Background
Section 962G of the Corporations Act 2001(Cth) (“Corporations Act”) requires Australian Financial Services licensees who have entered into an ongoing fee arrangement with a customer, to provide that customer with an FDS at least every 12 months. Under section 962H of the Corporations Act, the FDS must contain details about the amount of ongoing fees paid by the customer, information about the services the customer was entitled to receive, and information about the services the customer actually received. Section 962K of the Corporations Act provides that customers with an on-going fee arrangement must be issued with a Renewal Notice every two years so that they may renew the ongoing fee arrangement. This section also specifies that if the client ‘opts-out’ of the arrangement, or does not actively opt-in, the ongoing fee arrangement must be terminated.
ASIC’s review into compliance with FDS and Renewal Notice obligations stems from the large number of breach reports received by ASIC from licensees indicating that that they have failed to comply with these requirements under the Corporations Act, implemented in 2013 as part of the Future of Financial Advice reforms. ASIC are concerned that the volume and range of breach reports indicate a widespread risk of systematic non-compliance with FDS and Renewal Notice obligations.
ASIC’s review
ASIC will review the extent to which licensees issue FDSs and Renewal Notices to customers, and whether they are issued within the time frames required by the law. ASIC will examine the extent to which FDSs include the required content, and whether the content within the FDSs is accurate. This will include an assessment of the accuracy of the description of services received, and services for which the customer is charged. ASIC will be investigating whether licensees have appropriate procedures in place to ensure ongoing services are discontinued when the ongoing fee arrangements are terminated as a result of licensees failing to comply with FDS or Renewal Notice requirements.
The significance of FDSs and Renewal Notices has been highlighted in ASIC’s continuing work into failures relating to fees for no service in the advice industry. The purpose of the FDSs enables customers to have a better understanding of the services they have received, and the services they have not received. Renewal Notices, and the ‘opt-in’ method for customers before fees are charged, significantly reduce the chances of disengaged customers paying ongoing fees.
ASIC is currently investigating substantial breaches of the FDS and Renewal Notice obligations and will take enforcement action where breaches are substantiated. Remediation programs overseen by ASIC have resulted in licensees paying $259,555,513 in compensation to their customers so far, for breaching these obligations. ASIC will examine compliance with these obligations within both large and small entities, and intends to release findings in 2019.
ABA reforms
In addition to ASIC’s review, the ABA announced on 10 October 2018 that the Banking Code of Practice will be overhauled to change the way banks manage a customer’s estate, in order to eradicate fees for no service in the financial advice industry. The ABA is also seeking to amend legislation to end grandfather payments and trail commissions for financial advisers. These reforms by the ABA are the first of several changes in response to the findings in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Service Industry.
If you have any questions about your obligations please contact Hillary Ray or Elaine Wilson of our Financial Services team.