CPD: DBFO legislation – a plain English framework for adviser implementation

02 Sep 2024

From AdviserVoice - this Regulatory Compliance and Consumer Protection CPD series is proudly brought to you by Russell Investments

New compliance obligations resulting from Tranche 1 QAR reforms are now law.

In recent times, few topics have dominated adviser consciousness – and industry media coverage – as much as the Quality of Advice Review (QAR), one of the most significant consumer protection agendas seen in years.

When Michelle Levy handed down her final report to the Government in December 2022^[1], there was a sense of optimism that many of the barriers to accessible, affordable financial advice would come down. Since then, it is fair to say some of these hopes have faded somewhat, due the actual legislative response to and articulation of her recommendations, and the tortuously long-time frame to bring this response to life.

So long and convoluted has been this response – broken into Tranche 1 and Tranche 2 reforms, that advisers and licensees could be forgiven for any confusion and lack of awareness of the current state of play with the changes – changes which represent the most significant reforms to advice since the FOFA reforms of a decade ago.

In July 2024, the first Tranche of Reforms – in the guise of the ‘Delivering Better Financial Outcomes (DBFO) legislation finally came into effect^[2], with practical implications for advisers and AFSLs to be aware of.

This article will provide readers with a practical guide to the changes, including their details, their effective dates, and any relevant guidance from ASIC. To give this framework its full context, this article will also explore the background to the changes, the industry response and associated media coverage, as well as a reminder of the Tranche 2 reforms the Government intends to flesh out in the second half of 2024.

From QAR to DBFO

Six months after the QAR report was handed to the federal government, in June 2023, the federal government announced it was happy to accept 14 of Levy’s 22 recommendations^[3], largely intact, with its position on the remaining 8 to be announced later in the year. Much later in the year that clarity came, with the Minister Stephen Jones announcing a second tranche of reform less than three weeks before Christmas 2023^[4].

By the time these changes found themselves presented to parliament as draft legislation – in the Delivering Better Financial Outcomes Bill – some of the tranche 1 changes had been delayed until tranche 2. Among the delayed changes was the one of the headline reforms – the scrapping of SOAs^[5].

Tranche 1 of DBFO is now law

The DBFO legislation received Royal Assent on 9 July 2024, although its passage was not without controversy, particularly around s99FA relating to advice deductions from superannuation (more on that below).

Change 1: Deduction of Advice Fees from Superannuation

The purpose of this change is to clarify the legal basis for trustees to pay advice fees agreed to by a member. Legislatively this required the repeal and replacement of s99FA of the SIS Act, and amendments to the Income Tax Assessment Act to ensure these fees are a deductible expense of the fund and not treated as an assessable benefit to the member.

Trustee obligations around advice fees include the following:

ensure that the advice given is personal
ensure the cost of the advice aligns with the terms of the member’s written consent
ensure the appropriate consent requirements are met, including those ongoing fee arrangements (as per the Corporations Act, requiring a single annual consent form explaining the services provide and fees charged for the 12 months ahead).

While Advisers and other stakeholders will welcome the intent of the Minister to approve a standardised consent form, the drafting of this particular change has remained mired in controversy.

Controversy over s99FA

The drafting of this particular change proved extremely controversial and forced last minute amendments to ensure its passage through parliament. While most welcomed these amendments^[6], some experts believe the clarity hoped for by trustees was not achieved.

Specifically, there was widespread industry concern that the initial wording would require trustees to scrutinise every single SOA before agreeing to a fee deduction. This was clearly sub-optimal on many fronts, raising fees of delays, and a high rate of rejection.

Under the hastily rewritten rules, which did not prescribe the approach to be taken, trustees are now allowed to take a risk-based approach (for example, spot checks conducted by trustees themselves, or by a third party).

While these amendments were widely accepted as having fixed the issue – an issue ASIC said wasn’t actually an issue anyway – dissenting opinions still exist. One prominent Kings Counsel – Bernard Quinn – believes the legislation is still problematic as the original intent of the applicable QAR recommendation was that the law enabled trustees to pay fees “on the direction of the member”. It did not contemplate any compliance role for trustees other than to ensure a member’s consent had been obtained^[7].

In Quinn’s view, the drafting of the legislation – as a prohibition with a suite of exceptions, rather than as a general permission – could be construed by courts strictly, “so as to continue to require trustees to scrutinise aspects of the SOAs provided by financial advisers to fund members”.

How trustees respond remains to be seen, however expect this issue to remain a hot media topic.

Change 1 start date: January 2025

These amendments apply to fees charged on or after the legislation start date, which is 10 January 2025.

Any one-off, complying advice arrangements in place before that date can remain in place until the earlier of:

when the advice is terminated, varied or renewed, or
10 January 2026.

Change 2: Ongoing Fee Arrangements

Another change under Tranche 1 is to ongoing fee arrangements, effectively giving advisers much more flexibility around timing and format.

In summary, the changes:

remove the requirement to provide clients with a Fee Disclosure Statement
codify the requirements into the Corporations Act (Division 3 of Part 7.7A)
repeal civil penalties for failing to advice third party account providers when consent had ceased
require advisers to obtain client consent for ongoing fees via a standardised written consent form
replace “anniversary date” with “reference date” for determining the renewal period, with a new consent required between
- up to 60 days before, and
- on or before 150 days after the reference date.

(This last change introducing far more flexibility than the current 120-day period commencing on the anniversary date of the arrangement).

The legislation empowers the Minister to approve one or more forms in relation to entering and renewing an ongoing fee arrangement, and deduction specific consents, meaning that we could see one or multiple standard consent templates.

At the time of writing this article, no templates had been released, and there was no clarity around when they may become available.

Change 2 start dates

As with other Tranche 1 reforms, the new rules apply to:

new ongoing fee arrangements on or after 10 January 2025,
existing arrangements on or after the first anniversary falling after 10 January 2025.

For ongoing advice in force immediately before the start date, modified renewal dates will apply from the later of:

10 January 2025, or
60 days before the anniversary date of the renewal^[8].

As an example, a client with an anniversary of March 15^th would have 150 days beyond that date (12^th August 2025) to provide fresh consent, failing which the arrangement would terminate. If that arrangement continued, then in the following year, the consent could be renewed up to 60 days prior to the reference date (the original date the arrangement was first entered into).

Change 3: More flexible FSG requirements

While Financial Services Guides are still required, advisers can now choose to provide an FSG via their website, where it must be publicly available (not requiring any logging in or registration to access). The same requirements as apply to written FSGs will also apply – namely they are approved by the adviser’s ASFSL, and:

comply with Corporations Act requirements
are up to date and carry a preparation date.

Change 3 start date

10^th July 2024.

Changes 4 and 5: Life insurance commissions and consent

Tranche 1 saw a new definition of ‘conflicted remuneration’ come into force, removing from the previous definition references to benefits given by the client to the advisers (which inadvertently impacted rules around paying for advice through super).

According to the Explanatory Memorandum^[9] accompanying the draft legislation, conflicted remuneration means:

any benefit (monetary or not) that is given to a financial services licensee or representative of a financial services licensee, who provides financial product advice to retail clients; and
that because of the benefit, could reasonably be expected to influence the recommendation or the advice given by the licensee or their representative to the retail client;
but the benefit is not given or paid by a retail client (or on their behalf) to the licensee or their representative for financial product advice received by that client.

The benefits given by product providers to financial advisers are classed as conflicted remuneration, with exemptions given for commissions payable for life and general insurance and consumer credit.

For life insurance, this exemption only applies to commissions within the caps introduced as part of the Life Insurance Framework (LIF), i.e. 60% upfront and 20% renewal.

Additionally, as per recommendation 13.7 of QAR^[10], to ensure any commission does not work against the advisers Best Interest Duty, an adviser must obtain a client’s consent before they accept any commission.

The consent – a new document – must include the following information:

mame of the insurer
commission rate
if more than one monetary benefit will be given in connection with the issue or sale of the relevant product, the frequency of giving those monetary benefits and the period over which monetary benefits covered by the consent could be given, including any renewals
the nature of any services that the AFSL or authorised rep will provide the client in relation to the relevant product
a statement that “it is a requirement of the law that client consent must be obtained before payment of an insurance commission”, and
the fact that the consent is irrevocable.

Crucially, these guidelines mean that – provided the rate of commission on renewal does not exceed that disclosed in the initial consent – no further consents are required, meaning the consent is a one-off, for the life of the policy.

(If the client doesn’t consent, then the adviser can either agree to provide that advice in exchange for a fee paid by the client, or they can decline to provide advice. This is clearly something that needs to be addressed at the very beginning of the advice process).

Start dates for changes 4 & 5

These changes to the definition of conflicted remuneration commenced 10 July 2024.

The consent requirement commences 9 July 2025 (12 months after the date of Royal Assent), giving the industry up to a year for new standardised consents to be developed.

ASIC to update various Regulatory Guides and Information Sheets

By November 2024, ASIC plans to release new guidelines concerning ongoing fee arrangements and the consents required to deduct fees under non-ongoing fee arrangements, reflecting the changes introduced by the DBFO Act^[11]. ASIC also intends to publish a new Information Sheet regarding Financial Services Guides (FSGs) and the updated website disclosure requirements. This Information Sheet will replace the existing guidance found in RG 175.

Additionally, ASIC will revise RG 246, to reflect the updated conflicted remuneration obligations, as well as amending other related guidance.

Likely timing for Tranche 2?

In a statement shortly after the first DBFO Bill was passed, Minister Jones indicated^[12] that the second tranche of reforms, which include “the government’s commitment to reform statements of advice, modernise the best interests duty and remove the safe harbour steps, and increase the provision of advice by financial institutions” will be developed over the second half of 2024.

Needless to say many are sceptical, believing the current senate logjam, and the Government’s faltering popularity may mean other legislation may take a much higher priority. With some insiders believing the next Federal Election could be as early as December, the precedent set by Tranche 1 suggests we could well be looking the next electoral cycle (by which time we could have a new Government.

Either way, the uncertainty is frustrating, especially given the potential for the scrapping of SOAs and simplifying of Best Interest Duty to streamline red tape, significantly reducing the cost and compliance burdens on advisers.

Conclusion

The Delivering Better Financial Outcomes (DBFO) legislation represents a watershed for the financial advice profession, and broader financial services sector, with Tranche 1 already in effect as of July 2024 and practical implications expected to fully manifest in January and July 2025, and advisers must make themselves aware of, and prepare for, the new regulations, much of which ASIC hopes to clarify by November 2024, when it plans to issue updated Regulatory Guides and Information Sheets.

While the legislation aims to reduce barriers to accessible, affordable advice, the complex and staggered implementation has created confusion and disappointment among advisers and licensees. Controversies, particularly around the deduction of advice fees from superannuation, highlight ongoing industry concerns regarding the practical application of these reforms.

The pending Tranche 2 changes, expected to be developed in late 2024, hold the potential for further streamlining of red tape through the elimination of Statements of Advice (SOAs) and modernisation of the Best Interests Duty. However, political uncertainties may delay these developments, leaving the industry in a state of cautious anticipation. The full impact of these reforms – in terms of their objectives to make advice more understandable, affordable, and sustainable, will clearly not be certain for some time.