Wednesday 25 July 2018
Fee Disclosure Statement and opt-in renewal notice
Wednesday 25 July 2018
The Future of Financial Advice (FoFA) reforms introduced in 2013 require advisers to provide ongoing written disclosures to retail clients who have entered into an ongoing fee arrangement (OFA), under which the client is paying an ongoing adviser fee for personal advice. This article provides a reminder of the key ongoing disclosure requirements. Specifically, advisers are required to provide:
- a Fee Disclosure Statement (FDS) on an annual basis to all retail clients who have entered into an OFA
- a renewal notice every two years to the retail clients who have entered into an OFA after 1 July 2013. This gives the clients an opportunity to decide whether to continue with the arrangement (ie opt-in requirement).
An OFA exists when an Australian Financial Services Licensee or its representative gives personal advice to a retail client and the client enters into an arrangement with the licensee or representative, the terms of which provide for the payment of an ongoing fee during a period of more than 12 months.
The following are not considered an OFA, and therefore not subject to the FDS and opt-in requirements:
- a payment plan meeting prescribed requirements eg an upfront advice fee paid in instalments
- an arrangement under which the only fee payable is an insurance premium
- an arrangement to the extent that the fee payable is a product fee.
The diagram below illustrates the relationship between the FDS and opt-in requirements.
What needs to be included in an FDS?
An FDS needs to set out:
- the amount (in Australian dollars) of each ongoing adviser fee paid by the client during the last 12-month period – however, advisers are not obligated to disclose any insurance premiums, commission, product fees, upfront advice fees or transaction fees
- the services that the client was entitled to receive under the OFA during the last 12-month period
- the services received by the client under the OFA during the last 12 month period.
Advisers can include additional information such as services provided outside of the OFA, however, ASIC’s view is that the additional information should be kept separate from the prescribed information set out above.
When to provide an FDS?
Advisers must give an FDS to a client no later than 60 days after the disclosure day. The disclosure day is the anniversary of the date that the OFA was entered into. The disclosure day can remain the same each year provided the annual FDS relates to the same 12-month period.
The law provides advisers with the flexibility to give the FDS earlier than the actual disclosure day, which can reset the future disclosure day. This is useful because it can help advisers streamline the timing of FDS obligations for different clients or align the timing to other major events such as annual reviews. However, even when the disclosure day is reset, the new FDS has to cover the previous 12 months, which will overlap with the period covered by the previous FDS. It is a good practice to explain this overlap to clients so that they can fully understand the fees they’ve paid, the services they’ve received and the services they were entitled to receive.
Advisers don’t need to obtain a positive response from the client following the provision of an FDS. This is different to the opt-in requirements set out below, where advisers need to obtain a positive election from the client in order to continue to receive ongoing fees.
What needs to be included in an opt-in renewal notice?
A renewal notice must state that:
- the client may renew the OFA by giving the fee recipient (ie the adviser and/or the licensee) notice in writing of the election
- the OFA will terminate, and no further advice will be provided or fee charged under it, if the client does not elect to renew the arrangement
- if the client doesn’t give their election in writing within 30 days of receiving the renewal notice, it will be assumed that they’ve chosen to opt out of the OFA.
When to provide an opt-in renewal notice?
The opt-in renewal notice must be given within 60 days after the second anniversary date of the OFA, and every two-year anniversary thereafter. Generally it is the same date that the FDS is due.
An FDS that discloses the ongoing adviser fee and services over the last 12 months must be provided together with the renewal notice.
As mentioned earlier, advisers need to obtain an election from the client under the opt-in requirement. The client has 30 days from when the renewal notice is given to renew the OFA in writing.
- If the client notifies the adviser in writing within the 30-day period that they do not wish to renew the OFA, the OFA terminates on the day on which the notification is given. Fees must be terminated accordingly.
- If the client fails to make an election within the 30-day period, the OFA terminates another 30 days later (ie 60 days after the renewal notice was given). If the client elects to renew the OFA after the first 30 days but within the next 30 days, the OFA can continue.
Opt-in renewal notices give clients the opportunity to renew or terminate the OFA every two years. However, this does not mean the OFA is ‘locked in’ for two years once the client opts in. The law provides clients with the ability to terminate the OFA at any time. It is a good practice to explain the termination process to the client upfront when the OFA is established.
An alternative to meet the opt-in laws -- Financial Planning Association (FPA) Professional Ongoing Fees Code
ASIC has approved the FPA Professional Ongoing Fees Code (FPA Code), providing the participating FPA members with an alternative to meeting the opt-in requirements of the legislation.
The key differences between the opt-in legislation and the FPA Code are outlined below.
- The opt-in legislation requires each OFA that is entered into on or after 1 July 2013 be renewed every two years. The FPA Code extends it to every three years.
- The opt-in legislation requires an explicit client election be received in writing within 30 days of the renewal notice. The FPA Code is not prescriptive about the method of client’s election (verbal or in writing) or the timeframe by which the election must be obtained. This provides advisers with further flexibility to embed the opt-in discussions as a part of annual reviews.
- The FPA Code requires regular review of the suitability of the OFA upon renewal. The adviser and the client must agree on the renewal interval that is not less often than every three years. This is not required under the opt-in legislation.
- The FPA Code requires that advisers review the advice and strategy and the client’s circumstances, portfolio and risk profile upon the OFA renewal. This is not mandated under the opt-in legislation, although in practice a large number of advisers time the OFA renewal to coincide with annual reviews.
- The FPA Code requires more explanation of terms and disclaimers to be included in the OFA and client engagement letter.
Compliance with the FPA Code is monitored by the FPA, and the FPA has the power and the obligation to report breaches of the FPA Code to ASIC. Non-compliance with the FPA Code will effectively mean that the member has failed to meet the opt-in obligations of the law. As such, advisers who wish to subscribe to the FPA Code need to meet a range of training, registration and annual attestation requirements set by the FPA.
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