Trustees face breach risk under advice deduction proposals

A leading financial services regulation lawyer has said the government may have good intentions, but the upcoming financial advice legislation needs to be amended to remove the risk of future liability. 

Michael Vrisakis, partner at Herbert Smith Freehills, has 30 years experience in financial services law. He told Money Management there are numerous legal problems with the Delivering Better Financial Outcomes legislation. 

One area of concern is the advice costs being deducted by superannuation trustees, a topic referenced by both the Financial Advice Association Australia (FAAA) and the Financial Services Council (FSC), and he is concerned it will lead to unintended consequences. 

The legislation sets out multiple requirements that need to be satisfied before a trustee can charge the cost of advice against a member’s interest in the fund. This includes an assurance that the financial product advice is personal advice, and is wholly or partly about the member’s interest in the fund.

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Earlier this week, ASIC commissioner Alan Kirkland told delegates at the FAAA roadshow that super fund trustees will not be required to check every individual Statement of Advice, but this is contrary to what is stated in the legislation.

Vrisakis said: “There is no doubt that the government and ASIC are coming at it from the right spirit in that they don’t intend additional burden, but you need something specific in the legislation such as ‘reasonable steps’ to ensure everyone is on the same wavelength and there is no slippage or unintended consequences which an explanatory guidance cannot override.

“There are two objective and absolute requirements to satisfy; that it is personal advice and that the charge does not exceed the cost of advice. Because these are unqualified obligations, a trustee is likely to have to do a deep dive into the advice to ensure these criteria are satisfied, with the consequential additional costs for members.

“If it does not delve, a breach can occur despite the trustee’s best endeavours, and that is a lot of burden for the trustee which all relevant players have an interest in avoiding.” 

He is concerned any potential breaches in this regard or if a cost cannot be justified, then there is a risk of regulatory or member liability associated with a breach.

Law Council of Australia

Separately, in a submission to the review, the Law Council of Australia agreed that the legislation targets an unachievable “standard of perfection” for the superannuation trustee.

The Law Council’s superannuation committee said it will be very difficult for a super fund trustee to know or be reasonably confident whether an ongoing fee arrangement between a fund member and a third-party adviser complied with the requirement.

“It is very unlikely that a superannuation fund trustee could ever be completely satisfied as to whether a particular arrangement complies at all relevant times.

“Paragraph 99FA(1)(d) implies a level and cost of due diligence and governance on the part of the trustee that is – in the committee’s respectful opinion – unreasonable (and an unfair burden to be shared across the fund in terms of cost) and, indeed, a standard of perfection that a trustee, not being the fee recipient, is simply not in a position to achieve.”

For this reason, the risk of inadvertent non-compliance with the requirements, which the committee said are already “notoriously difficult” to meet under existing legislation, remains in place.

Without any changes being made, the proposed legislation would not meet the objectives of the Quality of Advice Review in reducing red tape and providing superannuation fund trustees with more legal certainty about paying advice fees from a member’s super account.

“It will also make superannuation trustees very reluctant to permit personal advice fees to be paid from their funds and it is therefore inconsistent with the government’s apparent policy intention.”

The Superannuation Committee recommended that the bill include a provision to the effect that paragraph 99FA(1)(d) of the SIS Act is deemed to be satisfied if:

(a) the fee recipient in relation to the ongoing fee arrangement is neither the superannuation fund trustee nor a representative of the trustee; and 

(b) the trustee has taken reasonable steps to ensure that any applicable requirements of Division 3 of Part 7.7A of the Corporations Act are met in relation to the ongoing fee arrangement.