How to prepare a fee disclosure statement

Kathryn Wardrobe outlines the steps for preparing your fee disclosure statement (FDS).

As we all know by now, from 1 July 2013, fee recipients must give a fee disclosure statement to certain new and existing retail clients.

The Australian Securities and Investments Commission (ASIC) recently released Regulatory Guide, Fee Disclosure Statements (RG245) provides guidance on the whos, whens, whats and hows of giving an FDS. Although RG245 provides some clarity on FDSs, we are finding that there are still some circumstances which the guidance does not address. Of course, this is not unexpected.   

Here’s what we do know:

• Who must give an FDS;
• Who is entitled to receive an FDS; and 
• How an FDS is to be given.

Here’s what’s a little unclear:

• When an FDS needs to be given;
• What must be included in an FDS;
• What is unreasonably difficult; and
• What is unreasonably onerous.

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We have come up with some simple steps to prepare for the requirement to give an FDS:

1. Collate a list of all retail-only clients

The requirement to provide a FDS only applies to retail clients who are given personal advice. Fee recipients can confidently exclude wholesale-only clients and execution only clients. 

Fee recipients must remember that an FDS must be given to existing retail clients as well as new clients. New clients are clients who enter into an ongoing fee arrangement from 1 July 2013.

In preparation for provision of the FDS, licensees should be focusing on collating a list of existing clients. That is, clients who received personal advice before 1 July 2013. 

Tip: Remember, the obligation to provide an FDS also applies to licensees to whom rights under an ongoing fee arrangement have been assigned. 

2. Exclude clients who are not subject to an ongoing fee arrangement

The obligation to give an FDS only arises if an ongoing fee arrangement exists between the client and the licensee or their representative.  

An ongoing fee arrangement is an arrangement between the licensee (or representative) and the client, under the terms of which the client is to pay any fee (except for a product fee) during a period of more than 12 months.

A product fee is charged by a product issuer for the management and operation of a financial product issued to a client. 

The following are not ongoing fee arrangements:

• Payment plan arrangements where:
  • the total fees payable is fixed and specified when the arrangement is entered into;
  • the fees are payable by instalments over a fixed period;
  • no fee is dependent on the amount invested or advised about; and
  • the client cannot opt out of any of the fees payable under the arrangement.
• Insurance premium arrangements where the only fees payable are insurance premiums.

We also add that, typically, commissions are paid to an adviser under an arrangement between the product issuer and the adviser, and as such would not be covered by the fee disclosure requirements (see Treasury’s Future of Financial Advice FAQs for advisers page). 

Tip: An arrangement under which a client receives unrelated separate pieces of advice does not necessarily constitute an ongoing fee arrangement, even where the client uses the same adviser over a period longer than 12 months (RG245.25). 

Now, you should be left with a list of retail clients who are subject to an ongoing fee arrangement (FDS recipients).  

3. Determine the first disclosure day

The disclosure day is the anniversary of the date that the ongoing fee arrangement was entered into. For new clients this is simple.  

For existing clients, the situation may not be so straightforward. Fee recipients will need to determine when they first entered into an ongoing fee arrangement with the existing clients.

Depending on the circumstances, this may be the date an Authority to Proceed (ATP) was signed or a financial product was acquired by the client (RG245.59).  

Depending on the licensees’ data recording capabilities, this may involve trawling through client files and searching for this date. Fee recipients will also need to consider:

• Has a new arrangement terminated an old arrangement?
• Are there two or more ongoing fee arrangements for the one client?
• Ongoing fee arrangements that have been assigned to the licensee – an assignment does not generally mean the creation of a new ongoing fee arrangement (RG245.58). It will depend on the circumstances. 

No luck?

Where it is impossible or unreasonably difficult to identify the date an ongoing fee arrangement was first entered into, you should adopt a common sense approach (RG245.61).

For example, make the disclosure day for all existing clients 1 July 2013. That means the FDS must be provided before 1 August 2013. 

Where it is impossible or unreasonably onerous to determine the date an ongoing fee arrangement was first entered into, you can notify existing clients in writing of a nominal disclosure day between 1 July 2013 and 31 January 2014 (RG245.62).

ASIC’s no-action position (see below) gives licensees some flexibility to pick a suitable disclosure day.  

In our view, it is unclear when something is unreasonably difficult as compared to unreasonably onerous.

We think the most common examples of this will be if, after making reasonable inquiries, you cannot ascertain the day that the arrangement was entered into: ie, if there is no dated, signed Customer Services Agreement (CSA) or ATP on the client’s file, or if a reasonable inquiry has been made and a dated, signed CSA cannot be located. 

Other examples may be where there is a signed CSA on the file, but there have been financial services provided to the client before that date, so it does not reflect the date the arrangement was first entered in to, and the initial start date cannot be located.  

Examples of reasonable inquiries includes accessing the physical file or, in the case of a paperless office, accessing the online client data and conducting a simple search. It is not enough to say it is unreasonably onerous or unreasonably difficult to determine the day of ongoing fee arrangements. There must be solid reasons to justify this stance. 

Tip: Whatever approach you decide to take to identify the disclosure day, make sure that it is documented and consistent across your client book (RG245.60).  

4. Diarise the first FDS due date

Fee recipients must provide new clients with an FDS before the end of period of 30 days beginning on the disclosure day.

Fee recipients must give existing clients an FDS due date within a period of 30 days beginning on the disclosure day.

Therefore, if the disclosure day for a new client is 1 June, the FDS can be given at any time before 30 June.  If the disclosure day for an existing client is 1 June, the FDS must be given between 1 June and 30 June. 

The wording of the legislation in this regard gives more flexibility to fee recipients to provide the FDS to new clients at a time that is more administratively suitable to them.   

ASIC has set out a no-action position in relation to the FDS due date. It will not take action where a fee recipient provides an FDS to an existing client before the end of period of 30 days beginning on the disclosure day.

Tip: Make the most of ASIC’s no-action position when it comes to determining the FDS due date and treat all FDS recipients as new clients for this purpose. 

5. Consider the content of your fee disclosure statement

An FDS must include:

• The amount of each ongoing fee paid by a client in the previous year, expressed in dollars; not as a percentage;
• The services the client was entitled to receive in the previous year; and
• The services the client actually received in the previous year.

It is unclear the level of detail that ASIC is expecting in a FDS. The level of detail in a FDS is not prescribed by the legislation.

ASIC’s commentary on this matter is that fee recipients will need to determine the level of detail needed to communicate the required information clearly and effectively, including how services and fees should be described and presented in the statement (RG245.32). 

Tip: Remember this includes services the client was entitled to receive, and actually received, from any previous fee recipient. 

It is already proving challenging for some licensees to capture some of the fees paid, particularly from third party providers, where information is only reported to the fee recipient periodically.  

Tip: In our view, the FDS should include what information is readily available. Set out in the FDS an estimate of the amount accrued in the final month that is not fully available, and separated from the actual fees charged.

A warning could explain that the final amount is an estimate only, and further detail can be provided upon request, because it will be available within 30 days.

Commission payments are generally not required in an FDS, except if it is too difficult to determine the breakdown of commission and advice fees, in which case ASIC considers that they should disclose all of the fees in the FDS (RG245.39).

Despite this, some fee recipients have voluntarily decided to include all information regarding fees and commissions in an FDS, in the interests of full disclosure and also using the opportunity to engage inactive clients. It also may assist in “reconciling” the remuneration and benefits disclosed in the SOA and the fees in the FDS.  

Tip: When considering the content of your FDS, be sure to consider the impact on the client of receiving an FDS with certain financial information, and other disclosure documents such as a statement of advice, with differing financial information. Will this be confusing?  

Tip: You may consider amending the wording of your ongoing fee arrangement documents for future clients to ensure they are worded in a way that is easy to report against. 

6. Warn clients

An FDS must be provided to a client in writing. RG245 clarifies that an FDS can be provided to a client personally, by post, email or via secure online portal (RG245.47).  

ASIC encourages fee recipients to agree to an appropriate form of communication of the FDS with their clients (RG245.48). In light of this, you may choose to take the opportunity to warn clients that an FDS will be provided to them and explain what this means.

Kathryn Wardrobe is a lawyer at Holley Nethercote Commercial and Financial Services Lawyers.