Royal Commission recommendations are due for implementation in 2021 - have you prepared?

This was originally published on 3/02/2021

It’s fair to say that for most, 2020 is “that year” we would all like to erase from our memories. In addition to whatever challenges we faced at an individual level, those within our industry have spent the year looking after the financial, mental and emotional wellbeing of clients and staff (and rightly so).

With all this madness, and the speed at which we have had to shift our businesses, it’s possible that some of the regulatory reforms haven’t received the attention they normally would. With the end of 2020 fast approaching, many businesses will soon wind down and give staff some much needed time off to recharge. This article is a quick reminder of some of the changes licensees and advice businesses will need to implement in 2021.

As part of the Royal Commission recommendations, there are a raft of changes coming our way, including independence declaration, the banning of advice fees inside MySuper products and the widening of reference checking processes industry wide. These changes will all require some level of action to accommodate, but there are two changes which we believe are most significant that licensees should start acting on now (if they haven’t already) which are the breach reporting and ongoing fee arrangement changes.

At the time of writing, the Government had introduced into Parliament the Financial Sector Reform Hayne Royal Commission Response) Bill 2020 in mid November to implement a large number of the Hayne Royal Commission recommendations, including the breach reporting changes (due to commence in October 2021). The Bill doesn’t include any of the changes to ongoing advice fees, however it’s still possible they will be introduced before the end of the year. But even if there is a delay in implementation, we think the preparation work should begin as the changes are imminent.

1. Breach reporting – what you should know

Essentially, we are moving from a subjective assessment of what is ‘significant’ and therefore reportable, to a more prescriptive test. Licensees will also need to report on the outcome of the investigations to ASIC as well as to their client/s. In addition, there will be an obligation for a licensee to lodge reports in relation to other licensees where they suspect that a reportable situation has arisen about an individual who is operating under another AFSL.

The result? More reporting more often.

Breach Reporting – prepare now

Licensees should start thinking about how they will implement the changes and more importantly be prepared and ensure they have sufficient resources to do it. At a minimum (the list below isn’t extensive), licensees will need to:

• Review and update existing breach reporting policies and procedures.

• Review their resource capacity to accommodate the increased and more frequent reporting obligations.

• Establish controls to ensure requirements are being met and within timeframe.

• Establish processes for reporting other licensees as well as processes to deal with matters if another licensee reports them.

• Establish a process to notify the client of suspected misconduct and notify them again, of the financial impact (if relevant).

In addition, advisers and staff will need to be re-trained on any new processes that are put in place by the licensee. Advisers will need to have robust processes and systems to identify and report breaches and/or suspected breaches to assist their AFSL to meet their obligations.

2. Ongoing Fee arrangements – what you should know

Ongoing fee arrangements will need to be renewed annually versus the current two year requirement. In addition, ongoing fee arrangements entered into prior to 1 July 2013 will be subject to the same annual renewal requirements and no longer grandfathered from renewal as is currently the case.

Written consent will be required before fees under an ongoing fee arrangement can be deducted from a client’s account and the consent cannot be for a period of more than 12 months. This means advisers must obtain written consent annually in order to continue to deduct fees from a client’s account.

The FDS regime will also change slightly, with a new requirement to set out the fees that will be charged and the services that will be provided in the following 12 month period (currently, disclosure of fees and services is only required for the previous 12 months). Where fees are estimates (e.g. asset based fees), a worked example needs to be included.

Ongoing fee arrangement – prepare now

Licensees should start reviewing the impact this will have on their business. At a minimum (the list below isn’t extensive), licensees will need to:

• Update and review client engagement policies and processes.

• Review any grandfathered pre July 2013 clients that may have been excluded from the current opt in requirements to ensure they will now be included as part of their annual review and renewal process.

• Update FDS letters to also include fees and services that will be charged for the following 12 months. Licensees may also need to provide guidance to their advisers on how to provide examples where asset based fees are charged.

• Put in place workflow processes and controls to meet the new annual renewal requirements.

• Develop and deliver training to advisers and staff to ensure they understand the new requirements.

With advisers needing to obtain written consent to arrange for the deduction of fees, as well as having to provide a copy of the consent to the third party arranging the deduction (e.g. the product provider), record keeping processes will need to be more robust than ever with advisers needing to demonstrate compliance with the new renewal, consent and disclosure requirements.

Changes may need to be made to CRMs and financial planning software in order to accommodate the new requirements. The effective use of technology to meet these new obligations will be critical going forward.

Time is ticking

The new year will be upon us before we know it with a new raft of significant changes. We think it’s really important that licensees now take some time to understand and prepare for the impact to their practices and financial advisers in order to be ready.

Tangelo can help

If you need help preparing your organisation, get in touch. At Tangelo we have the expertise needed to help your organisation prepare for these changes, as well as the many other changes and challenges facing our industry.

Tangelo was founded in 2019 by Conrad Travers and Selin Ertac. We wanted to create a fresh kind of consultancy, a hybrid model with a focus on expertise and practical solutions for clients of all sizes. Our consultants are passionate about the financial advice and wealth industry - it’s crucial to the financial health and well-being of Australians, and we want to be a part of it now and for the future.