Advisers need to start work on financial disclosure statements (FDS) now, warned one compliance stakeholder, despite the fact the legislation does not take effect for five months.
The Association of Financial Advisers’ (AFA) Chief Operating Officer, Phil Anderson, told advisers they should be developing FDS processes and documentation now, because some FDS may need to be delivered to clients in July 2013.
Under the Future of Financial Advice (FoFA) reform legislation, an adviser must issue an FDS to any client (either new or existing) with whom they have entered an ongoing fee arrangement. The FDS needs to be issued within 30 days of the anniversary of the date the fee arrangement was entered into.
According to Mr Anderson, this means that advisers who have an ongoing relationship with clients which commenced in July 2012 or prior will need to have an FDS ready to issue in July 2013, to align with the anniversary date.
Speaking as part of an industry panel at the Australian Securities and Investments Commission’s (ASIC) FoFA workshop in Sydney, Mr Anderson said:
“The fee disclosure statement obligation is live right now. Why I say that is because if you gave advice to a client in July of 2012 or July of 2011 or previously, you will have an obligation in July 2013 to provide a fee disclosure statement that covers July 2012 to July 2013. So you need to be managing that right now.”
He told the audience that the AFA is recommending its members follow three steps to prepare for the delivery of FDS to clients from July 2013:
- Determine which clients will require a fee disclosure statement. Some arrangements, such as commissions or transactional advice fees, are exempt from the requirement to provide clients with an FDS.
- Determine the date the FDS must be issued for each client, known as the disclosure date. This is the anniversary of the date the arrangement was first entered into. If it is not possible or too onerous to determine the disclosure date, ASIC have granted an exemption which allows advisers to set the disclosure date themselves. In order to take advantage of this exemption, advisers must notify their clients of the ‘new’ disclosure date by 31 January 2014.
- Determine the contents of the FDS. In relation to service, advisers need to include the services that the client was entitled to receive, and those that they actually received during the previous 12 month period.
Adding to the steps above, co-panellist and Financial Planning Association General Manager, Policy and Government Relations, Dante De Gori, said advisers could also take the opportunity to review the type of arrangement they had with their clients.
… you need to make the decision before 1 July 2013 as to which clients you will have an ongoing fee relationship with
“One of those steps could actually be (to determine) whether you want to have an ongoing service arrangement with those clients. Do they have to be in a fee arrangement that is greater than 12 months? Or do you want them to be on a transactional arrangement where they come and see you when they need advice. You have many options, however you need to make the decision before 1 July 2013 as to which clients you will have an ongoing fee relationship with,” he explained.
Advisers who are receiving commissions for life insurance products (or trail commissions on existing products) are not required to provide their existing clients with an FDS, unless the client has given their clear consent or direction for commissions to be paid. However, when discussing this issue during the session, ASIC representative, Nick Coates, suggested that if commission had been dialled up or expressly agreed with the client, then it would need to be disclosed. Riskinfo is seeking further clarification from ASIC in relation to this issue.
It seems that ASIC havent really thought through the details of this – what on earth does that last paragraph mean? Risk comms need to be disclosed if the client has agreed to them??? Arent they aware that clients receive full disclosure of our fees (including risk). Seriously its policy on the run and poorly thought through – I am sure it will be badly executed and licensees all over the place will make life very difficult for AR’s as they will not want a mistake to be made. Compliance is going to be a nightmare – unless some common sense, clear guidelines are given.
No wonder we are still scratching our heads over FOFA. The last paragraph above was head scratching stuff. Nowhere has insurance commissions been referred to when taking about the issuing of an FDS. The last statement says an FDS must be issued if the client has given clear consent or direction for commission to be paid. Well they do that in the SOA. And further the comment says if commission had been dialled up or expressly agreed an FDS has to be issued. Say what! How hard do the regulators want to make our lives. Even you guys who try to interpret this utter rubbish further confuse all and sundry.
riskinfo here…
In relation to the comments above, we thought some additional information may be useful.
ASIC’s Regulatory Guide 245 on fee disclosure states that commissions for life insurance are not conflicted remuneration. The guide goes on to say:
‘We therefore consider that commissions generally do not need to be disclosed in the FDS, on the basis that they are paid under a commercial arrangement between a product issuer or platform operator and an AFS licensee or a representative.
‘However, fee recipients should consider whether any commissions were entered into with the clear consent of or at the direction of the client and therefore need to be disclosed. We would not generally consider that a commission was entered into with the clear consent of or at the direction of the client merely because it has been disclosed in the SOA.’
The above statements have prompted some questions from industry stakeholders about what ‘clear consent’ means. Subsequent comments made at the Sydney ASIC FoFA Roadshow raised further questions, so riskinfo has approached ASIC directly for clarification. We hope to update our readers soon.
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