Breakthrough acknowledgement on FDS arrangements
The Government will be almost compelled to change the arrangements for annual client renewals to address what would represent almost an impossibility for financial advisers, according to the Association of Financial Advisers (AFA).
AFA acting chief executive, Phil Anderson is arguing that as the legislative and regulatory arrangements currently stand, advisers might literally have only one day to provide a fee disclosure statement (FDS) – something which is virtually impossible.
What is more, the AFA has had its understanding of the situation confirmed by the Australian Securities and Investments Commission (ASIC) and Treasury.
“We have been very adamant that it is simply not possible to provide an FDS in one day and have equally been clear that it is inappropriate to take the risk, as any breach in terms of the content of an FDS or getting the amount wrong would result in the Ongoing Fee Arrangement being terminated,” Anderson has said in a message to members.
“Some of the obvious reasons for why this is impossible are as follows:
- There is often a delay in fees being processed into the remuneration systems;
- It is not possible to precisely predict in advance the amount for asset-based fee clients;
- FDSs are important disclosure documents and should be subject to careful checking;
- ASIC expect advisers to manually check FDS amounts against product systems (ASIC Report 636);
- Advice businesses like to do FDSs in batches and, putting aside everything else, this would make it impossible to check them all in the time available; and
- Importantly this is the first year where the services and the fees for the next 12 months must be included in the FDS, and this will be extra complicated for asset-based fee clients, where you need to prepare an estimate and explain the basis of the estimate.
“Since we became aware of this potential issue, we have engaged with ASIC and Treasury to ascertain whether our understanding was correct. Once it was confirmed that we were correct, we have then proceeded to raise this issue with the Government and to submit a request to ASIC that they take a facilitative compliance approach during the transition year. We did this letter jointly with the FPA.
“It is important to understand that ASIC does not have the powers to provide relief. They can only take a facilitative compliance approach, where they would agree not to take any regulatory action where breaches occur. An ASIC no action position or facilitative compliance approach would not stop ongoing fee arrangements from being automatically terminating if you breach the FDS requirements. This also does not prevent other parties from taking action. Ultimately this issue can only be solved by legislative change, however this is unlikely in the time left before commencement on 1 July, 2021.”
Anderson said the AFA would continue to work with ASIC and the Government on finding a workable solution, with ASIC currently working on guidance for advisers which would be released as soon as possible.
Recommended for you
Government has introduced a bill to Parliament to legislate the first stream of the QAR reforms.
ASIC now has a 1:1 ratio when it comes to court success in the enforcement of crypto activities and more action is expected as Treasury seeks to introduce a regulatory framework.
A leading governance body has hit out at “specialist interest groups proposing ad hoc law reform” when it comes to reforms of financial services legislation and believes an independent body is needed.
The release of ALRC’s final report into financial services legislation has highlighted financial advice as a “significant” focus as it seeks to reduce costs and help advisers understand their obligations, alongside the Quality of Advice Review.
