Fees for no service: Remediation
This is Information Sheet 232 (INFO 232). It explains:
In 2015, we began a project to review the extent of failure to deliver ongoing advice services to financial advice clients who were charged fees for those services (fees for no service).
The project covers AFS licensees that are product issuers or provide personal advice to retail clients, and that are part of AMP Limited, Australia and New Zealand Banking Group Limited, Commonwealth Bank of Australia, Macquarie Group Limited, National Australia Bank Limited and Westpac Banking Corporation. The project covers periods both before the introduction of the Future of Financial Advice (FOFA) reforms as well as after the implementation of the reforms.
We released Report 499 Financial advice: Fees for no service (REP 499) on this project in October 2016, and provided updates in May 2017 and December 2017: see Media Release (17-145MR) Compensation update: Major financial advisory institutions continue refund programs for fees for no service and Media Release (17-438) Update on financial advice institutions fees-for-no-service refund programs.
Since REP 499 was issued, more AFS licensees have reported charging fees for no service to ASIC.
While a fee for no service is the failure to deliver ongoing advice services to financial advice clients who were charged fees for those services, this information sheet focuses specifically on failures to deliver an annual (or other periodic) advice review that was promised to a client. There are many reasons why these failures might arise. For example, the adviser might have retired or resigned and the AFS licensee did not appoint a new adviser to service the client. In other cases, the adviser may simply have failed to provide the annual review that the client has paid for.
The information below relates specifically to fees for no service. It should be read in conjunction with Regulatory Guide 256 Client review and remediation conducted by advice licensees (RG 256).
When an AFS licensee remediates fees for no service (or considers whether it has charged fees for no service), we expect the licensee to review the following questions in order to provide appropriate remediation and compensation:
- Did the AFS licensee deliver what the client paid for?
- Is an offer of an annual review sufficient to meet an AFS licensee’s obligations?
- What evidence is necessary to demonstrate that an annual review was provided?
- What if the client paid 'bundled fees'?
- How should refunds be calculated?
- What should the AFS licensee tell clients?
An AFS licensee should review the terms of its ongoing service arrangements with clients to determine what services the client was charged for. In conducting the review and remediation program, the licensee must act efficiently, honestly and fairly, and should take a client-focused approach.
When a client has paid to receive an annual review, the adviser's or AFS licensee’s mere offer to the client of an annual review is unlikely to satisfy our expectation that the licensee is taking a client-focused approach. When a client did not receive the annual review that they were entitled to, we expect that the licensee will pay them compensation.
If the ongoing service arrangement specifically limits the AFS licensee's obligation to the mere offer of a review, the licensee should consider whether such an agreement justifies significant annual fees and whether it is acting efficiently, honestly and fairly in such circumstances.
The provision of an annual review typically constitutes personal advice. Therefore, if an AFS licensee has provided its client with an annual review, we expect the licensee will have either a Statement of Advice (SOA) or Record of Advice (ROA) on file to evidence the delivery of the annual review.
If an AFS licensee relies on other (secondary) evidence to determine if an annual review was provided to a client and whether compensation should be paid, it is important for the licensee to satisfy itself that the secondary evidence is reliable evidence to confirm it provided the client with an annual review. We expect that the licensee will implement an independent quality assurance process to confirm that clients really did receive their annual review. Larger licensees have typically obtained independent assurance from an external assurance provider.
If relying on secondary evidence, the AFS licensee should also consider whether it has breached its obligations to provide advice documents to a client when the licensee (or its representatives) provided personal advice.
If the AFS licensee cannot identify reliable evidence that the annual review was provided, we expect that it will refund the fees paid by the client.
When an AFS licensee determines that it would be too costly or time consuming to seek evidence that an annual review was in fact provided, it may choose to compensate the client without making further inquiries.
We do not consider a review and remediation program to be client-focused if it relies on a client opting in to the review or remediation program. Furthermore, while an AFS licensee may ask clients if they have copies of previous advice documents, clients should not be penalised if they are not able to provide copies of advice documents to the licensee. Licensees, not clients, have an obligation to keep copies of advice documents.
AFS licensees often charge a client one ongoing-service-arrangement fee that obliges the licensee to provide a number of services in addition to an annual review, but the component of the fee that applies to each individual component of the ongoing service arrangement is not identified. Ancillary services might include periodic newsletters and invitations to seminars.
Our experience is that these ancillary services are generally less valuable to a client than the annual review. We expect that an AFS licensee will refund the full amount of the ongoing-service-arrangement fee rather than assigning particular values to each ancillary service. If, in exceptional circumstances, the licensee does apportion fees to other substantive services that are covered by the 'bundled' ongoing-service-arrangement fee, it must have an evidence-based methodology for apportioning value to each service. Licensees should also prominently disclose this apportionment to each client.
An AFS licensee should refund to each client the fees paid for each annual review they did not receive. Each client should also receive interest, reflecting the lost investment returns on the fees that were inappropriately charged. In cases where it is not possible or practical to calculate the exact lost earnings, RG 256 explains that a licensee may apply an investment proxy, so long as it meets specified requirements.
When providing refunds, the AFS licensee should ensure that it does not cause a client further financial loss or detriment – for example, by breaching a contribution cap for a superannuation account.
AFS licensees must be transparent with each client about why they are receiving remediation. A licensee should explain to each client how the amount of compensation was calculated and that the client may complain to the licensee (and, where relevant, the licensee's external dispute resolution scheme) if they disagree with the remediation offered.
- REP 499 Financial advice: Fees for no service
- RG 256 Client review and remediation conducted by advice licensees
- Contact us online or call 1300 300 630.
Please note that this information sheet is a summary giving you basic information about a particular topic. It does not cover the whole of the relevant law regarding that topic, and it is not a substitute for professional advice.
You should also note that because this information sheet avoids legal language wherever possible, it might include some generalisations about the application of the law. Some provisions of the law referred to have exceptions or important qualifications. In most cases, your particular circumstances must be taken into account when determining how the law applies to you.
Information sheets provide concise guidance on a specific process or compliance issue or an overview of detailed guidance.
This information sheet was issued in August 2018.