ASIC Report 636 Shows Widespread Failure to Comply with Disclosure Obligations

While the furore surrounding the ‘fees for no service’ scandal hit the papers during the Banking Royal Commission, ASIC performed its own review of financial advisors’ compliance with their disclosure obligations for ongoing fee arrangements.


Through 2018 and 2019 ASIC collected and analysed information from a random sample of 30 AFS licensees.


ASIC found significant and widespread non-compliance with the obligations, which is summarised in Report 636: Compliance with the fee disclosure statement and renewal notice obligations released in November 2019.


What are the obligations


AFS licensees or their authorised representatives must provide a ‘fee disclosure statement’ to retail clients who pay fees for personal advice under an ‘ongoing fee arrangement’.[1]


An ongoing fee arrangement means any fee which is payable for a period exceeding 12 months however that fee is structured.


Advice providers must also send a renewal notice (RN) every two years to any client who has entered an ongoing fee arrangement, asking them to opt back into the arrangement. [2]

The obligations were introduced as part of the future of financial advice reforms introduced in July 2013, along with bans on conflicted remuneration and trailing commissions on new products. [3]


ASIC’s findings


The findings set out in Report 636 highlight significant and widespread failure to comply with the disclosure obligations. ASIC set out the following key compliance statistics from their sample of 30 AFS licensees. [4]


ASIC identified 1,609 instances where a fee disclosure statement was required.

  • 7% of the time, fee recipients did not give clients the required fee disclosure statement.

Of the 1,496 FDSs we assessed

  • 9% were not given within the required timeframe.

176 FDSs were reviewed in detail

  • 80% did not include accurate information about the services clients were entitled to receive.

  • 73% did not include all the required information about the services clients received.

  • 44% did not include the amount of each fee clients paid under the ongoing fee arrangement.

We identified 573 instances where an RN was required

  • 35% of the time, fee recipients did not give clients the required RN

Policies and procedures were examined

  • More than half of licensees did not have effective processes to remind them when RNs are due

  • More than half of licensees did not have effective processes to turn off ongoing fees

What it means


ASIC explained their findings to the participants in the survey and set out their expectation that any clients effected by the disclosure breaches would need to receive remediation.


ASIC is currently investigating these and other AFS licensees (not subject to the review) to determine whether court action is appropriate, as part of its ‘why not litigate’ approach to enforcement action.


Hamilton Locke has significant experience dealing with ASIC enforcement actions and can help you identify compliance issues before they become a problem. We can assist if you:

  • have received a requisition notice from ASIC;

  • are the subject of an enforcement action; or

  • would like to review your compliance policies or procedures, or the content of any fee disclosure documents.

Contact Brit Ibanez, Nick Huett or Jack Peterson for more information.

Sources

[1] Corporations Act 2001 (Cth), s 962B.

[2] Ibid s 962K–962Q.

[3] See the Corporations Amendment (Future of Financial Advice) Act 2012 (Cth) and Corporations Amendment (Further Future of Financial Advice Measures) Act 2012 (Cth).

[4] Australian Securities and Investment Commission, Report 636: Compliance with the fee disclosure statement and renewal notice obligations, p 4.

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