The government has made good on its promise to implement 22 delinquent royal commission recommendations with the release of draft legislation proposing annual ongoing fee renewals and the explicit disclosure of “lack of independence” for advisers accepting insurance commissions.
The two Bills, released Friday, give advice practices five months to amend their compliance systems and documentation by 1 July 2020, albeit with transitional arrangements that stretch the provisions to 1 January 2021.
The annual opt-in legislation requires “fee recipients” to disclose in writing past and future fees for 12 months, as well as obtain written consent for fees to be deducted from the client’s account.
Further regulation proposes 5-year record-keeping arrangements that could result in a penalty of up to one-year imprisonment for advisers.
The draft regulation also seeks to end grandfathering of pre-2013 ongoing fee arrangements that did not require client renewal, which Hayne called “no longer acceptable” in his final report.
Advice practices will be pressed to update compliance documents and rearrange their client meeting schedules to meet the July 1 deadline. The tightening of opt-in periods from 24 to 12 months could also further dampen practice values already reduced by the banning of grandfathered commissions as they give clients more opportunity to sever their relationship with the adviser.
“[Practice values] will go much lower for revenue where you can’t demonstrate probability the client will opt in,” says Tom Reddacliff, chief executive at Encore Advisory Group. “The vast chasm in revenue valuations will open up even more.”
Reddacliff says the onus will be on advisers to have a more “open and active” relationship with clients. Hayne was also clear on this in his final report, drawing a line between engagement and an informed assessment of whether the advice relationship was worth the cost.
“A client who is asked to give positive consent to the renewal of an ongoing fee is likely to focus his or her mind on what he or she has received in exchange for that fee,” Hayne said in his final report.
The Financial Planning Association hedged its bets its response to the Bills, noting in its response that while the draft legislation “closely aligns” to Hayne’s recommendations, “it will further increase the time and the administration burden on financial planners helping their clients”.
“This legislation will require business practice changes, administration changes [and] disclosure changes…” said Dante De Gori, the FPA’s CEO.
Annual opt-ins, De Gori lamented, will be yet another burden for advisers. “It is not practical and will be too much of an administrative burden for many practices,” he added.
On the ground, many practices have already gotten ahead of the legislation. Notably, IOOF announced it would ditch biennial OSAs for annual agreements in August last year.
“There has been an overall acceptance of the fact this is the direction things are heading,” IOOF’s general manager of advice, Darren Whereat, told Professional Planner.
The writing may have been on the wall, but the draft regulation’s release and its timeline means anyone not ahead of the change will need to make quick adjustments. “It’s a watershed moment for financial advice,” Reddacliff says.
Independence disclosure effect
The proposed independence disclosure rule could force some practices to reassess whether commissions-based insurance advice is worth retaining in their business.
The Bill forces advisers to give written disclosure of their lack of independence “in the form prescribed by ASIC” if they contravene section 923A of the Corporations Act, which requires advisers to refrain from using the terms ‘independent’, ‘impartial’ or ‘unbiased’ if they receive commissions or conflicted remuneration.
The rule impacts a large portion of advice firms that would otherwise satisfy the definition of independent if they did not offer insurance advice, which – at least until ASIC’s scheduled insurance review in 2021 – is predominantly remunerated via commissions.
For these firms, who have already had their insurance commissions capped as part of the Life Insurance Framework, having to explicitly reveal non-independence may be a step too far. While the public is largely unwilling to pay upfront for insurance advice, it may be more prudent for these firms to abandon the service.
According to Kris Mason, a partner at MBS Insurance, the royal commission has already forced a lot of advisers to stick to fundamental financial planning and stop giving insurance advice.
“A lot of them will want to get out of the insurance space to keep that clean model,” Mason said in September.
Daniel Brammal, president of the Profession of Independent Financial Advisers, said advisers looking to exit the insurance space is “entirely to be expected”.
The draft legislation notes that while the legislation is scheduled to take effect from 1 July this year, advisers will have the option to make the disclosure in a “supplementary” financial services guide instead of issuing a new FSG during a transition period.
Submissions on the proposed regulation are open until 28 February, 2020 on the Treasury website.