So far, I have considered the causes of the fees for no service conduct, and the responses to that conduct. It remains for me to consider what can, and should, be done to prevent similar conduct from occurring in the future.
2.4.1Improvements to systems and processes
Some of the necessary steps are already underway.
In its 2016 report, ASIC recorded the changes that some licensees – AMP, ANZ, CBA and NAB – had made to their systems to prevent a recurrence of charging fees for no service. Those changes varied from changing system controls, to altering record keeping and oversight.
A number of entities provided further detail about those changes in their evidence to the Commission. To take CFPL as an example, since identifying fees for no service issues, CFPL has:
- introduced a system that provides a central electronic record of all customers paying ongoing service fees and when ongoing service is provided;
- introduced a centralised document management system to record customer interactions and retain evidence of delivery of service;
- established an Ongoing Services Admin and Support team to administer ongoing service processes and controls;
- included reviews of ongoing services as part of the file audit process; and
- implemented additional processes and controls for customers paying ongoing fees when an adviser leaves CFPL, including checks designed to identify customers who are paying ongoing fees but are not assigned to an adviser.
Further, as I noted in the Interim Report, one of the requirements of the ANZ and CBA EUs was to have senior management attest that the relevant licensee’s compliance systems and processes were (at the time of the undertaking) reasonably adequate to track the licensee’s contractual obligations to its ongoing service clients. ANZ’s attestation was to be ‘audited’;  the attestation relating to CFPL (BWFA having ceased to carry on advice business) was to be ‘supported by an expert report’.
As noted above, and in the Interim Report, inadequate systems and processes of licensees may have contributed to some of the fees for no service conduct. It is to be hoped that the steps taken by entities to improve their systems and processes will go some way to preventing similar conduct from occurring in future.
However, as explained above, it is important not to view the fees for no service conduct as being merely the result of inadequate systems or processes. It had other and equally important causes, not least the enticing call of profit, the uncertain content of what was promised and the capacity to deduct the fees invisibly. Those matters are not solved by changing the systems and processes of AFSL holders.
As I said in the Interim Report, the uncertainty of the content of what is promised is not an issue to be solved by regulation. It is, and must be, a matter for client and adviser to decide what if any services will be provided after the provision of initial advice. It is, and must be, a matter for client and adviser to decide how those services are defined.
Even accepting that it is a matter for client and adviser to decide what services are to be provided, and how those services are to be defined, it is consistent with the policies that underpinned the FoFA reforms to consider:
- first, the information that an adviser must give a client about the services to be provided under such an arrangement;
- second, the period for which a contract for future services can be made; and
- third, the mechanism by which advisers and licensees should be permitted to charge ongoing fees to clients.
I deal with each in turn.
Information about the services to be provided
Under existing law, where a client has entered into an ongoing fee arrangement with a financial adviser, the adviser must give the client a fee disclosure statement each year. Among other things, the fee disclosure statement must set out:
- the amount of each ongoing fee paid under the arrangement by the client in the previous year;
- information about the services that the client was entitled to receive under the arrangement during the previous year; and
- information about the services that the client received under the arrangement during the previous year.
The fee disclosure statement is plainly a backward-looking document, looking back at what services the client was entitled to receive, and what services were provided. Neither the definition of ongoing fee arrangement in section 962A(2) nor any other provision of the Corporations Act appears to require an adviser to identify prospectively with any degree of specificity what services the client will be entitled to receive, and what services will be provided.
Obviously, principles of contractual certainty under the law of contract will require that those services be specified with some degree of certainty. But that degree of certainty could be reached by saying that the services to be provided under the ongoing fee arrangement are such services as the adviser chooses to provide. That is not satisfactory.
In my view, a financial adviser who enters into an ongoing fee arrangement with a retail client should be required to provide to the client – every time the ongoing fee arrangement is made or renewed – a statement of the services that the client will be entitled to receive under the arrangement during the coming year.
The duration of the arrangement
Under existing law, a client who entered into an ongoing fee arrangement after 1 July 2013 must positively renew the arrangement every two years – otherwise, the arrangement will terminate. This is achieved in practice by requiring the giving of a renewal notice every two years, and providing that the ongoing fee arrangement will automatically terminate unless the client positively opts to renew it within 30 days of receiving the renewal notice.
An important function of a renewal notice is to prompt a client who has entered into an ongoing fee arrangement to consider whether he or she values what he or she is receiving under that arrangement. A client who is asked to give positive consent to the renewal of an ongoing fee is likely to focus his or her mind on what he or she has received in exchange for that fee.
As noted above, ASIC’s view is that the services promised under ongoing fee arrangements, even when provided, may not give the client a benefit commensurate with their cost. I have no basis on which to doubt that view. Where the ongoing fee is fixed as a percentage of the ‘funds under advice’ (rather than as a fixed dollar sum), the question of value for money is all the more evident.
The information that the client needs in order to assess whether the services provided under an ongoing fee arrangement represent value for money is currently set out in the fee disclosure statement as a record of what was done. That statement must be provided annually. There is no reason that a client should not continue to receive annually a fee disclosure statement of that kind.
But the central changes I would make are to require that ongoing fee arrangements must be renewed annually and that the client be told what will be done.
Subject to an exception for certain arrangements entered into between 1 July 2012 and 1 July 2013, no requirement to give a renewal notice currently applies to ongoing fee arrangements made before 1 July 2013.
As noted above, before the FoFA reforms required advisers to obtain client agreement every two years for the charging of ongoing fees, the client may have made the ongoing fee arrangement at the time advice was first provided and neither at that point nor thereafter adverted to, or been reminded of, the adviser’s obligations. I have no doubt that this was a key contributing factor in many instances where fees were charged for no service.
While this position has been addressed to some extent by the requirement to provide fee disclosure statements, there are still some ongoing fee arrangements in relation to which financial advisers are not required to provide renewal notices. That is no longer acceptable. I can see no principled reason for it to be maintained.
Regardless of whether a client entered into an ongoing fee arrangement before or after 1 July 2013, that arrangement must be subject to annual renewal.
Authorisation for deductions
Ongoing fees have often been paid, and are still often paid, by deduction from clients’ investment accounts, including superannuation accounts. The ‘invisible’ nature of the payments contributed to the charging of fees for no service.
Deducting advice fees from superannuation accounts presents its own particular issues and I deal with those in the chapter on superannuation. But, subject to that important qualification, I see no reason in principle why licensees should not be permitted to continue to deduct fees from investment accounts (other than superannuation accounts), provided the entity making the deduction has the express authority of the client.
I noted in the Interim Report that platform operators have routinely deducted, and continue to deduct, ongoing service fees from clients’ accounts and have remitted, and continue to remit, the fees to advice licensees without having any authority beyond the licensee’s claim to be entitled to payment. (If the client’s account has insufficient cash to make the payment, assets are liquidated to realise sufficient cash.) As I said there, to pay away money held on behalf of another, on the request of the party who claims payment, is a distinctly unusual arrangement. It is not one that I consider should be permitted to continue.
If a licensee wants a product issuer to deduct an ongoing fee from a client’s investment account, then the client must give the issuer express authority for this to occur. That authority should operate only for the period of the ongoing fee arrangement to which it relates, and should be required to be renewed annually, with the ongoing fee arrangement.
ASIC, Report 499, 27 October 2016, 35–8.
ASIC, Report 499, 27 October 2016, 36–8.
Exhibit 7.2, Witness statement of Matthew Comyn, 14 November 2018, 49 .
Enforceable Undertaking, ASIC and ANZ, 29 March 2018, 5–6 pt 3. See also ASIC, Media Release 18-092MR, 6 April 2018.
 Enforceable Undertaking, ASIC and CBA, 9 April 2018, 8–9 [3.3]–[3.5]. See also ASIC, Media Release 18-102MR, 13 April 2018.
 Corporations Act ss 962H, 962S.
 Corporations Act s 962H(2).
 Corporations Act Pt 7.7A Div 3 ss 962A–962Q; see especially ss 962K, 962L.
 Corporations Act s 962K.
 Corporations Act s 962N.
 Corporations Act s 962S.