The Financial Advice Bill has unintended effects for responsible entities

The Corporations Amendment (Future of Financial Advice) Bill 2011 was introduced into the House of Representatives this month.

A financial services licensee or representative who receives fees paid under an ongoing fee arrangement entered into on or after 1 July 2012 must provide a fee disclosure statement to the client annually and a renewal notice every two years.  If they don’t, the arrangement terminates and the fee recipient cannot charge the ongoing fee.  A fee recipient who provided personal advice to a retail client before 1 July 2012 must give their client a disclosure notice every year. 

The problem is that the definition of ongoing fee arrangements is too wide and includes product fees charged by banks, trustees and responsible entities.

An arrangement with a financial services licensee or their representative is an ongoing fee arrangement if: 

  1. the licensee or representative gives personal advice to a retail client;
  2. the client enters into an arrangement with the licensee or representative; and
  3. under the terms of the arrangement a fee is to be paid during a period of 12 months or more.

While there can only be an ongoing fee arrangement with a person who has provided personal advice to a retail client, the arrangement can take any form.  An account holder has an arrangement with their bank, a member of a superannuation fund has an arrangement with the trustee, an investor has an arrangement with the responsible entity of a fund.  The fee does not have to be a fee for providing advice. There is no timing requirement – the personal advice might have been given before the ongoing fee arrangement is entered into. 

This means that an ongoing fee arrangement may apply to fees charged by funds where personal advice has been given to a retail client. 

The Bill has been referred to the Parliamentary Joint Committee on Corporations and Financial Services.

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