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19-325MR ASIC reports on compliance with financial advice fee disclosure obligations
A new report about fee disclosure obligations released by ASIC has found that consumers receiving financial advice could be at risk of receiving wrong information about advice fees, or in some cases, being charged fees after ongoing fee arrangements have terminated.
Report 636 Compliance with the fee disclosure statement and renewal notice obligations (REP 636), reports on ASIC’s compliance assessments of fee disclosure statements (FDSs) and renewal notices (RNs) issued by 30 randomly-sampled Australian financial services (AFS) licensees and their representatives. The review focused on whether the fee disclosure documents provided to clients complied with the law and if not, the nature of the failures.
The provision of FDSs are important legal obligations for consumer protection that were introduced as part of the Future of Financial Advice (FOFA) reforms in 2013. When they are recipients of fees from clients under ongoing fee arrangements, AFS licensees or their representatives are required by law to provide FDSs and RNs to their clients in a timely manner.
For this review, ASIC required the 30 AFS licensees to produce samples of FDSs and RNs to ASIC for assessment. 1496 FDSs and 373 RNs were collected and analysed by ASIC along with fee disclosure policies and procedures. ASIC also commissioned a compliance consultant to review 176 FDSs in detail to determine whether the contents complied with legal requirements.
Non-compliance by fee recipients ranged from less material and technical breaches to more significant breaches. The review found that seven per cent of the FDSs required to be given to clients by law, were not given. In 35 per cent of the instances when an RN was required, an RN was not given.
Of the 176 FDSs reviewed in detail:
- 80 per cent did not include all the required information about services that clients were entitled to receive
- 73 per cent did not cover all the information about services that clients received, and
- 44 per cent did not include the amount of each fee paid by the clients.
When reviewing policies and procedures, ASIC found that more than half of licensees did not have effective processes to remind them when RNs are due or to turn off ongoing fees.
ASIC Commissioner Danielle Press said the findings have raised concerns about industry practices in relation to fee disclosure to clients.
‘Our review has found widespread non-compliance with fee disclosure obligations across the sample of AFS licensees and their representatives, suggesting that compliance with the FDS and RN obligations may be an industry-wide problem.
‘Consumers are at risk of receiving inaccurate fee disclosure statements or in some cases, none at all. This is a timely reminder that while disclosure alone is not enough as a consumer protection mechanism, transparent and timely disclosure still has an important role to play.
‘The 30 licensees in our review have been advised of our concerns, and we are strongly urging all AFS licensees to immediately take steps to improve the robustness of their compliance measures,’ Ms Press said.
REP 636 provides practical tips for AFS licensees and their representatives to improve their compliance with the FDS and RN obligations. Fee recipients should consult ASIC’s Regulatory Guide 245 Fee disclosure statements (RG 245) for more detailed guidance.
Separately, ASIC is investigating a number of other advice licensees for potential breaches of the FDS and RN obligations. ASIC will determine whether court action is appropriate at the end of these investigations.
ASIC commenced this project to examine compliance with FDS and RN obligations in 2018, after receiving a number of breach reports from licensees that indicated that they had failed to comply. The legal obligations to comply with the FDS and RN obligations apply to the entity or person who entered into an ongoing fee arrangement with the client – this may be an AFS licensee, or a representative of an AFS licensee. Separately, AFS licensees have a general obligation to monitor and supervise their representatives.
FDSs are intended to help clients of financial advisers understand what services they have paid for, what services they have received and how much those services cost, and to enable them to make more informed decision about whether their ongoing fee arrangements with their adviser should continue.
RNs are designed to ensure that disengaged clients do not continue to pay fees by ensuring that ongoing fee arrangements remain in place only if the client actively chooses to continue the advice relationship because they value their adviser’s services.
The Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission), published in February 2019, recommended that the law be amended to provide that OFAs must be renewed by clients annually (instead of every two years). In its response, the Government has agreed to amend the law to require this change. ASIC will assess whether further industry guidance about FDS and RNs is required after these Royal Commission legislative changes are settled.