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Changes in the way financial planners manage and administer fee renewals have been introduced, with legislation passing the senate in February 2021. Find out what this means for financial planners and how they manage fees and service arrangements with their clients.
On 25 February 2021, the Financial Sector Reform (Hayne Royal Commission Response No. 2) Bill 2020 passed the senate. Minister for Superannuation, Financial Services and the Digital Economy Jane Hume said the new legislation on fee renewals are designed to “further protect Australian households from hidden fees and unexpected expenses.”
What is changing?
Annual renewal for ongoing fee arrangements
Financial planners who have been in an ongoing fee arrangement with clients will now need to have their client opt-in and give consent to fees owing every year. If clients have been renewing their fee arrangement on a biannual basis, financial planners will need to move them to a yearly renewal process.
Financial planners working with clients on the basis of a fixed engagement agreement of 12 months will continue to provide an annual service offer, including a fee agreement and services to be provided.
Forward fee estimates
For annual fee renewals, financial planners will need to issue their client an enhanced Fee Disclosure Statement (FDS). This will include the following information about:
Services provided and fees for the last 12 months:
The fees paid by your client over the last 12 months
The services offered over the last 12 months
The services used by the client over the last 12 months
Services provided and fees for the next 12 months
The actual or estimated fees your client will pay over the coming 12 months
The services to be offered/provided over the next 12 months
A renewal authorisation (doesn’t need to be a separate document anymore)
Financial planners must seek annual agreement from clients for fees to be collected from products (except credit cards and basic banking accounts). The client’s consent to fees will need to be passed on to product providers annually.
Anniversary dates for ongoing fee arrangements will now be fixed and cannot be brought forward should the client renew before their anniversary date.
Financial planners must provide the enhanced FDS to their client within 60 days of the anniversary date.
Financial planners have 120 days from the anniversary date to obtain consent from a client for renewal of their ongoing service arrangement.
Financial planners have a further 30 days to switch off the ongoing fees if the client doesn’t consent to renew.
These amendments to fee renewals are effective from 1 July 2021, with a transition period of 12 months for financial planners to move existing grandfathered and biannual clients to the new annual enhanced FDS and renewal obligations.
The forward-looking fee statements could present some issues, for example with reconciling fees charged vs fees received when financial planners are remunerated through some of the super funds. For financial planners providing an estimate of forward-looking fees for an asset-based fee arrangement, this can be calculated in the same way as for a Statement of Advice. ASIC provide guidance on this in Regulatory Guide 182 on Dollar Disclosure.
Need more guidance and answers?
The FPA Policy team are putting together further guidance to help our members adjust their arrangements in light of this change in legislation. We are also communicating with members on this issue on the FPA Community forum and we encourage members to join in with any questions, concerns or comments they have.