APES 230 – Risk Commissions Back Down

The Accounting Professional and Ethical Standards (APES) Board has issued a revision to its guidance on the provision of financial planning advice by accountants (APES 230), ahead of its Board Meeting on 5 April 2013. The key element covered by the revisions is the removal of a proposed ban on the payment of commissions on life insurance advice.

The original APES 230 Standard proposed a ban on commissions as a form of remuneration for accountants who provided financial advice services to clients, including advice on life insurance. The industry was largely critical of this approach, particularly because it went further than the Future of Financial Advice (FoFA) reforms, which exempt life insurance products from the ban on commissions (see: APES 230 Outcome ‘Disappointing’ – Associations).

Responding late last year to the concerns raised during industry consultation, the APES Board said it would proceed with measures to prevent accountants from receiving commissions on life insurance product advice.

In what now appears to be a back down from its original stance, the APES Board’s updated version of APES 230 permits the payment of commissions on new life insurance advice, provided the following ‘safeguard’ conditions are met:

• The member (accountant) obtains written informed consent from the client prior to commencement of the financial planning service
• The member provides the client with three comparative quotes, where available
• The client must receive annual disclosures from the member on the estimated and actual amount of commission received
• The member must disclose to the client the impact of any proposed changes to existing life insurance and other risk contracts

… the fee for service alternative… is the most effective safeguard against threats to the fundamental principles of the Code arising from conflicted remuneration

The arrangement is proposed as an alternative to the APES Board’s preferred remuneration method – fee for service. According to a statement issued in conjunction with the updated Standard, the APES Board believes the fee for service alternative, which requires a member to rebate any commissions received back to the client, is ‘… the most effective safeguard against threats to the fundamental principles of the Code arising from conflicted remuneration’.

A member will be able to continue to accept trailing commissions in respect of life insurance product advice provided prior to 1 July 2014, as long as there are no subsequent financial planning advice services provided to the client.

While the majority of the APES 230 Standard, if agreed to by the Board, is due to commence from 1 July 2014, the new remuneration provisions will not take effect until 1 July 2015.

Also on the agenda for discussion at the next APES Board Meeting is a new Guidance Note on Outsourced Services. APES GN 30 provides guidelines to assist professional accountants to manage risks associated with delivering or utilising outsourced services.

The APES Board defines ‘outsourcing’ as an activity where an entity or a firm engages a party, on a continuing basis, to perform a business activity that is being, has been, or could be performed by that entity or firm. Outsourcing can be from a client to a member, or from a member to another service provider to assist with the delivery of a professional service to a client.

It requires that members utilising outsourced services should:

• Take reasonable steps to determine that the outsourced service provider has the required professional competence, skills, capacity, policies and procedures to conduct the services
• Retain the primary responsibility for the delivery of the service
• Disclose the geographical location of the provider
• Disclose the extent to which outsourced services are used in the delivery of professional services to the client
• Consider obtaining written consent from the client to utilise outsourced services

APES Board Chair, Kate Spargo, said while outsourcing can have benefits such as staff utilisation on core activities, lower costs and access to specialised skills, it also has ‘potential risks’.

“Areas such as disclosure to clients, confidentiality of client information, integrity of information transferred between professional accountants and the outsourced service provider, and control and supervision of the work performed are areas addressed in the guidance note,” she said.