Financial Services Regulation

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Client Update: Financial advice and fees – ASIC reports

27 October 2016

In brief: ASIC released its report Financial advice: Fees for no service today. It says that there has been a systemic failure by advice licensees within some of the major banks and AMP to provide ongoing advice in return for ongoing fees. The report relates chiefly to arrangements between licensees and clients when the law still permitted product issuers to pay trail commissions. ASIC says that FOFA, specifically the opt-in and annual fee disclosure requirements, will substantially reduce the likelihood of similar systemic failures recurring, but then concludes that the advice industry 'may still have a culture of reliance on ongoing trail revenue (through commissions and fees) for a portion of their income, without necessarily providing advice to customers in return'. It is not clear why ASIC thinks that FOFA won't break that reliance. Partner Michelle Levy (view CV), Senior Regulatory Counsel Michael Mathieson (view CV) and Managing Associate Simun Soljo (view CV) report.

A trail commission or an ongoing advice fee?

The systemic failures the report is about are instances where customers were charged ongoing fees to receive ongoing advice. The affected customers did not get the regular advice because they did not have an adviser or because their adviser did not deliver the advice promised. ASIC does say that pre-FOFA there was no obligation for an advice licensee or adviser to provide an ongoing service despite receiving ongoing remuneration unless the licensee or adviser promised to do so. The report only addresses those cases where the customers paid 'periodic advice fees'. The problem with this is that the distinction between a trail commission paid by a product issuer to a licensee or adviser, on the one hand, and an ongoing advice fee paid by a product issuer with the consent of the client to a licensee or adviser, on the other, is not always obvious. It would be helpful to know what ASIC thinks the distinction is because it is fundamental to the investigation that licensees have to undertake. 

Two categories of licensee

The report says that its review focused on licensees that are:

  • authorised to provide personal advice to retail clients; or
  • product issuers that identified a failure to provide ongoing advice services to customers or incorrect charging on ongoing advice fees to customers. 

The first category makes sense – if an advice licensee enters into an agreement with a client to provide an ongoing service in return for an ongoing fee, albeit deducted from the client's financial product, and they fail to provide the ongoing service, the advice licensee has breached its promise and is required to compensate the client. ASIC says that the licensee must compensate the client by paying the fees together with the return the client would have received if the fees had not been deducted from their products and, if that is too hard to work out, interest determined at a 'reasonably high' rate. ASIC helpfully provides an example – the RBA cash rate plus 6 per cent per year.

The second category is most interesting. ASIC seems to be saying that some product issuers identified cases where advisers had promised to provide ongoing services to their client but did not in fact do so.  Presumably the product issuers were paying fees for the ongoing services promised by the adviser to the client with the consent of the client. This raises the question about whether a product issuer has an obligation to check that services are in fact being provided to a member of a fund or scheme by an adviser before it pays the fee from the member's account in the fund or scheme to the adviser. The law probably does not go so far, but if it did it might provide a very effective means of ensuring that any reliance by the advice industry on ongoing trail revenue is broken. As the report says, at least one of the financial institutions reviewed has decided that one way to stop advice licensees and advisers charging fees for no service is to require licensees to instruct product providers to switch off advice fees if no ongoing advice is provided, or if the client asks the licensee to, rather than the product issuer waiting for the customer to ask them to.

Cultural indicators

ASIC thinks that 'cultural factors in the specific banking and financial services institutions and advice licensees' covered in its report contributed to the systemic failures ASIC observed. ASIC pulled no punches by saying:

Of particular concern is that many of the banking and financial services institutions covered by this review publicly state that their core values include being customer focused, ‘doing what is right’ for customers, and acting with integrity.



Review methodologies

The report also provides an interesting insight (for those not already up to their elbows in them) into the way in which these reviews are conducted. All involved 'sampling' – looking at samples of potentially relevant cases rather than all potentially relevant cases. Some licensees utilised 'random' sampling, others utilised 'risk-based' sampling and still others utilised a combination. ASIC says it was 'not prescriptive' about whether advice licensees should take a random or risk-based approach to sampling. This stands in contrast to the reviews required by ASIC of life companies of their claims handling – where ASIC specifically required a risk-based approach. Also interesting is that in neither context has ASIC required all potentially relevant cases to be reviewed. No doubt this is based in realism and pragmatism but it is nonetheless inevitable that some cases of non-compliance will not be detected.

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