Financial planners remain terminally confused by exactly how they can qualify for an ‘opt-in’ exemption when the industry codes of conduct required may include their own versions of the controversial provision.
Christopher Brown, partner and specialist in financial services mergers and acquisitions at Minter Ellison, says this area of financial planning reforms has created “further confusion in an already uncertain environment”.
Practices that choose not to opt in, or that fail to qualify for the exemption, will still be required to seek active consent from their clients every two years to continue charging advice fees.
This has lead some in the industry to speculate that it may be easier to comply with the opt-in provision than wait for industry codes that may in essence demand the same compliance.
“Under existing statutory powers which were not enacted specifically for the purpose of opt-in, the Australian Securities and Investment Commission (ASIC) can exempt advisers from the renewal requirement where an approved code of conduct ‘obviates the need for opt in’,” says Brown.
“Any approved code must be binding and satisfy a number of other criteria.”
Brown’s view is that the compromise was agreed and rushed through without too much thought to the type of code content likely to secure ASIC approval.
A number of financial-planning professional bodies have formal codes of conduct, but none of them have been approved by ASIC under their existing powers, let alone for the purpose of the Future of Financial Advice (FoFA) legislation.
“You need to look at why opt-in advocates were pushing so hard for it and address each of their arguments. Opt in was really about ensuring that asset-based fees did not become trailing commission by another name.
“Proponents will also tell you that it is about advisers actually working for their money and ensuring that clients don’t allow retainers to become evergreen through apathy and not understanding their rights to terminate.”
Explicit code required
Brown suggests that an explicit code provision requiring advisers to provide a reasonably defined service to clients will address the first and second of these two points.
“It is impossible to be prescriptive in an industry code of conduct which is to have general application. Similarly, you can’t mandate provision of an adequate service for the fee paid to an adviser,” he says.
“What an approved code can do, however, is require advisers to describe the services in reasonable detail in client-engagement letters.”
In practice, Brown says that most professional planners will already be documenting the terms of their engagement in reasonable detail as required by existing professional rules.
“It is expected that this will increase client self-advocacy and ought to encourage ASIC to adopt a light-handed approach when it comes to looking at this aspect of codes submitted for approval,” he says.
“Allowing clients to terminate retainers on reasonable notice and providing clear statements to that effect periodically – for instance at the outset and in the annual-fee statement – are also likely to influence ASIC favourably.”
Brown believes that a provision included in the Professional Rules of the Financial Planning Association, which requires advisers to facilitate the transfer of client data to new advisers upon termination, ought to be viewed positively by ASIC.
