Senate Considers Bill to Implement Further Recommendations of Hayne Royal Commission
On 9 December 2019, the Financial Sector Reform (Hayne Royal Commission Response No. 2) Bill 2020 (Cth) (‘the Bill’) was introduced to the House of Representatives. The House subsequently passed the Bill on 15 February, and the Bill is currently being considered by the Senate. The Bill is part of a series of reforms implementing the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, also known as the Hayne Royal Commission. The Bill implements four of the Commission’s recommendations to improve consumer protections. The first two recommendations amend the Corporations Act 2001 (Cth) while the latter amend the Superannuation Industry (Supervision) Act 1993 (Cth).
Annual Renewal and Payment
Firstly, the Bill implements Recommendation 2.1 of the Hayne Royal Commission regarding annual renewal and repayment.
It is common practice for financial services licensees to charge ongoing fee arrangements. An ongoing fee arrangement refers to an arrangement between a financial services licensee and a person as a retail client for the licensee to provide personal advice in exchange for a fee to be paid over a period greater than 12 months. However the Commission observed that some advice licensees prioritised fee generation over the delivery of quality financial services and as a result, some clients were unaware of the inadequacy of the services they received or the precise magnitude of these ongoing payments.
Currently. financial services licensee is obliged to provide a fee disclosure statement annually and a renewal notice every 2 years under the Corporations Act. The Bill would require financial services licensees to renew ongoing fee arrangements annually. Renewal of ongoing fee arrangement will be included in the fee disclosure statement. Failure to provide a fee disclosure statement within 60 days of the anniversary day of the arrangement will result in a civil penalty provision.
Furthermore, under the current framework, a fee disclosure statement is only required to include information about fees charged in the previous 12 months. The Bill would expand this requirement to include fee information for the upcoming 12 months. The fee information for the upcoming 12 months must include:
- the amount of each ongoing fee payable by the client to the fee recipient;
- the services the client is entitled to receive;
- the amount of any ongoing fees payable after the end of the upcoming year for a service provided in that year; and
- any other information prescribed by the Regulations.
Disclosure of Lack of Independence
Secondly, the Bill would implement Recommendation 2.2 of the Hayne Royal Commission regarding disclosure of lack of independence.
Currently, financial service licensees are prohibited under the Corporations Act to use certain words (including ‘’independent’, ‘impartial’ and ‘unbiased’) if they would inaccurately describe the status of the entity. Many entities cannot utilise these descriptors because they receive commissions from product providers, remuneration based on the volume of business generated for a particular product, or gifts and other benefits from product issuers.
The Commission suggested that the current provisions lack a corrective mechanism in the case where an entity contravenes the prohibition against use of restricted words. Thus the Bill introduces a requirement that where an entity commits such a contravention, they will be required to give a written disclosure of lack of independence where they are authorised to provide personal advice to a retail client. The Bill will allow ASIC to prescribe a particular form for this disclosure.
Advice Fees in Superannuation
Finally, the Bill implements Recommendations 3.2 and 3.3 which address a lack of transparency in the charging of fees under the Superannuation Industry (Supervision) Act 1993.
Firstly, the Bill will introduce a new requirement that a superannuation trustee cannot charge a member for the const of financial product advice unless:
- The cost is paid in accordance with an arrangement known and entered into by the member;
- The member has provided express and written consent to being charged for the advice; and
- The trustee has the written consent or a copy of the consent.
Secondly, the Bill proposes to expressly prohibit a superannuation trustee from charging fees under an ongoing fee arrangement for financial product advice from MySuper products. Importantly, this provision does not prohibit superannuation funds from providing financial product advice to their members. The effect of the amendment is that the superannuation trustee cannot ‘automatically’ charge the client under a pre-existing ongoing arrangement in order to improve transparency regarding costs.
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Financial Sector Reform (Hayne Royal Commission Response No. 2) Bill 2020 (Cth) and explanatory materials available on TimeBase’s LawOne service