It’s nearly twelve months since the Government proposed to streamline the Future of Financial Advice (FoFA) changes, including a proposal to repeal the opt-in requirement. Streamlining FoFA was supposed to reduce red tape and the costs that are passed onto clients.
However, the manner in which the Government has managed the reforms has resulted in advisers being unsure now about who they need to send a renewal notice to, and by what date.
The lack of clarity has meant more time spent designing and changing compliance processes, which equals greater costs passed onto clients. However, advisers have again substantial uncertainty about whether they will be held responsible for any losses suffered by a client who fails to respond to a renewal notice within the statutory 30 day timeframe.
The current situation is this:
– If an adviser entered into an ongoing fee arrangement with a client that did not only comprise of ongoing risk commissions or grandfathered benefits, then the adviser needs to send the client a fee disclosure statement (FDS) on or before the disclosure date of their ongoing fee arrangement. This includes ongoing fee arrangements entered into before 1 July 2013. The adviser can, however, choose a different disclosure date for a class of clients – as long as the date is brought forward and an FDS covers the intervening period. This allows advisers to streamline their FDS processes.
– The requirement though to send clients an opt-in notice with an FDS only applies to ongoing fee arrangements entered into after 1 July 2013. The minimum requirement is to send the renewal notice to the client no later than the second anniversary of their ongoing fee arrangement – that is, every two years. Some industry players are saying this means advisers don’t have to start sending renewal notices until 1 July 2015. However, there is nothing stopping advisers from sending opt-in notices more frequently than every two years, or with an FDS that has been brought forward under the disclosure date rule outlined above.
The Australian Securities and Investments Commission (ASIC) has said that its facilitative approach only applies where advisers and licensees take reasonable steps to comply with the requirements, but are unable to comply.
The main problem
The main problem with the opt-in process, however, is that if a client does not respond to the opt-in notice within 30 days, the adviser must not receive any further ongoing fees from the client – presumably until a new ongoing fee arrangement is entered into. This means that either the adviser continues to monitor their client’s portfolio of investments on a pro bono basis (i.e. for free) or the client’s portfolio becomes unmonitored and unsupervised (i.e. the client becomes an orphan). What the adviser chooses to do will largely depend on whether they will be held responsible for any losses that the client may subsequently incur.
The Financial Ombudsman Service (FOS) considers that advisers are responsible for monitoring a portfolio while they have an ongoing fee arrangement with that client. This is based on contract law principles. Whether the adviser will be held liable for any losses, however, depends on what caused or contributed to the losses.
FOS does not have jurisdiction to consider a dispute that is purely about investment performance. But if someone claims that their losses were caused by something other than investment performance, their claims will generally be further investigated which results in a cost of at least $3000 for the adviser for a merits assessment by FOS.
FOS also considers that advisers have a fiduciary duty of care to their clients under the common law and advisers also have a statutory best interests duty. Neither of those obligations appear dependent on whether the adviser is remunerated or not – they’re obligations that arise from the relationship between the adviser and the investor and what was represented by the adviser to the client.
The main question
The main question therefore is – when does the adviser’s potential liability for subsequent losses end?
Is it when the fees stop? What if the adviser also receives risk commissions but the client fails to respond to the opt-in notice for their investments? Does it depend on what the adviser said to the client? Does an adviser’s duty of care require them to follow up with their client if the client has not responded by the 30 day due date? What steps does an adviser have to take to alert the client’s product providers of the termination?
Unless the opt-in requirement changes, these questions will only be answered when FOS or a Court receives its first case about subsequent investment losses from a person whose ongoing fee arrangement was terminated automatically by the opt-in requirement. Until that time, advisers should consider not only when they will send clients an opt-in notice, but what subsequent steps they will take if the client fails to respond within 30 days.
