By Mark Bland, Partner, Geoffrey McCarthy, Special Counsel and Ashley Kasner, Lawyer
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 the growing risk in the politicised field of intra-fund advice.
The Australian Treasurer is due to release the Commonwealth Governments budget on 6 October.
The House of Representatives is to sit on October 6 to 8, 19 to 22 and 26 to 29. Senate Budget Estimates hearings are to be held from 19 to 30 October.
ASIC had planned to issue work in the third quarter on some topics that had not yet been addressed in publications.
- publish regulatory guidance on product design and distribution obligations as inserted into the Corporations Act by Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019. The product design and distribution obligations seek to bring accountability for issuers and distributors to ensure that the design, marketing and distribution of financial and credit products meets consumer needs. Issuers and distributors must comply with these obligations from 5 October 2021.
- consult on proposals to extend the application of remediation policy in Regulatory Guide 256 Client review and remediation conducted by advice licensees beyond financial advice. ASIC’s focus is to promote greater transparency on the progress and outcomes of remediation, and provide best practice guidance for designing and conducting consumer-centred remediation.
- commence the second phase of targeted consultation on IDR data collection and reporting building on the feedback that industry and consumer stakeholders provided in response to Consultation Paper 311 Internal dispute resolution: Update to RG 165. ASIC has already published an updated guide, Regulatory Guide 271 Internal Dispute Resolution.
5 October – FASEA published a draft Financial Planners & Advisers Code of Ethics 2019 Guide for consultation seeking comments by 2 November 2020. The draft guide provides an explanation of the intent and application of the Code’s values and standards and includes information in question and answer format.
1 October – APRA published FAQ 14 on whether personal contributions can be accepted from persons aged 65 to 74 on Jobkeeper. APRA considers that Trustees can accept personal contributions in this situation.
30 September – The updated Fees and Costs Disclosure requirements under ASIC RG 97 can apply on an opt in basis to PDS first given from this date. The new requirements will apply to all PDSs given from 30 September 2022. ASIC Corporations (Disclosure of Fees and Costs) Instrument 2019/1070
24 September ASIC issues a no action position in relation to ongoing fee arrangement obligations for Victorian financial advice businesses. To assist affected financial advice businesses, ASIC does not intend to take regulatory action against an Australian financial services (AFS) licensee or their representative for a breach of requirements to give fee disclosure statements and renewal notices in certain circumstances. This no-action position applies to AFS licensees or representatives where their entire business, or a substantial part of it, is located in Victoria.
23 September – ASIC further amends fees and costs disclosure requirements relating to disclose of administration fees in the PDS fee and cost example to allow a separate figure to differentiate administration fees payable regardless of the balance. ASIC Corporations (Amendment) Instrument 2020/853.
23 September – ASIC extends its relief for COVID-19 related financial advice until 11 April 2021 – see ASIC Corporations (COVID-19—Advice-related Relief) Instrument 2020/355. The relief allows a SoA to be provided later or, in some cases, the requirement to provide it is removed. ASIC also extended its no action position for intra-fund advice to 31 December 2020 20-220MR ASIC extends COVID-19 relief for certain capital raisings and financial advice
23 September – AFCA publishes its Datacube on complaints during 2019/2020. In accordance with ASIC Regulatory Guide 267 and AFCA Rules, AFCA must publicly report information about complaints they receive and close against each fund member, including comparative complaint data. The AFCA Datacube shows how many complaints are made about financial firms and what kind of outcomes are reached.
21 September – Treasury consults on remake of sunsetting Income Tax Assessment Regulations 1997 The regulations include a number of topics affecting taxation of superannuation such as contribution limits and aspects of taxation of funds.
21 September – Consultation commenced on AFCA Rules changes ahead of Superannuation Complaints Tribunal ceasing operations to allow AFCA to hear any SCT complaints not yet resolved at its shutdown. The consultation ends 16 October 2020.
21 September – Monthly Pandemic Data Collection report due for submission to APRA via D2A. APRA has stated in FAQ 5 that it would review by 30 December the need for continuing this collection, but there is no indication that it will not continue for the time being.
On the horizon spotlight – Intra-fund advice
There are two developments in the increasingly politicised area of intra-fund advice. ASIC has extended its COVID-19 no-action position on intra-fund advice and ASIC has responded to the Economics Committee query about the very legality of intra-fund advice. However this public debate on the ‘legality’ on intra-fund advice has not aired all of the challenges for intra-fund advisers.
COVID-19 No Action
ASIC has extended its no-action position for expanded intra-fund advice on early release of superannuation relating to COVID-19 until 31 December 2020. The purpose of this no-action position is to confirm that, in the circumstances and subject to conditions, ASIC will not take action in relation to personal advice about the COVID-19 early release scheme provided as intra-fund advice on the basis that it breaches section 99F (Cost of financial product advice) of the SIS Act. Just because ASIC has a no-action position doesn’t mean that the relevant conduct would in fact be contrary to s 99F or that on the other hand that there aren’t other issues which arise due to intra-fund advice.
In the public hearing of the Standing Committee on Economics on 5 August 2020, questions raised by Mr. Falinski indicated that not everyone, and certainly not Mr. Falinski, understands the nature and obligations involved in intra-fund advice. The Committee Chair had to step in and ask ASIC to review the transcript to try to divine a question out it, which was essentially, how is it legal?
ASIC’s response is consistent with its existing guidance but what is more interesting is that the response does not grapple with the main challenge for intra-fund advisers, which is the FASEA Code of Ethics.
ASIC’s response notes that intra-fund advice is not subject to special or different obligations to other financial product advice but is advice that is not prohibited from being charged to members collectively under s 99F. Where intra-fund advice is personal advice, the advice provider still has the same obligations and needs to comply with the best interests duty and the disclosure obligations that are applicable to other personal advice.
ASIC advises the Committee that all advice is scaled to some extent and that scaled advice can meet all the legal requirements, including the best interests duty, because these obligations can be ‘scaled up’ or ‘scaled down’ depending on the nature and scope of the advice.
ASIC confirms its position that when assessing whether an advice provider has complied with the best interests duty, ASIC will consider whether a reasonable advice provider would believe that the client is likely to be in a better position if the client follows the advice provided.
Implicit in ASIC’s response is the challenge intra-fund advisers face, which is that if they limit their inquiries to the information relevant to the member’s interest in the super fund, how can they know the client is likely to be in a better position if the advice is followed?
Intra-fund advice and FASEA Code of Ethics
Interestingly, ASIC did not address the basis upon which the most recent challenges have been made to the legality of intra-fund advice, which is the FASEA Code of Ethics. This is an important consideration because while it does not directly apply to Trustees, in does so indirectly because it applies to their employee advisers.
The FASEA Financial Planners and Advisers Code of Ethics 2019 applies to all relevant providers who provide financial services to retail clients (which includes certain individuals rather than bodies corporate). However FASEA has indicated FG002 Financial Planners & Advisers Code of Ethics Guidance that its standards are to be viewed as a whole.
The key challenges posed by the Code of Ethics to intra-fund advice are:
- Standard 2: Best interests – FASEA’s guidance underscores this challenge for intra-fund advisers by noting the “strong onus on the adviser to act fairly and exercise professional judgement about whether a limited scope engagement is appropriate and, in the client’s, best interest as the client may not fully understand the consequences of deferring or scoping out advice on some issues”.
- Standard 3: Conflicts of Interest – this presents a challenge because intra-fund advisers can only advise in relation to their employer’s products. FASEA has sought to soften this requirement with guidance that recommending an employer’s product is permissible. However, advisers will be tested if their trustee employers use intra-fund advice as a member or FUM retention tool. Trustees need to ensure advisers are equipped to comply with Standard 3, for example with an SoA template for advice to not make a contribution or advice to take advantage of the COVID-19 early release program.
- Standard 6: Broad effects and long-term interests – this standard requires the adviser to take into account the broad effects arising from the client acting on the advice and actively consider the client’s broader, long-term interests and likely circumstances. This presents a challenge to the intra-fund adviser because the intra-fund advice restrictions prohibit the giving of advice where it relates to products other than the employer’s products. This standard forces the adviser to expand its scope of what the adviser considers in the advice process, but keep the advice (the opinion or recommendation) strictly related to the members’ interests in the trustee’s products.
In combination, Standards 2 and 6 may require advisers to scale up their enquiries even though they are necessarily scaling down their advice to meet the intra-fund rules.
This is confirmed in FASEA’s draft guidance issued today (5 October 2020). It states in relation to Standard 6 that the adviser must make an “independent, professional assessment as to whether scoping the advice is in the best interests of the client (and not just in accordance with their preference or instruction)” and to ensure scaled advice “is only provided where it is appropriate” (page 25).
Intra-fund advice and Switching
When an advice provider recommends that a member replaces one financial product with another, in full or in part (known as ‘switching advice’), the advice provider must compare the ‘from’ product with the ‘to’ product and disclose this information in the SoA (s 947D of the Corporations Act). The adviser needs to conduct a reasonable investigation into the products being replaced. The disclosure obligations contained in s 947D also apply when cash in a bank account and/or other investments are being used to fund increased contributions. This also applies if the advice is to reduce the client’s interest in a MySuper product in whole or part (eg move money from a balanced option which is held as a MySuper product to another option).
Personal advice about making non-concessional contributions would not be intra-fund advice permitted to be collectively charged under s99F if it includes a recommendation to apply funds currently in a bank deposit account, as that is a recommendation about another financial product being the bank deposit account. To be eligible for collective charging, personal advice must generally not relate to any other financial product (other than some related products). But this does mean that the advice provider is permitted to give advice without taking into consideration the holdings of financial products of the member and the implications of the advice on them. The adviser must tread the fine line of considering the other relevant financial product holdings, but not providing advice about them.
The need to consider matters beyond the holding in the superannuation fund could lead to situations where members collectively have to bear the cost of advice which is higher because of the relatively complex situation of a single member seeking advice. Trustees, in establishing the parameters of intra-fund advice they provide, or arrange, need to take this into account in assessing the best interests of members of the superannuation fund.
Apart from the specific requirements for inclusions in a SoA in case of switching that is not caught by s 947D, a SoA must still set out the basis for the advice and this may require disclosure concerning the different fees and costs in case of a recommendation to move funds from one investment option to another.
ASIC’s Report 639
In Report 639 Financial advice by superannuation funds, ASIC said it found that only 49% of the files they reviewed demonstrated full compliance with the best interests duty and related obligations. The main reasons identified for files not complying was due to the advice provider failing to identify the subject matter of the advice and the member’s objectives, financial situation and needs; and the advice provider failing to conduct a reasonable investigation into financial products and base all judgements on the member’s relevant circumstances.
ASIC asked the funds about what they thought were the key conflicts of interest for their advice business and their approaches to conflicts management. Only 29% referred to the use of a conflicts management framework in their responses which was lower than anticipated given that APRA’s Prudential Standard SPS 521 Conflicts of interest requires all superannuation funds to have a conflicts management framework in place.
Impact for Trustees
ASIC’s lack of action following the apparently poor results of superannuation funds in Report 639 is notable in light of ASIC’s ‘why not litigate’ mantra. It may suggest that there is a gap between a ‘fail’ in ASIC’s scoring and enforceability. It may reflect ASIC’s low expectations of advice or perhaps that there are greater ‘harms’ elsewhere in their regulated population. Notwithstanding this, trustees cannot afford to relax on intra-fund advice. Intra-fund advice is associated with industry funds and so is a politicised issue. The Chair and other Liberal Party members of the Economics Committee that oversees ASIC will ensure ASIC is accountable on the quality of intra-fund advice.
Intra-fund advice can be given under the Code of Ethics but it is much more difficult. Advisers need to scale up their enquiries and exercise professional judgement about whether intra-fund advice is in the best interests of the member in light of their particular circumstances. Trustees need to give advisers the tools and create the environment to do this. Trustees that have not made significant adjustments since the introduction of the FASEA Code of Ethics will be leaving themselves and their advisers exposed.