A new era of transparency

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1 TOMORROW S ADVICE PART 1 A new era of transparency 1

2 In this guide we will: 1. define transparency 2. distinguish between disclosure and true transparency 3. outline why transparency could lead to great client engagement and understanding 2

3 WITH THE ENTIRE FINANCIAL SERVICES INDUSTRY STILL REELING FROM THE FALLOUT OF THE ROYAL COMMISSION, THERE S NO BETTER TIME TO CONSIDER HOW TRUST CAN BE REBUILT. One of the key issues that emerged during the hearings - and we ll come back to them later - is how little consumers often understood about the contracts they were signing, the fees they were paying and the products they were buying. All these things, it s fair to say, fall under the umbrella of transparency. In an ideal world, a better-informed consumer is less likely to experience problems with their financial services arrangements because they have a better understanding of what they are paying for and how they are paying for it, right from the outset. In an industry as complex as financial services, it can be a somewhat slippery concept. It s easier in some respects to define what transparency isn t or shouldn t be - basic product disclosure as defined by law. If compliant disclosure is equivalent to sending a product disclosure statement (PDS) containing everything you can know about a product and telling you to read it yourself to figure out what you're buying, transparency, by contrast, is about two things. These are, first, giving a consumer a way of understanding the underlying costs and how they re increased or decreased based on the level of service. And second, providing a guarantee that anyone who buys the same product will get it at the same price, making sure all clients are treated equally. Ensuring this is obviously easier said than done, but building a transparent, future-proof approach to financial advice will be critical to navigating the tremendous changes taking place in the industry at the moment. Let s explore what those changes are. 3

4 1 RG97 Educate your clients about headline product fees, and what those fees comprise in terms of underlying costs: these are easier to determine as a result of the RG97 requirements. 4

5 Issued in March 2017, ASIC s Regulatory Guide 97: Disclosing fees and costs in PDSs and periodic statements (RG97 for short) has been one of the most critical pieces of disclosure regulation of the past few years, and it s still evolving. While it primarily targets investment products and superannuation funds, its broad mandate has tangible effects on the provision of advice. As background, the original idea behind the RG97 regime was to improve disclosure standards across the industry so that customers (including advisers) could better compare and contrast different options, and get a clearer picture of what costs would be involved over time. Back then, ASIC found there was considerable inconsistency in these disclosures. FEES DISCLOSURE STANDARDS In some cases, when the regime came into effect on 30 September 2017, fees rose by up to 40 per cent. This had a significant effect on industry funds, many of which invest in unlisted property and infrastructure. Under the current RG97 regime, issuers of investment products and trustees of superannuation funds must have a PDS that includes a standardised fees and costs template, particular explanations of fees and costs, an example of annual fees and costs, and a boxed consumer advisory warning. They must also describe certain transactions in periodic statements as well as indirect costs. 5

6 SIMPLE MANAGED INVESTMENT SCHEMES Simple managed investment schemes (along with super funds) must also comply with a shorter PDS regime so as to make PDSs easier to read for advisers, clients and consumers in this case, a maximum of eight A4 pages. Recent changes to the RG97 regime have highlighted how transparency differs from disclosure. To wit, the RG97 review determined that PDSs are point of sale documents and comparing each one can be laborious and timeconsuming. As a result, it s now been recommended that a consumer-facing portal - where advisers and clients can review information extracted from these lengthy documents so as to make an easier initial comparison - be established. Further to these ideas - and also something highlighted during the Royal Commission - RG97 is also adjusting to newer ideas around transparency in investment platforms. The review of the regime noted this was an area where there has been a significant divergence of views between different industry sectors. The reason for this is that there are effectively two layers of costs involved: 1 2 those charged by the platform itself those by the underlying investments accessed through the platform. To address the problem, the review suggested including key fees of underlying products in the platform s investment menu in a tabular format; greater consistency in terms of the warning that the platform s fee template relates to the cost of access rather than the fees charged by underlying products; and inclusion of cost impacts of accessible investments in the platform s periodic statements. 6

7 Target market 2 determinations While the target market determination laws have yet to be implemented, now is a good time to come up with a consistent and recorded product recommendation strategy for your client-base, if you haven t already. 7

8 ASIC s next big regulatory move involves the advice industry more directly. In July 2018, then Minister for Revenue and Financial Services Kelly O'Dwyer opened consultation for the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018, which is designed to "ensure that financial products are targeted and sold appropriately". At the time, she said the new laws will enable ASIC to "intervene in the distribution of the product to prevent harm to consumers" in circumstances where it's determined that the product is being "inappropriately targeted or sold". The proposed law targets "retail product distribution conduct," which is defined as dealing with the product in relation to a retail client; giving a disclosure document in relation to an offer of the product to a retail client; providing financial product advice in relation to the retail client; and making a "recognised offer, in relation to a recognised jurisdiction, of the product". Issuers of financial products will now need to identify target markets for their products and consider how the features of said products reflect consumer needs in those markets. They will also need to select "appropriate distribution" channels and periodically review arrangements to "ensure they continue to be appropriate". If you fit into the category of a "distributor" as defined above, you'll have to implement controls to ensure products are distributed in accordance with the relevant target markets and "comply with reasonable requests for information from the issuer in relation to the product's review." What this means is that you'll be prohibited from dealing in and providing advice on a product unless the issuer has provided a target market determination. If one has been made, you'll have to take "reasonable steps" to ensure any advice provided is consistent with the target market determination and notify offerors (who will then be required to notify ASIC) of any significant dealing in a product that wasn't consistent. 8

9 Accompanying this, both product issuers and distributors will naturally be required to maintain records relating to their new obligations. Under the terms of the new laws, ASIC will be given new powers to enforce these requirements. These include requesting information, issuing stop orders relating to contraventions, enforcing product marketing and disclosure materials, imposing consumer warnings, restricting product distribution, banning products and making exemptions and modifications to the above. The regulator will also be given the ability to ban aspects of remuneration practices in circumstances where it s determined there s a link between remuneration and product distribution. Penalties for breaching these new requirements range between 200 penalty units and five years imprisonment, or a blend of both. Furthermore, the new draft provides consumers the opportunity to commence a civil action for losses resulting from breaches of an issuer s failure to notify and a distributor failing to stop distributing when notification has occurred. The proposed date for commencement of the regime will be two years after the Bill receives Royal Assent. It s worth noting, though, that these intervention powers can only be made for a period of up to 18 months, after which the Government will determine whether the order should be made permanent. 9

10 Royal 3 Commission Review your ongoing fee arrangements with clients and help them better understand what they re paying for. 10

11 All of this brings us to the last, largest and least-certain factor affecting the future of transparency in advice: the Royal Commission. With the interim report now available to the public, though, it's worth looking past the headlines and considering what's actually being recommended. The report identified multiple extant concerns in financial advice. 1 SOUND ADVICE First, it questioned how an adviser s employer and licensee encourages the provision of sound advice including, where appropriate, recommending a client do nothing. 2 1 CONFLICTS OF INTEREST It also asked whether conflicts of interest and duty can be managed, and identified a potential need for greater separation between the manufacture of financial products and the provision of advice. Bearing in mind this is the interim report and recommendations haven t been finalised it s illuminating to see where the discussion is going. The Commissioner, the Honorable Kenneth Hayne asks whether financial product sellers and manufacturers should ever be permitted to provide advice to retail clients, and expands on this by asking whether authorised representatives should be allowed to recommend products manufactured or sold by their licensees. If so, he continues, should it only be following a written demonstration that the product is better for the client than comparable thirdparty products? 3 1 MAKING INFORMED CHOICES Finally, the report questions whether current product and interests disclosure requirements are sufficient to allow customers to make fully informed choices. With regard to licensees fee arrangements, the report asks whether the period after which a client must positively review an ongoing fee arrangement be reduced from two years to one, and whether platform operators should be able to deduct fees on licensees behalf without clients express permission. It s difficult to say how many of the recommendations made here will make it into the final report - let alone be implemented into law - but it s worth noting how they tie directly into the idea of transparency and enabling consumers to make informed choices. 11

12 4 Takeout s So, where does this leave the advice industry? 12

13 There s never going to be a point where regulations are completely set in stone, but considering how so many of the reforms of the past few years - not to mention whatever results from the Royal Commission - have involved improving disclosure requirements to consumers, we re very clearly in a new era where consumers and regulators are expecting a much higher level of transparency than ever before. Navigating these changes will require a more in-depth exploration of each piece of regulation than a paper like this could provide, but there is one practical step you can take to ensure you re ahead of the curve: start thinking about how you can better break down the services you provide in terms of time and value to the client, so that you can explain your value proposition and implement services consistently That last point is arguably the most complex step. Addressing this may involve overcoming certain legacy issues in your business, but it will also involve educating clients and determining how they look at fees and disclosure. In this way, we can understand transparency as less the provision of information to a customer, and more an ongoing exchange to understand both parties are on the same page. This process is more in-depth than disclosure requirements might imply, but it ensures each client understands exactly what they re getting out of their advice arrangements, and knows they re being treated consistently and fairly. 13

14 The opinions expressed in this content do not necessarily represent those of No More Practice Education or its related entities. All content is intended for a professional financial adviser audience only and does not constitute financial advice. To view our full terms and conditions, click here. If you are interested in finding out more information about No More Practice Education and our available resources, support@nomorepractice.com.au 14