Financial services: Making sense of coming legislative changes

This article was current at the time of publication.

Accounting practitioners and financial advisers should be prepared for major changes to the regulatory environment.

Over forthcoming months, further legislation is set to be introduced as a result of the 76 recommendations contained in the 2019 report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Imminent changes include increased financial disclosure requirements for advice practices from 1 July 2021 around independence and automated client fee renewals. 

Then, from 1 October this year, there will be greater obligations for practices to report any breaches of the Corporations Act 2001 (the Act) – including those arising from administrative errors – directly to the Australian Securities and Investments Commission (ASIC).

The federal government is also pushing hard to introduce legislation before 30 June 2021 for the creation of a single disciplinary board for financial advisers. 

At the same time, the Department of the Treasury is working on the framework for a compensation scheme of last resort that would aid victims of negligent financial advice.

New requirements from 1 July 2021

ASIC has enacted a series of legislative instruments dealing with advice fee consents and independence disclosure.

These instruments are Consent to Deductions, Disclosure of Lack of Independence and Consent to Pass on Costs of Providing Advice.

From the start of the 2021-22 financial year, financial advisers must obtain written consent from clients before deducting or arranging to deduct advice fees from a client’s account as part of an ongoing fee arrangement.

Clients renewing their fee arrangement on a biannual basis will need to be moved to a yearly opt-in renewal process.

For annual fee renewals, financial planners will need to issue clients with an enhanced Fee Disclosure Statement, including fees paid over the last 12 months, services offered and used over that period, and fees and services information to be provided for the next 12 months.

In addition, from 1 July Australian financial services (AFS) licensees or authorised representatives will be subject to stricter reporting obligations around independence.

They will be required to disclose to clients any lack of independence from financial product issuers that would be in breach of the Act through the use of words such as “independence”, “impartial” or “unbiased”.

Reporting obligations from 1 October 2021

Potentially the biggest change this year will be from 1 October when financial advisers will need to report to ASIC any breaches of the Act or ASIC’s guidance.

Breaches could be as simple as failing to provide a Financial Services Guide (FSG) to a client or not having expeditiously issued a Statement of Advice (SOA).

“You have to report any breach to ASIC, even if it’s an administrative error or a technical breach that’s had a detrimental effect on the client,” says CPA Australia Senior Manager Advocacy and Retirement Policy, Michael Davison.

“ASIC is still consulting on the final mechanics. They have Consultation Paper 340 out at the moment on how it would work, but the expectation is there will be a significant increase in the volume of reports they’ll receive.

“We still don’t know how they’re going to wade through all of that and actually respond.”

Creating a single disciplinary board for financial advisers

From 1 January 2022, the federal government will close the Financial Adviser Standards and Ethics Authority (FASEA) and move its standard-setting functions to Treasury.

The remaining elements of FASEA’s role, including administering adviser educational exams, will be incorporated into the expanded mandate of the Financial Services and Credit Panel (FSCP) under ASIC.

The FSCP currently supports ASIC in the exercise of its regulatory functions concerning making banning orders against individuals for misconduct.

Also, from 1 January 2022 individuals providing tax (financial) advice must either be a registered tax agent or a financial adviser who satisfies the education and training standards under the Act. The details of how this will work are still to be finalised. 

The new legislation determines the degrees, qualifications, courses, work and continuing professional development required to provide such services.

Status of the compensation scheme of last resort

A key recommendation of the Financial Services Royal Commission was the establishment of a compensation scheme of last resort (CSLR) that would allow consumers to be compensated in cases where they have been victim to financial misconduct by a firm unable to pay them.

The federal government has agreed to establish an industry funded CSLR operated by the Australian Financial Complaints Authority (AFCA), although research is still underway on aspects such as its coverage beyond personal advice, funding arrangements, compensation to be paid and managing the evolution of the scheme.

“We strongly suspect we’re not going to see the scheme anytime soon,” Davison says. “Treasury is still working on it and trying to work out the mechanics of it and probably who pays for it.

“Is it a levy on all participants in the industry or the advisers, or is it a levy on the product manufacturers or on everyone, or those sectors that are most at risk of providing advice that may end up harming or be detrimental to consumers?

“We don’t know where they’re up to. They’re playing their cards pretty close to their chest.”

Increased compliance burden

Davison believes the raft of new legislation will only add to the existing compliance burden on accounting practitioners and advisers.

“We’re already seeing a big reduction in the number of advisers at the same time advisers are being faced with more onerous reporting and disclosure requirements which create more compliance work for them [and] will push up the cost of advice,” he says.

CPA Australia research shows the average financial planning practice now has the equivalent of 0.6 of one full-time employee working on compliance alone.

“Feedback from members is that it’s becoming much more costly to advise and consumers aren’t seeking out the advice they need,” Davison says.

“Probably the main concern is the government has made a commitment to implementing the Royal Commission recommendations by a certain time.

“It appears to be a real box-ticking exercise just to get everything implemented, as opposed to trying to implement reform that actually reduces the regulatory burden on advisers and makes the provision of advice more affordable for consumers.”