RegTracker – 14 December 2020 – Spotlight on ASIC CP on Affordable Advice

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By Mark Bland, Partner, Geoffrey McCarthy, Special Counsel and Sam Morris, Consultant

This fortnightly update is designed to help superannuation trustees track and manage regulatory change. We look ahead to forthcoming developments, look back at recent changes and then consider the impact on trustees. This edition’s spotlight is on ASIC CP 332 Promoting access to affordable advice for consumers.

Key developments

  • Legislative developments including passing the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 with an amendment to defer restrictions on trustee and director indemnification
  • Deadlines on 31 December for annual member meetings, business performance reviews, modern slavery reporting (for some), grandfathered conflicted remuneration, PS 234 standards for third parties where APRA has exempted and COViD-19 early release applications
  • Commencements on 1 January for laws for trustees to have no other duty, amendments to provisions about enforceable codes, new restrictions on insurers avoiding life insurance and the use of insurer and insurance, new powers for ASIC in relation to superannuation and requirements for cooperation between ASIC and APRA
  • Regulatory Guidance and consultations on cyber security, design and distribution, insurance occupational classifications, value for money in default insurance and financial advice

Looking ahead

21 December – Due date for report on inquiry into class actions referred to the Parliamentary Joint Committee on Corporations and Financial Services on 14 May 2020.

24 December – ASIC has timetabled to have consulted on changes to Regulatory Guide 38  The hawking prohibitions to expand the guidance on the hawking prohibition to superannuation and insurance products.

24 December – ASIC has timetabled to have released an update to Regulatory Guide 245 Fee disclosure statements and make relevant legislative instruments subject to passage of legislation.

24 December – ASIC had timetabled to publish a report by December 2020 on its review of the industry’s progress on improving insurance outcomes for consumers.

31 December – Government timetabled to release Financial Accountability Regime draft legislation

31 December – The first annual members meeting must be convened by superannuation trustees for their funds by 31 December 2020

31 December – First business performance review to have been completed under APRA SPS 515 Strategic Planning and Member Outcomes

31 December – For entities subject to modern slavery reporting in 1 April 2019 to 31 March 2020, the deadline for submission of their modern slavery statement has been extended to this date.

31 December – Last day for eligible Australian and New Zealand citizens and permanent residents to apply to access a further $10,000 of their super under the COVID-19 early release of super program.

1 January – Ban on grandfathered conflicted renumeration paid to financial advisers commences.

1 January – Commencement of law that Trustees can hold no other role

1 January – The regulated entities who had been granted a six-month extension on a case-by-case basis by APRA in relation to requirements applying to third parties, must comply with APRA Prudential standard CPS 234 Information Security.

1 January 2021 – Amendments to enforceable code provisions apply.

1 January 2021  – Restriction on avoiding life insurance contracts (Hayne recommendation 4.6) applies relating to insurer avoidance of life insurance contracts and duty to take reasonable care not to make a misrepresentation (recommendations 4.6 and 4.5). Part 1 of Schedule 2 applies to any life insurance contract that is entered into from the later of Royal Assent and 1 January 2021.

1 January 2021 – Restrictions on use of terms “insurance” and “insurer” commences (Hayne recommendation 4.2).

1 January 2021 – Statutory obligation for ASIC and APRA to cooperate and formalising ASIC meeting procedures (Hayne recommendation 6.9 and 6.11).

1 January 2021 – Adjustment of APRA and ASIC’s roles in superannuation, including expanding ASIC’s role in the super space, introduction of new AFSL authorisation to provide superannuation trustee services commences (Hayne recommendations 3.8, 6.3, 6.4 and 6.5).

18 January 2021 – Comments due on ASIC CP 332 Promoting affordable advice for consumers.

Looking back

14 December – Treasury Laws Amendment (Miscellaneous and Technical Amendments) Regulations 2020 was registered.  The regulations formalise that NZ permanent residents are treated the same as Australian permanent residents for COVID-19 Early release of super from 23 March 2020 and addresses consequentials for the Family Law Amendment (Western Australia De Facto Superannuation Splitting and Bankruptcy) Act 2020

14 December – ASIC issues Report 675 Default insurance in superannuation: Member value for money (REP 675).  REP 675 compares some measures of value for money, with a focus on outcomes for members, across superannuation trustees and for distinct member cohorts.

14 December – APRA issues weekly data on COVID-19 Early release of super collected under the COVID-19 Pandemic Data Collection Request program. $35.6 bn in payments have been made to 6 December.

11 December – Senate Select Committee on Financial Technology and Regulatory Technology Issues Paper response due date.

11 December –  Financial Sector Reform (Hayne Royal Commission Response) (Regulation of Superannuation) Regulations 2020 made.  The amendments remove licensing exemptions for non public offer trustees from 1 July 2020.  Non public offer trustees are advised to apply for an AFS licence by 30 April 2021. Exemptions for trustees of pooled superannuation trusts are also extended to the new provide a superannuation trustee service.

11 December – APRA announced that it has issued a new version of D2A and upgrade is required by 31 March 2021.

11 December – ASIC issues RG 274 Product design and distribution obligations.

10 December – The Treasury Laws Amendment (2020 Measures No. 5) Bill 2020 passed Parliament. It contains provisions  that facilitate payment of lost and unclaimed superannuation money held by ATO directly to KiwiSaver schemes.

10 December – ASIC released technical updates to RG 246 on conflicted remuneration, to reflect the ending of grandfathered conflicted remuneration and changes to the stamping fee exemption.

10 December – Parliament passed Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 with an amendment that changes the commencement date of restrictions on indemnity of superannuation trustees and directors to 1 January 2022

10 December – The Anti-Money Laundering and Counter-Terrorism Financing and other Legislation Amendment Bill 2019 was passed by Parliament.  The Bill includes provisions clarifying the ability to rely on customer due diligence by others.

10 December – The Treasury Laws Amendment (2020 Measures No. 6) Bill 2020 was passed.  The Bill includes miscellaneous amendments, some of which affect superannuation including clarification of SGC obligations, removing the restriction on the number of different investment fees for lifecycle MySuper products, enabling insurance elections made by members for the purposes of insurance in low balance accounts to survive  a successor fund transfer.

10 December – Security Legislation Amendment (Critical Infrastructure) Bill 2020 introduced.  The Bill would apply to critical superannuation infrastructure and additional risk management requirements and government assistance may apply especially to larger funds although this will depend on subsequent rules.

9 December – Government announces that the Disciplinary Body for advisers will be the Financial Services and Credit Panel (FSCP) within the ASIC.  The standard setting functions will be performed by Treasury and FASEA will be wound up.

9 December – The House of Representatives standing committee on economics tabled its report on the 2019  annual reports of APRA and ASIC. There is discussion of the Committee’s interest in superannuation including trading by executives, unlisted asset valuation and use of ad words.

9 December – Financial Sector Reform (Hayne Royal Commission Response No. 2) Bill 2020 introduced to House of Representatives.  The Bill covers ongoing fee arrangements, disclosure of lack of independence and advice fees in superannuation, discussed further below.

8 December – Family Law Amendment (Western Australia De Facto Superannuation Splitting and Bankruptcy Act 2020 given royal assent to. The Act gives effect to a referral of power from Western Australia to the Commonwealth in respect of superannuation matters in family law proceedings for separating de facto couples in Western Australia.

8 December – ASIC extends deferral of Portfolio Holdings Disclosure to 31 December 2021 by ASIC Corporations (Amendment and Repeal) Instrument 2020/921,

8 December The Council of Financial Regulators released a Cyber Operational Resilience Intelligence Led Exercises (CORIE) framework to test and demonstrate the cyber maturity and resilience of institutions within the Australian financial services industry.  Tests will be conducted on a small number of systemically important financial institutions selected from applicants in the pilot exercise.

4 December – ASIC published an article ‘Intra-fund advice has no special status over other personal advice’ .  ASIC does however continue to provide a no action position to trustees in respect of conflicted remuneration received as management or administration fees that may influence intra-fund advice but is otherwise compliant.

4 December – ASIC issued 20-390 MR Trustees to improve occupational classification practices in insurance in superannuation.  ASIC viewed the ‘occupational default’ practices of a sample of 21 trustees who were using a high-risk occupational category as the default in their MySuper products. ASIC found significant variation in the sophistication of trustees’ assumptions and in the factors they took into consideration when designing their default category.

3 December – ASIC published CP 335 on consumer remediation and updating of RG 256 Client review and remediation which will apply beyond financial advice. The updated material covers the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 provisions addressing remediation.

3 December – APRA publish a speech by Chairman Byers on risk management and black swan events.  He referred to the COVID-19 early release of super as an example.

On the horizon spotlight – ASIC CP 332 Promoting access to affordable advice for consumers

In CP 332 Promoting access to affordable advice for consumers,  ASIC identifies concerns that the reduction in the number of financial advisers has made it difficult for consumers to access affordable, good-quality personal advice.

Many large financial institutions have either sold or reduced the scope of their financial advice businesses. At the same time, a number of financial advisers have either left, or signalled their intention to leave, the industry. As of 5 November 2020, there were 21,284 current financial advisers listed on the Financial Advisers Register (FAR). This is approximately 14.6% below the long-term average (of 24,930) prior to 1 January 2019. Once the deadline to pass the exam and the education standards set by FASEA is past, there is industry talk that these numbers could further reduce with more advisers choosing to leave the industry.

ASIC’s previous research, as set out in REP 224 and 62, has highlighted that many consumers preferred receiving piece-by-piece or limited advice rather than comprehensive advice. As part of its Unmet Advice Needs project, its latest consultation paper, CP 332 Promoting access to affordable advice for consumers, ASIC is seeking input from industry participants and relevant stakeholders to help ASIC understand:

  • the issues and impediments relating to the supply of good quality affordable personal advice; and
  • the practical steps that can be taken by ASIC and industry to improve consumer access to good quality affordable advice.

This broad project aims to help ASIC understand what it and the industry can do, to better promote access to good-quality affordable personal advice. ASIC has set out several areas of focus and is seeking feedback on:

  • the problems associated with providing limited advice;
  • effectiveness on the past guidance released by ASIC (RG 90 and RG 244);
  • the terminology used to describe ‘limited advice’;
  • the availability and affordability of personal advice;
  • experience with digital personal advice (also known as ‘robo-advice’ or ‘automated advice’) and whether this is a good way to provide good-quality limited advice; and
  • other issues relating to the delivery of both affordable personal advice and limited advice.

The CP does not include specific proposals but indicates a willingness to review regulatory guidance or raise law reform issues.

Limited Advice

ASIC considers that the use of the terminology ‘scaled advice’ has contributed to a misunderstanding about the difference between comprehensive advice and ‘limited’ or ‘single-issue’ advice. It has used the term ‘limited advice’ instead of ‘scaled advice’ in the paper as well. It has further acknowledged that the industry struggles to provide limited and affordable personal advice.

The regulatory environment is complex. The issues faced by the industry have much to do with the conflicting opinions regarding Best Interest Duty and the code of ethics set by FASEA. Some have raised concerns that under Standard 6 of the FASEA Code of Ethics, advisers are not able to provide ‘limited’ advice. It is not clear that ASIC is engaged with FASEA to address the potential implications for FASEA Code.  The subsequent announcement by Government that FASEA is to be wound up and its standard setting role absorbed into Treasury may mean that in reviewing the Code over time there will be significant focus on issues of affordability of advice.

Government response to concerns about costs

This is consistent with changes since the exposure draft of the proposals concerning ongoing advice and restriction of payments for advice from MySuper product in the Financial Sector Reform (Hayne Royal Commission Response No. 2) Bill 2020.  In particular, under the Bill, the period from anniversary to cessation for an inactive client in an ongoing arrangement has been set at 150 days.  Existing clients at 1 July 2021, can have their anniversary determined by the provider.  The renewal notice will be absorbed into the new Fee Disclosure Statement.  Any advice fees may be charged from MySuper products with consent, under an arrangement of less than 12 months.

Past Guidance

RG 244 Giving information, general advice and scaled advice was released in 2012. Since then there have been a number of changes in the industry along with the establishment of FASEA Code of Ethics. RG 90 Example Statement of Advice: Scaled advice for a new client is also limited to advice on insurance, with ASIC not addressing some key points in the sample SoA. ASIC recognises that this past guidance may need changes to assist the industry in providing good-quality limited personal advice which meets the requirements set under the FASEA Code of Ethics as well.

Digital Advice

Digital personal advice has the advantage of often being more cost-effective than traditional advice models. RG 255 Providing digital financial product advice to retail clients addresses matters that a licensee has to consider while providing digital personal advice. However, ASIC has found that many consumers prefer to have human interaction when receiving advice. Research suggested that some of the participants preferred engaging face-to-face with a financial adviser because this allowed them to establish trust and rapport with the adviser.

Affordability of Advice

There is a disconnect between what the consumers are willing to pay for advice and what the industry is charging. While a sample of clients were willing to pay between $340- 550 for personal advice, Investment Trends reported that in 2019 financial planners on an average were charging between $1,500 to $2,900 for limited and comprehensive advice respectively.

There is a lot of time required to research and provide a “good quality” advice document to the clients that meet all the requirements set out under the legislation and guidance provided. This is reflected in the upfront fee charged by advisers.

ASIC has raised the possibility of extending the provisions allowing a record of advice rather than a SoA, if certain conditions are met. This may not be enough in itself to bridge the difference in what the consumers are willing to pay and what is being charged by advisers to keep their businesses viable.

The importance of affordable advice in the face of complexity is also a key emphasis of the Report of the Retirement Income Review. ASIC is seeking responses to CP 332 by 18 January 2021 to help it to understand issues faced by industry and plans to hold stakeholder roundtables by early 2021. Time will tell if the outcome of this consultation will provide sufficient guidance that will resolve the issues that are currently impeding the industry, including compliance burdens and uncertainties. Further relief or legislative amendment is likely to be necessary.

Previous Editions

You may also be interested in reading some of our other commentary in our previous editions’ spotlights.  Note these publications relate to the position when published and have not been updated for later developments.

For further information, please do not hesitate to contact us.

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    Financial Services

    A timely reminder for super fund members