By Michelle Levy, Allens

The Future of Financial Advice Bills aim to improve the quality of financial product advice provided to consumers by:

• introducing new duties for advisers including a requirement to act in the best interests of their clients;
• banning commissions and other forms of “conflicted remuneration”; and
• requiring advisers to convince their clients to renew ongoing fee arrangements every two years (“opt-in”).

After sustained and intense lobbying against opt-in by many industry participants, at the last minute the Government agreed to amend the Bill to give ASIC the power to exempt an adviser from the requirement to obtain an opt-in notice every two years if the adviser is bound by a code of conduct approved by ASIC.  The amendment has been welcomed as a significant concession.  However, it is not entirely clear that it is.   

In Parliament Minister Shorten said that ASIC could approve more than one code of conduct. Under the amended Bill, a code of conduct can be approved by ASIC if ASIC is satisfied that the code of conduct “obviates” the need for the opt-in requirement and meets any other requirements prescribed by regulations.

Obviate means to “make unnecessary”.  What could a code of conduct do to make it unnecessary for an adviser to receive an opt-in notice from their client every two years in order for the adviser to continue to receive remuneration from their client (or at their client’s direction)?  This question is brought into sharp focus by Dr Deen Sanders’ implication that the Financial Planning Association’s (FPA’s) Code of Professional Conduct may already be fit to receive ASIC’s blessing under the amended Bill.

In order to answer the question, it is necessary to identify the purpose of the ongoing fee arrangement provisions, of which the opt-in requirement forms part.  There seem to be two related yet distinct purposes:

• to ensure that advisers do not charge open-ended ongoing fees where the client is receiving little or no service; and
• to allow a client who is receiving an ongoing service to reconsider whether they are receiving value for money.

In relation to the first purpose (to ensure the client is receiving services), it seems unlikely that the opt-in requirement is the only mechanism for fulfilling that purpose.  For example, an alternative mechanism would be to impose an effective obligation on the adviser to ensure that, for any ongoing fee charged to a client, the client receives a commensurate service.  A requirement, in other words, for there to be a real, genuine and proportional link between the ongoing fee charged and the value of an adviser service which is in fact provided.

In relation to the second purpose (to enable a client to reconsider the value of the service), the ongoing fee arrangement provisions also include a requirement for advisers to give their clients disclosure statements once a year setting out the services provided and fees charged.  This disclosure statement requirement operates independently of the opt-in requirement, and the Government’s last-minute amendment did not alter the disclosure statement requirement.  Given the disclosure statement requirement, opt-in is probably unnecessary in order for the second purpose to be fulfilled.

Returning then to the first purpose, is it possible for ASIC to be satisfied that a code of conduct can place an effective obligation on an adviser to ensure that, for any ongoing fee charged to a client, the client receives a commensurate service?  This question raises a number of further questions.  In what way can a code be said to be “binding” on an adviser?  If a dealer group is a member of a professional association and the dealer group contractually requires its advisers to comply with the association’s code of conduct, the code would seem to be “binding” on the adviser.  However, in considering whether to approve a code, ASIC would no doubt be interested in the sanctions that the professional association and/or the dealer group could impose for non-compliance.  ASIC might well require the ability to review periodically the enforcement action that is in fact taken.

An alternative mechanism would be for a code of conduct itself to include an opt-in requirement, either in the same terms as the terms of the legislative requirement or in some modified (and less onerous) form.  Professional associations are unlikely to offer ASIC, in the proposed codes they submit for approval, opt-in in the same terms as the legislation.  What might a diluted opt-in requirement look like?  It is difficult to envisage.  The content requirements for an opt-in notice are already very limited.  The means by which a client can respond and opt-in are not prescribed.  It is unlikely ASIC would accept a longer opt-in period than 24 months, or more than 30 days for the client to opt-in.  In any event, a code of conduct with a diluted version of the opt-in requirement may be unlikely to obviate the need for the legislative version of opt-in.

The amendment places a significant burden on ASIC.  In considering whether to approve a code, ASIC will be considering an alternative to opt-in but the alternative must obviate the need for opt-in.  In theory, ASIC could insist that a code include opt-in in the same terms as the legislation.  However, it is difficult to think that this is what Parliament intended and ASIC is likely to come under considerable pressure to approve an alternative mechanism.  To us, the most obvious alternative would be a genuine fee-for-service requirement of the kind discussed above.  However, ASIC could well have little appetite for that alternative, as it would take a lot of effort to ensure that the “real, genuine and proportional link” threshold is satisfied.  There is a lot of room for debate when the question is whether a fee is a genuine fee for a service.  There is much less room for debate when the question is whether a client has failed to opt-in.

Whichever mechanism is proposed, ASIC is likely to require the code to confer considerable powers on it, in relation to oversight, compliance and enforcement.  ASIC commonly imposes conditions on the exercise of its exemption and modification powers and those who have “offered” ASIC enforceable undertakings will know that ASIC is not shy when it comes to outlining the terms it wants.

As a concluding comment, it is interesting that the amendment enables ASIC to exempt an adviser from the requirement to send the client an opt-in notice (proposed section 962K) but it does not amend the provision which says that an ongoing fee arrangement terminates if the client fails to opt-in (proposed section 962N).  Unless ASIC is able to suspend the operation of proposed section 962N in cases where ASIC has approved a code of conduct (either through its general exemption and modification powers or through power granted under further legislation), very few advisers may wish to rely on the code of conduct alternative.

*  THIS ARTICLE WAS CO-WRITTEN WITH MICHAEL MATHIESON, KING & WOOD MALLESONS