How does one deal with FDSs and breaches given the law still imposes an obligation to provide FDSs to pre 1 July 2013 clients on ongoing fee arrangements?

[Archived User]

In essence, you are asking whether ABC is required to report breaches to ASIC arising from advisers failing to provide fee disclosure statements to existing clients (i.e. clients with whom the adviser has an ongoing fee arrangement of more than 12 months entered into prior to 1 July 2013) given ASIC’s statement that “we will not take action for breaches of current section 962S of the Corporations Act 2001, which requires fee disclosure statements to be provided to retail clients with ongoing fee arrangements entered into before 1 July 2013” – ASIC Media Release dated 20 December 2013.

Holley Nethercote’s advice

1.The fact that the regulator has indicated that it is not going to enforce the current law does not change the law. Indeed, while draft legislation and regulations have been prepared to remove the obligation, they have yet to be implemented.  Accordingly, the legal requirement to provide a fee disclosure statement to pre-1 July 2013 clients remains.

2.The failure to do so remains a breach of the financial services laws.

3.Accordingly, the breach will need to be assessed in the usual way in accordance with the criteria set out in section 912D of the Corporations Act.

4.As you are well aware, the criteria are (we have provided our comments in italics):

a.The number or frequency of similar previous breaches; (the number of breaches may be numerous)

b.The impact of the breach or likely breach on the licensee’s ability to provide the financial services covered by the licence; (no impact on ABC’s ability to provide the financial services)

c.The extent to which the breach or likely breach indicates that the licensee’s arrangements to ensure compliance with those obligations is inadequate; (you are seeking advice in relation to the issue which indicates that ABC takes its compliance obligations seriously and has appropriate arrangements in place)

d.The actual or potential financial loss to clients of the licensee, or the licensee itself, arising from the breach or likely breach. (we expect this will be nil)

5.The fact that ASIC does not intend to enforce the law or that the government has drafted legislation to repeal the law is not one of the criteria to determine the significance of the breach.

6.Nevertheless, given our comments in brackets above, we think it is understandable if you arrive at the conclusion that the breaches, while potentially numerous, are not significant and, therefore, do not need to be reported to ASIC.  However, you should make your own assessment.

 

Fur further advice, please contact our office.

 

Author: Tim Nethercote

[KMack]

Thank you for this information – terrific.
An FDS question to follow if I may: Do you agree that an FDS will still be required under the draft legislation for a pre-1 July 2013 client, with whom a revised ongoing service level agreement is signed post-1 July 2013. ie that a new service agreement (which meets the continuing definition of an “ongoing fee arrangement”) signed after 1 July 2013 drags them into the post 1 July 2013 requirements?

[Megan Jaksa]

Thanks for your question.

According to the Exposure Draft of the Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014, which was released on 29 January 2014, these types of clients will no longer be captured.

Under the current legislation, clients fall under either Subdivision B or C of Division 3 of Part 7.7A.  Subdivision B applies to clients who have not been provided with personal advice as a retail client before 1 July 2013.  Subdivision C applies to any clients that are not captured by Subdivision B.  Broadly speaking, Subdivision B captures all of your new post-1 July 2013 clients and Subdivision C captures all of your pre-1 July 2013 clients.

The draft legislation repeals Subdivision C in its entirety.  As a result, any clients to whom you have provided personal advice as a retail client prior to 1 July 2013, will no longer require a FDS.

Please note that this answer is based on the Exposure Draft and may change if any amendments are made to the legislation.  It also assumes that there has been no change to the licensee providing the advice to the client since 1 July 2013.

For further information, please feel free to contact our office.

Author: David Court

Co-contributor Megan Jaksa

[Author]

Posts