the disclosure of conflicts of interest.

Schedule 2 of the Bill addresses this issue by amending the Corporations Act to require a providing entity (a financial services licensee or authorised representative) to provide a written disclosure of lack of independence where they are authorised to provide personal advice to a retail client. The disclosure must explain simply and concisely the exact nature of the conflict of interest ie why the adviser is not independent, impartial and unbiased. ASIC may, by legislative instrument, determine requirements for the purposes of the disclosure.


New Law (sch 2):

Entities (financial services licensees or authorised representatives) who are not acting independently (ie who would contravene s 923A of the Corporations Act by using any of the restricted words or expressions identified in s 923A(5), including “independent”, “impartial” and “unbiased”) must provide a retail client with a written statement in the form prescribed by ASIC disclosing their lack of independence before providing personal advice to the client.

The statement is included in the list of statements and information that must be included in the Financial Services Guide.

Current Law:
No equivalent.

Schedule 3


The issue:
The Commission highlighted concerns with advice fees being charged to superannuation products where such ongoing fees were often charged without the member’s visibility, awareness or informed consent. The Commission also emphasised that advice fees should only be paid for the actual provision of a service.

Schedule 3 of the Bill seeks to address this issue by amending the Superannuation Industry (Supervision) Act 1993 to provide greater protection for superannuation members against paying fees for no service. The amendments increase the visibility of advice fees for all superannuation products. The Bill also removes a superannuation trustee’s ability to charge fees under an ongoing fee arrangement for financial product advice from MySuper products. These amendments will protect superannuation members and allow them to make informed assessments about the value of the advice they are receiving and paying for out of their superannuation interest.

A comparison of the key features of the new law (sch 3) versus the current law, is provided in the table below:

New Law (sch 3):

The general fee rules prohibit a superannuation trustee from charging a member fees for advice (other than advice that may be collectively charged, such as intra-fund advice) unless:

• the fee is charged in accordance with an arrangement that the member has entered into,

• the member has consented to being charged the fee in accordance with the arrangement, and

• the trustee has the consent or a copy of the consent from the member.

A superannuation trustee cannot charge a fee under an ongoing fee arrangement (fee for personal advice paid for a period over 12 months) to a MySuper product.

A superannuation trustee can charge a fee in relation to an ongoing fee arrangement to a MySuper product.

Current Law:

The general fee rules do not include requirements for superannuation trustees charging a member for advice provided to that member. 

A superannuation trustee can charge a fee in relatiion to an ongoing fee arrangement to a MySuper product. 

What next

The Bill is awaiting assent.

Schedules 1 and 2 will commence on 1 July 2021.

Schedule 3 applies from 1 July 2021, with a 12-month transitional period commencing from 1 July 2021 for arrangements entered into before 1 July 2021.

The Treasurer, Josh Frydenberg, views the new Bill as an important step in restoring trust, confidence and integrity in Australia’s financial system.

_____________________

Sources: Financial Sector Reform (Hayne Royal Commission Response No. 2) Bill 2020, 25 February 2021, accessed 26 February 2021.

Financial Sector Reform (Hayne Royal Commission Response No 2) Bill 2020, Text of Bill, 25 February 2021, accessed 26 February 2021.

Financial Sector Reform (Hayne Royal Commission Response No 2) Bill 2020, Explanatory Memorandum, 25 February 2021, accessed 26 February 2021.

Treasury, Protecting Australians from hidden costs, [media release], issued 25 February 2021, accessed 26 February 2021.

Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Banking Royal Commission Final Report, 1 February 2019, accessed 26 February 2021.