If the government’s plan to make advisers explicitly disclose their lack of independence goes ahead, the combination of managed accounts, insurance commissions and asset-based remuneration will probably mean 99 per cent of advisers have to amend their disclosure documents.
The new legislation, which was introduced earlier this month alongside a Bill proposing annual ongoing fee arrangements, is set to kick in by July 1 if it passes the house and senate. The twin proposal was characterised in this Professional Planner piece as a ‘watershed moment’.
Firms that provide insurance advice via commissions are, according to section 923A of the Corporations Act, not independent. As are providers of managed discretionary accounts, if a fee is attached, and likely anyone that charges their clients on an assets-under-management model.
According to Dan Brammal, the president of the Profession of Independent Financial Advisers (PIFA), there are only a handful of advisers in the country that don’t come under any of these descriptions.
“There’s probably about 250 advisers in the country that meet that standard,” Brammal says.
Brammal – whose group has 60 members and pitches itself as the only conflict free, independent association in the industry – reckons the ‘lack of independence’ disclosure is a long time coming.
“When you have an interest in the product or the transaction then you’ve lost your independence,” he says. “If I’m charging you a fee as a percentage of the assets you protect, then I have an interest in the transaction.”
The assertion, he says, isn’t an attack on advisers.
“You don’t need to be independent for a client to trust you, that’s a furphy,” he says. “It doesn’t mean the adviser is negligent or poor, all it simply means is that it doesn’t entitle the adviser to call themselves impartial, because they’re not.”
The shape of the thing
Just what shape the disclosure will take is unclear, and causing considerable consternation amongst advisers.
Despite the proposed Bill’s implementation date being only four months away, the closest the industry has to a definition of exactly what’s required is the draft legislation’s original demand for written disclosure of an advisers’ lack of independence “in the form prescribed by ASIC”.
ASIC haven’t yet offered any prescriptive guidance, which is understandable given the Bill hasn’t passed yet.
Advisers on the ground are in a bit of a quandary here. “We still don’t know exactly what we’re meant to say,” laments Wayne Leggett, a principal adviser at Paramount Financial in Perth.
Some licensees have already gotten ahead of the game and added catch-all disclosures to their financial services guide – it’s understood MLC is among them. This is admirable, but could mean they have to redo it again in July.
In the end, this disclosure may not even go in the most obvious place. “Frydenberg assumed it was going to be in the FSG,” Brammal says. “We said in our submission that it needs to be more prominent.”
Conflicting views on conflicts
A central question on the ‘lack of independence’ disclosure rule is whether asset-based remuneration is actually considered conflicted. Here, the interpretation of regulators is crucial.
As it stands, ASIC haven’t said that asset-based fees are conflicted; they make it clear in RG 175 that asset-based fees alone don’t preclude advisers from being independent.
“Financial services providers that receive asset-based fees are not prevented from using restricted terms such as ‘independent’ merely because of their receipt of asset-based fees,” the guide states.
The spirit of the proposed legislation, however, is that any conflict should be declared. Further, the Code of Ethics put forward by another regulator, FASEA, suggests that asset-based fees are inherently conflicted.
“You will breach Standard 3 if a disinterested person, in possession of all the facts, might reasonably conclude that the form of variable income (e.g. brokerage fees, asset based fees or commissions) could induce an adviser to act in a manner inconsistent with the best interests of the client or the other provisions of the Code,” FASEA states in its guidance.
Notwithstanding concerns that verbiage like “might reasonably conclude” and “could induce” will leave advisers open to future litigation, it is clear that ASIC and FASEA are not aligned.
Brammal says his group is calling on ASIC and Treasury to clarify their position. ASIC’s interpretation of RG 175 is a “misreading”, he believes.
“We ‘ve had it confirmed by a legal team that you cannot use asset fees and be unconflicted under 923A,” Brammal says. “RG175 is ASIC taking a softer view.”
If the interpretation does encapsulate asset-based fees, and 99 per cent of advisers need to bend to the new legislation, some worry that the scope of it will actually reduce its effectiveness.
“It’s completely meaningless,” says Paramount’s Leggett. “The people that aren’t going to be classified as independent are so few and far between its virtually moot.”
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