Proposed annual fee renewal arrangements, the disclosure of “lack of independence” and a deferred sales model for add-on insurance are the most controversial aspects of a raft of changes to financial services law introduced in a draft bill last week
Treasurer Josh Frydenberg released a draft bill on Friday, implementing a number of outstanding recommendations of the Hayne royal commission. Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumer – 2020 Measures) Bill 2020 contains 24 separate measures relating to financial services, credit and superannuation licensees.
Frydenberg says that by the end of 2020, all remaining total commission recommendations requiring legislation will have been introduced. The bill includes the following measures:
A requirement that ongoing fee recipients renew the arrangements annually. This provision applies to licensees providing personal financial product advice to retail clients under ongoing fee arrangements. Licensees must set out the total fees that will be charged over the period.
The Financial Planning Association says this change would “further increase the time and the administrative burden on financial planners helping their clients.”
It says: “The FPA agrees financial planners should be required to periodically review and renew ongoing fee arrangements. However, we believe requiring this to be conducted annually… adds considerable time and cost pressures on financial planning practices.”
A requirement that a financial services licensee or authorised representative provide written disclosure of “lack of independence”. The use of terms such as “independent”, “impartial” and “unbiased” will be restricted.
A person may only use a restricted word or expression in relation to a financial services business or financial service if they do not receive a commission, remuneration based on the volume of business placed or gifts or benefits that may be expected to influence the person.
Rob Lavery, the technical and policy manager at knowIT digital, says: “Effectively, any adviser who has an ownership or licensing relationship with a product provider, who receives commissions or volume-based payments of any sort, or who has a difficult time recommending off-APL products cannot be considered independent
“This captures most advisers in Australia and, ultimately, if this become law most advisers will be required to include a statement in their FSG declaring that they are not independent, unbiased or impartial.”
Deferred sales model for add-on insurance. This provision covers consumer credit insurance, travel insurance and mobile phone screen protection insurance.
Add-on insurance is a financial product that is sold in connection with the consumer entering into a commitment to acquire a product or service and which manages financial risk related to the principal product or service.
A four-day deferral period is designed to give consumers an opportunity to consider the suitability of the add-on insurance product.
The Association of Financial Advisers has argued against this measure, saying it may provide consumer protection but it does nothing to stop the sale of poor insurance products. It wants to see minimum product standards.
A cap on vehicle dealer commissions. ASIC will be given power to set a cap on the amount of commission that can be paid in relation to add-on risk products sold in connection with the sale or lease of a motor vehicle.
Stronger breach reporting requirements. The bill expands the situations that need to be reported to ASIC. These include investigations about whether a specific breach has occurred and outcomes of those investigations, incidence of negligence or fraud.
The bill introduces a comparable breach reporting regime for credit licensees. Most of the changes will apply from 1 April next year.
Reference checking and information sharing protocols in relation to financial advisers and mortgage brokers. It will be a licensing condition to comply with reference checking and information sharing regarding a former, current or prospective employee. The protocol will be modelled on the current Australian Banking Association protocol.
The bill creates a civil penalty for non-compliance with the obligation.
Granting ASIC power to designate enforceable industry code provisions and the establishment of a mandatory code of conduct framework. A court may impose a penalty if a declaration has been made that an enforceable code of conduct provision has been breached and there is a contravention of the obligation to comply with the enforceable code provision.
Advice fees in superannuation. The bill removes a superannuation trustee’s capacity to charge advice fees from MySuper products. Trustees would still be permitted to charge fees in relation to intra-fund advice as administration fees.
Trustees of registrable superannuation entities should hold no other role or office. The bill will prohibit trustees from having duties other than those arising from or in the course of the performance of its duties as a trustee of a super fund.
No hawking of superannuation and insurance products. The bill also contains a new general prohibition on selling or issuing financial products that are made in the course of, or because of, unsolicited contact. This general prohibition will apply to all kinds of financial products, including securities and interests in managed investment schemes, except in certain circumstances.
Superannuation regulator roles. The bill changes APRA’s and ASIC’s roles in relation to superannuation to accord with the principles that APRA is the prudential regulator and ASIC the conduct and disclosure regulator. The coverage of the Australian financial services licensing regime in superannuation will be extended to give ASIC greater power in the superannuation industry.