Guide to Ongoing Fee Arrangements
Breaking down the new legislation for ongoing fee arrangements
On 1 July 2021, the Financial Sector Reform (Hayne Royal Commission Response No. 2) Act 2021 will come into effect.
The new legislation introduces new requirements relating to ongoing fee arrangements and the relevant consents necessary to deduct ongoing advice fees from product accounts. You can read the legislation here.
What it means to you
From what we have seen, the new changes are not well understood across the board. However, the regulator has recently provided guidance, which you can read here.
In this article, we explain what these changes mean to your business and how you can manage them at a practice level.
We will also share some tools we have developed to help Advisers and their staff navigate this new landscape.
We have also compiled answers to some frequently asked questions (FAQs) below.
Background
Commissioner Hayne, in his report to the Royal Commission, recommended an overhaul to ongoing fee arrangements.
Previously, under the FOFA laws, Advisers were required to provide a Fee Disclosure Statement (FDS) annually and clients were required to ‘opt-in’ to the arrangement at least every two years.
Now, the legislation effectively amalgamates the FDS and opt-in obligations and requires the client’s consent to the ongoing fee arrangement every year.
There will be a new look FDS which must not only relate to the past but must also look to the future.
However, there are some further changes that need to be considered.
Fixed term advice agreements versus ongoing service arrangements
Even before the legislation was passed, some Advisers and dealer groups moved away from ongoing fee arrangements by providing so called ‘fixed term advice agreements’.
To paraphrase the legislation, an ongoing fee arrangement is one which continues beyond 12 months.
By fixing the term of the agreement to apply not beyond 12 months, it has been argued that the arrangement is not an ongoing fee arrangement and therefore not subject to the requirement to provide an FDS.
It is our understanding that many practice groups will simply decide to continue this practice beyond 1 July and some may adopt it.
It is important to note that, even in the case of a non-ongoing fee arrangement, the client must consent to fees being deducted from a superannuation account.
So what’s the difference?
Firms will need to weigh up a few different factors.
Ongoing fee arrangements provide a window of time for a client to consent to renew the arrangement following the anniversary date. Indeed, there is a 120-day renewal period following the anniversary date, plus a further 30-day period to switch off the fees if the client fails to make an election. The FDS must be provided within 60 days of the anniversary date.
Fixed term advice agreements, by their very nature, cannot last for more than 12 months.
In either case, to avoid fee leakage, robust compliance systems will need to be in place to track anniversary dates, consents and to ensure that the relevant documentation is signed and completed by the required deadline.
Importantly, this is an area open to interpretation and it is crucial that you seek your own professional advice as to how to structure these arrangements for your firm.
Software tools
Ahead of these changes, we will be releasing new functionality to Plutosoft Adviser Hub to help Advisers monitor, track and navigate these arrangements. The software will allow you to:
- Place clients onto either a fixed term advice agreement or ongoing fee arrangement.
- Monitor and track clients on fixed term advice agreements or ongoing fee arrangements including anniversary dates and FDS due dates etc.
- Migrate clients with existing ongoing service arrangements onto the new regime.
- Electronic consent options through our Client Hub Portal.
- Easily produce high quality FDS and related documentation.
- For Dealer Groups – global reporting through our Licensee Portal.
We will also make available for Plutosoft users the following new report templates:
- A new service agreement for ongoing service arrangements.
- A new form FDS; and
- Consent to deduct ongoing fees from a product account.
Frequently Asked Questions
What is the anniversary date?
This is defined to be 12 months after the arrangement is entered into.
For current ongoing fee arrangements in place before 1 July 2021, ASIC has stated that the anniversary date will become the day that you provide them with a new FDS.
For example, if you provide an FDS on 2 July 2021, the Anniversary date will become 2 July for all future years and each FDS in the future will need to cover information for the period between 2 July and 1 July (previous year) and from 2 July to 1 July (upcoming year).
In other words, it is a fixed date that will rollover each year, providing the client has consented to it.
What is the transitional period?
There is a 12-month period to transition existing ongoing fee arrangements onto the new regime.
What about product consents
There is a separate requirement for the client to provide consent to ongoing fees being deducted from an account (apart from accounts linked to a credit card or basic deposit account).
This requirement applies to any ongoing fee arrangement after 1 July 2022. However, ASIC has confirmed that consent can be obtained prior to that.
It remains to be seen how product providers will manage this requirement, including whether they insist on consent being signed on the provider’s approved form. It may vary from provider to provider.
Where you are managing multiple accounts with different providers, you will need to ensure the requirements are met for each account. If it is jointly held, then both holders will need to consent.
Documentation
The new format FDS and ongoing consent forms will need to be signed ahead of the deadline. Both will need to include the required information.
It is also likely that Service Agreement would need to be updated to reflect the new changes.
It is also important to ensure that that the documentation is consistent. In practice, it seems likely that many firms will adopt the practice of sending the relevant documents together and signed at the same time. This will ensure that the dates are aligned for the subsequent period.