Financial advice
LegalCorporateFinanceCompliance18/05/2021 12:00:00 AM

Company Law - Financial Advice Fees Regulations in response to Banking Royal Commission

The Financial Sector Reform (Hayne Royal Commission Response-Advice Fees) Regulations 2021 (Cth) (Instrument) was registered on the Federal Register of Legislation on 14 May 2021. Schedules 1 and 2 of the Instrument will commence on 1 July 2021. The Instrument amends the Corporations Regulations 2001 to specify records which fee recipients must keep in order to evidence compliance with the obligations for ongoing fee arrangements. The Instrument also amends the Electronic Transactions Regulations 2020 to permit written consents in relation to financial product advice fees, paid out of a superannuation interest, to be provided electronically.

The Instrument is made pursuant to s 1364 of the Corporations Act 2001 (Corporations Act) and s 16 of the Electronic Transactions Act 1999.

Background

The amendments brought about by the Instrument are in response to the recommendations from the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Banking Royal Commission).

In particular Recommendation 2.1, addressed significant issues which were identified with clients being charged for services that were not provided (particularly in relation to ongoing fee arrangements). To address these issues, amendments enacted through sch 1 of the Financial Sector Reform (Hayne Royal Commission Response No 2) Act 2021, impose a range of obligations on fee recipients, including in relation to the information provided to a client regarding the services provided under an ongoing fee arrangement and the frequency with which clients must opt-in to such arrangements. The amendments in sch 1 of the Instrument support the amendments to sch 1 of the Financial Sector Reform (Hayne Royal Commission Response No 2) Act 2021.

The amendments in sch 1 of the Instrument were released for public consultation for 4 weeks, from 31 January 2020 to 28 February 2020. Direct consultation with ASIC and APRA was also undertaken at that time.

The amendments in sch 2 of the Instrument were informed by consultation with government agencies and industry feedback.

You can read more about the Banking Royal Commission on our Pinpoint platform here.

The changes in detail

Schedule 1 of the Instrument supports Recommendation 2.1 of the Banking Royal Commission, by:

  • implementing an enhanced fee disclosure regime,

  • requiring ongoing fee arrangements to be renewed annually,

  • requiring annual renewals to be agreed in writing by clients,

  • specifying the records which fee recipients must keep in order to demonstrate compliance with obligations for ongoing fee arrangements pursuant to the new s 962X of the Corporations Act, and

  • making consequential amendments to the Corporations Regulations 2001 to reflect the updated ongoing fee arrangement rules.

With regards to the obligation on fee recipients to maintain sufficient records, the Instrument provides that the fee recipient must keep a record of any fee disclosure statements which they provide to clients under an ongoing fee arrangement, as well as any documents relating to the receipt, variation or withdrawal of consent to make, or arrange, a deduction of an amount for an ongoing fee from a client account.

This new obligation to keep sufficient compliance records is integral to the legal framework to address the issues which the Banking Royal Commission identified with ongoing fee arrangements. Keeping sufficient compliance records ensures that there is a minimum level of information available to ASIC when undertaking compliance and enforcement work. A contravention of this obligation attracts a maximum penalty of up to 5 years’ imprisonment and/or a fine of up to 600 penalty units for an individual and 6,000 penalty units for a corporation. It is the only contravention in the new law which gives rise to a potential criminal offence, thereby highlighting its importance to the overall integrity of the new regime.

Schedule 2 of the Instrument supports Recommendations 3.2 and 3.3 of the Banking Royal Commission by:

  • amending the Electronic Transactions Regulations 2020 to permit written consents in relation to financial advice fees, paid out of a superannuation interest, to be provided electronically, and

  • making consequential amendments.

Conclusion

The changes, on the whole, benefit the financial services industry as they provide greater flexibility in obtaining consents from clients, in particular by allowing those consents to be provided electronically. The amendments also safeguard clients engaging in ongoing fee arrangements by ensuring sufficient scrutiny and review of those arrangements.

Sources: Financial Sector Reform (Hayne Royal Commission Response – Advice Fees) Regulations 2021, 14 May 2021, accessed 18 May 2021.

Financial Sector Reform (Hayne Royal Commission Response – Advice Fees) Regulations 2021 Explanatory Statement, 14 May 2021, accessed 18 May 2021.

Banking Royal Commission Final Report, 1 February 2019, accessed 18 May 2021.

CCH Pinpoint ®, Banking Royal Commission, 27 October 2020, accessed 18 May 2021.