Treasury Laws Amendment (Delivering Better Financial Outcomes and Other Measures) Bill 2024 received royal assent on 9 July 2024, bringing into effect tranche 1 of the Quality Advice Review reforms.

The passage of tranche 1 of the Quality Advice Review (QAR) reforms through the Parliament was not without controversy; somewhat ironically for reforms that were supposed to be quick wins to ease unnecessary compliance pressure on the financial advice industry.

The sticking point was the repeal and replacement of section 99FA of the Superannuation (Industry) Supervision Act (SIS Act). Section 99FA is intended to enable superannuation trustees to, on the direction of a member, pay a fee from the member’s superannuation account to an adviser for personal advice about that member’s interest in the fund. However, potential unintended consequences meant that there was scope for the new law to compel trustees to check every Statement of Advice (SOA) issued to members of their fund.[1] Section 99FA(1)(a) and (b) of the proposed section were repealed prior to the passage of the bill to address these concerns.

The Bill applies from the day after Royal Assent, but transitional measures apply to some measures and advisers will need to ensure they are across the practical impact of the measures and the timing requirements.

What does tranche 1 cover?

Tranche 1 of the QAR reforms covers:

• Deduction of adviser fees from superannuation
• Ongoing fees and timing of consent
• Flexibility for FSG disclosure
• Conflicted remuneration
• New client consent for insurance commissions

For financial advisers, the reforms addressing the deduction of adviser fees from superannuation, ongoing fees, and timing of consent and flexibility for FSG disclosures are welcome. While amendments to conflicted remuneration and consent for insurance commissions are likely to have a minimal impact.

Deduction of adviser fees from superannuation

The repeal and replacement of section 99FA SIS Act clarifies the legal basis for trustees to pay advice fees agreed between a member and their financial adviser from the member’s superannuation account. And, amendments to ITAA 1997 ensure that the advice fees are a deductible expense of the fund and not treated as an assessable benefit to the member.

What does this really mean for trustees?

To enable the payment of personal advice fees from the member’s superannuation, trustees must:

1. Ensure that the advice given is personal[2].
2. Only charge the cost of the advice if it aligns with the terms of the member's written consent request.
3. Where the advice is:
   7. An ongoing fee arrangement, the advice meets the conditions of an ongoing fee arrangement in Division 3, Part 7.7A of the Corporations Act 2001. That is, advisers need to obtain a client’s consent annually via a single consent form explaining the services that will be provided and the fee that will be charged for the following 12 months.
   8. Not an ongoing fee, meets the requirements for a written request or consent.
4. Have the member's written request consenting to the payment of the advice fee or a copy. The intent is that the Minister will approve a standardised form.

The legislation is not prescriptive in its approach to trustee obligations. The final amendments prior to the passage of the Bill clarified that trustees could take a risk-based approach to compliance with section 99FA.

Trustees are subject to the sole purpose test in section 62, SIS Act, which requires them to ensure that the fund is maintained to provide benefits to the member. In addition, trustees have a duty to act in the best financial interests of the member under paragraph 52(2)(c) of the SIS Act.

Under the new rules, trustees will need to satisfy themselves the arrangement complies with the law. In addition to ensuring that they have the consent or a copy of the member’s consent, and that the fees charged are in line with the consent, trustees will need to work out how best to oversight compliance with the law. This might be spot checks or audits by the trustee or a third party, or for SMSFs, a review of by the trustee of each SOA.

For advisers, in addition to updating the standards of the practice to accommodate the new law, education should be provided to advisers on the requirements.

Timing

The amendments to the SIS Act apply to costs charged on or after the start date of the legislation on 10 January 2025 (the ‘start date’ is 6 months after the day the Bill received royal assent on 9 July 2024).

Transitional arrangements are in place for existing one-off advice arrangements that were in force prior to 10 January 2025 that comply with the original section 99FA. These arrangements can remain in place until the earlier of:

• When the advice is terminated, varied or renewed; or
• 10 January 2026 (12 months from the start date on 10 January 2025).

The amendments to ITAA 1997 enabling a tax deduction for the costs of advice fees commences on 1 October 2024, but retrospectively applies to the 2019-20 income year (to align with the ATO’s 4 year notice period to amend assessments.)

Any issues?

The last-minute amendments to remove 99FA(1)(a) and 99FA(1)(b) of the SIS Act addressed industry concerns that trustees of superannuation could be compelled to check every SOA. It will now be up to the trustees to determine how they will comply with the new requirements within the context of their responsibilities under the SIS Act.

Ongoing fee arrangements

Currently, for an ongoing fee arrangement to be effective, an adviser had to:

• Give the client a fee disclosure statement (FDS) within 60 days of the anniversary date of the arrangement, and
• Obtain the client’s consent to deduct advice fees within 120 days of the anniversary date of the arrangement, and
• If the client does not consent within the renewal period to the renewed arrangement, the arrangement terminates 30 days after the end of the renewal period (150 days).

The amendments repeal and replace Subdivision B of Division 3 of Part 7.7A to streamline the client consent process by:

• Removing the requirement to give the client a fee disclosure statement;
• Codifying the requirements for consent for ongoing fee arrangements into legislation. ASIC Corporations (Consent to Deductions—Ongoing Fee Arrangements) Instrument 2021/124 has been brought into the Corporations Act under the new Subdivision B of Division 3 of Part 7.7A and amended for the new ongoing fee arrangements.
• Repealing civil penalties for failure to notify any third-party account provider that consent for account deduction has ceased. This recognises that this measure was disproportionate to the harm caused by consumers. While civil penalty will no longer apply, other regulatory consequences continue to exist.

What is the new process for ongoing fee arrangements?

The legislation has replaced “anniversary date” with “reference date” for determining the renewal period.

Under the legislation, a new consent must be obtained:

• Up to 60 days before, and
• On or before 150 days after the reference date.

This change provides advisers with a significant buffer compared to the existing rules to accommodate unforeseen circumstances and removes inflexible, fixed anniversary dates.

The process for obtaining a client’s consent for an ongoing fee arrangement is:

1. A standardised, written consent form must be given to an ongoing advice fee client (new or renewed). This standardised form, will set out issues such as who the advice is for, why the consent is required, information about the services that the client will receive, and details of the payments to be made including frequency, and amount (or a reasonable estimate of the fee cannot be determined at the time).
   • The start date of the arrangement, the reference date, can be a day determined by agreement with the client (between 60 days prior or 150 days of the anniversary/reference date).
2. The client consents to the ongoing fee arrangement and the deduction of fees from their account. The consent form/s must be signed by the client and dated within 150 days of the start date (anniversary/reference date).
3. The adviser must keep the signed consent form/s (or copies of the signed forms).

Termination

The arrangement will terminate 150 days after the reference day if a new compliant renewal has not been put in place.

If the adviser has not complied with the consent requirements and has deducted fees, the arrangement will terminate. Any adviser deducting fees without proper consent faces a civil penalty.

A client can terminate the arrangement at any time by giving the adviser notice in writing (effective from the day of notice). The client is only liable to pay any amounts they have accrued but not satisfied under the ongoing fee arrangement before the termination, and costs incurred by the adviser that are solely and directly as a result of the termination.

Will there be one consent form?

The legislation specifies that the Minister may approve one or more forms for giving consent in relation to one or more of the following:

• Entering into an ongoing fee arrangement;
• Renewing an ongoing fee arrangement;
• Deducting an amount in respect of ongoing fees from an account;
• Arranging to deduct an amount in respect of ongoing fees from an account.

So, we could have one, or multiple purpose specific standardised forms.

The draft regulations (Treasury Laws Amendment (Delivering Better Financial Outcomes) Regulations 2024), set out that the consent forms can be sent, stored and attributed to the member.

The forms are not yet available.

Timing

The amendments to ongoing fee arrangements apply on or after the start date of the legislation on 10 January 2025 (the ‘start date’ is 6 months after the day the Bill received royal assent on 9 July 2024).

The amended arrangements apply to:

• New arrangements on or after 10 January 2025;
• Existing arrangements on or after the first anniversary date that falls after 10 January 2025 (the “transition date”).

Modified renewal periods apply to ongoing advice in force immediately before the start date. The modified renewal periods apply from the later of:

• 10 January 2025; or
• 60 days before the anniversary date of the renewal (transition date).

This is so that the more flexible timing, and the 150 day termination requirements for ongoing fee arrangements, apply to all renewals from the start date of the legislation. For example, if your client’s renewal period is 7 February 2025, you and your client could choose to put in place the ongoing fee arrangement between 10 January 2025 (the start date of the legislation) up until 7 July 2025 (150 days from the anniversary date), for example 1 July 2025. If the requirements for the renewal have not been put in place by 7 July 2025, the arrangement terminates[3].

Changes to terms and terminology

Any issues?

While the changes to the rules for ongoing fee arrangements are long overdue and welcome, its success may rest with the Minister’s ability to standardise forms that are consistent across product providers.

Flexibility for FSG requirements

Financial services guides (FSG) are still required, however a new Division 2A of Part 7.7 of the Corporations Act enables advisers to choose whether to provide an FSG directly to clients, or subject to the approval of their AFSL, make the information in the FSG publicly available on their website as ‘website disclosure information.’

What must appear on the website for an FSG to be compliant?

When an adviser provides financial product advice to a client, and is not providing an FSG directly to the client, a compliant version of the FSG must be available on the website. To be compliant, the disclosure statement on the adviser’s website must be:

• Compliant with the existing information requirements for an FSG under sections 942B and 942C of the Corporations Act.
• Approved by the adviser’s AFSL (and any material changes or updates)
• Readily accessible to the general public (not locked behind a client login or subscription), and
• Up to date and the date it was prepared or last updated clearly stated.

The regulations to accompany the Delivering Better Financial Outcomes Bill are in draft form. See Delivering Better Financial Outcomes Tranche 1 – Draft Regulations.

Timing

The ability to provide a website disclosure statement apply from 10 July 2024 (the day after royal assent of the legislation).

Any issues?

Out of sight out of mind! Advisers using the website option need to ensure that their FSG is accurate and up to date, or they will fail to fulfill their obligations.

The existing penalties, and potential prison time, for defective or inaccurate FSG’s also applies to website disclosures.

Simplifying conflicted remuneration provisions

A new definition of conflicted remuneration removes some of the noise on the nature of monetary or non-monetary benefits from clients and enables the exceptions related to superannuation fund trustee fees for personal advice.

Under the new definition, conflicted remuneration means:

• Any benefit (monetary or not) that is given to an AFSL or an authorised representative of an AFSL, who provides financial product advice to retail clients; and
• that because of the benefit, could reasonably be expected to influence the recommendation or the advice given by the licensee or authorised representative to the retail client;
• but the benefit is not given by a retail client (or on their behalf) to the licensee or authorised representative in relation to financial product or service provided by the licensee or authorised representative.

In addition, a benefit is not conflicted remuneration where it is:

• given to the AFSL or an authorised representative of a licensee by a trustee or trustees of a regulated superannuation fund;
• given in relation to financial product advice that is personal advice, which is provided by the licensee or authorised representative to a retail client, about the client’s interest in the fund; and
• charged against the client’s interest in the fund, or against the interests of the client and other members of the fund.

In addition, the exception in section 963D that permits employees of an Authorised Deposit-Taking Institution (i.e., banks) to receive sales incentives from their ADI employer, including volume or sales-based incentives for recommending product to AFSL’s and advisers, has been removed. Employees of ADIs are not treated differently to employees of other financial institutions.

Timing

Commences 10 July 2024 (the day after royal assent).

A 6 month transitional period applies to the repeal of section 963D for ADI employees, to enable existing employment contracts and terms to be updated to reflect the new rules.

New client consent for insurance commissions

New consent requirements have been introduced for cases where an adviser is likely to receive a commission for life risk insurance, general insurance, or consumer credit insurance products. Before the commission becomes payable, the client's informed consent must be obtained. If the client does not consent, the adviser can choose to provide the advice for a fee paid by the client or decline to provide the advice altogether.

The following will need to be disclosed to the client before consent:

• Name of the insurer under the relevant product (if known);
• The rate of the monetary benefit (see below)
• If more than one monetary benefit will be given in connection with the issue or sale of the relevant product, the frequency of giving those monetary benefits and the period over which monetary benefits covered by the consent could be given, including any renewals;
• The nature of any services that the AFSL or authorised representative will provide the client in relation to the relevant product;
• A statement that it is a requirement of the law that client consent must be obtained before payment of an insurance commission; and
• The fact that the consent is irrevocable.

The rate of monetary benefit is:

• General insurance - percentage range of the policy cost for the product, for example, 10% to 20% of the premium.
• Life risk insurance - percentage of the policy cost payable for the product,
• Consumer credit insurance - percentage of the policy cost payable for the product.

Where the rate or frequency disclosed to the client ends up being less than what was provided in the disclosure, an additional consent us not required.

Renewals do not require a new consent as long as the client was advised that a commission would be paid on renewal and the commission remains the same or less than what was disclosed.

Timing

Applies to benefits given in connection with the issue or sale of general insurance products, life risk insurance products or consumer credit insurance on or after 9 July 2025 (12 months from the date of royal assent).

Any issues?

Currently, insurance commission is disclosed in a prescribed form in a Statement of Advice (SOA) and this measure has no impact on that process.

Timetable of reforms

Further information

• Treasury Laws Amendment (Delivering Better Financial Outcomes and Other Measures) Bill 2024
• Delivering Better Financial Outcomes Tranche 1 – Draft Regulations.
• Media Release – Albanese government passes financial advice laws
• ASIC acknowledges royal assent of the DBFO Act
• FSG requirements - ASIC Corporations (Amendment) Instrument 2024/554
• Corporations Act 2001
• Superannuation (Industry) Supervision Act 1993

Notes:

[1] Government amendments removed the words “the cost of providing financial product advice” 99FA(1) “and is wholly or partly about the member’s interest in the fund” 99FA(1)(a) and “the amount charged does not exceed the cost of providing financial product advice about the member’s interest in the fund “ 99FA(1)(b) from the proposed Bill. See Schedule of amendments made by the Senate

[2] Where the advice has considered one or more of the client’s objectives, financial situation and needs, or a reasonable person might expect the person giving the advice to have considered these matters.

[3] See the revised Explanatory Memorandum, Application to existing ongoing fee arrangements 1.187 – 1.191 and Examples 1.2, 1.3 and 1.4.