Regularly advising clients that they can opt out of an ongoing fee arrangement may, in some instances, allow a professional code to obviate the need for the opt-in requirement.
Under the headline, “Possible approaches to code content that obviate the need for complying with the opt-in requirement”, an Australian Securities and Investments Commission (ASIC) consultation paper suggests a grey area in terms of compliance.
“Parliament specifically imposed an opt-in requirement for the continuation of ongoing fee arrangements, and it is also a condition of such an arrangement that the client may terminate it at any time,” it states.
“An alternative code provision may include requiring an adviser to remind their client of the client’s ability to opt out, at the same time as requiring the client to actively pay the adviser’s fees, for example, by credit card or cheque.”
It would therefore appear that regularly advising a client of their ability to opt out may not be enough and will need to be considered in combination with other specific code provisions.
A reminder may not be enough
A legal view from corporate law firm Minter Ellison suggests it is unclear how regularly clients would need to be advised of their ability to opt out.
“ASIC says this could occur when a client pays a fee by credit card or cheque,” said a spokesperson for Minter Ellison. “The implication is that a reminder may not be enough where fees are debited automatically.
“ASIC has stated that it believes a code must have content that ‘exceeds or is differentiated from’ existing legal obligations. It is true that Section 1101A requires codes to be not inconsistent with the Corporations Act, so this position is reasonable.”
Under the opt-in requirement, an adviser who has an ongoing fee arrangement with a client must get the client to renew the arrangement every two years.
If the client does not opt-in, the arrangement terminates.
Relief and satisfaction?
ASIC may grant relief from the opt-in requirement if it is satisfied that an adviser is bound by a code of conduct which has been approved by ASIC and which obviates the need for compliance with the requirement.
The regulator is currently awaiting feedback on Consultation Paper 191 Future of Financial Advice: Approval of codes of conduct for exemption from opt-in requirement (CP 191), which, for many in the industry, has raised more questions than answers.
Despite hints to the contrary, the regulator is unlikely to be satisfied that a code obviates the need for the opt-in requirement unless it achieves substantially the same policy outcomes that the opt-in requirement was originally intended to achieve. In other words, the spirit of the original reform is likely to decide any areas of confusion.
Aside from requiring advisers to regularly advise the client of the ability to opt out, ASIC has outlined two other examples of possible approaches to code content that obviate the need for complying with the opt-in requirement. These examples include allowing a longer period for clients to opt in, combined with other obligations and banning ongoing asset- or volume-based fees for personal advice given to retail clients.
“It is interesting that ASIC is prepared to contemplate a longer opt-in period. No doubt the additional measures proposed in a code will be important here,” said a statement from Minter Ellison.
“It is certainly positive that ASIC is not mandating that certain content should be included in a FoFA code.
“In particular, there is no suggestion that asset-based fees would not be permitted – only that if prohibited by a code, then this may be sufficient on its own to obtain ASIC approval.”
The watchdog is also considering whether it would be appropriate in any circumstance to approve a code that is sponsored by a single licensee or dealer group, or a small number of licensees or dealer groups.
While ASIC has revealed serious concerns about whether such a code can ever be credibly and independently administered, it has undertaken to consider this option.
Submissions on the consultation paper close on December 4, with a regulatory guide to be issued in February 2013.
