Advice fees from super – important changes for advice licensees

It pays to understand super trustees’ obligations as modified by the DBFO Act when it comes to advice fees.  For an advice licensee, this will be useful when it comes to understanding the obligations of a retail or industry super trustee but also for understanding the obligations of any SMSF trustee clients.

Obligations for super trustees

Even though conflicted remuneration provisions governing the charging of advice fees to super (see below) are already in effect, modifications to the Supervision Industry (Supervision) Act 1993 (SIS Act) designed to operate in tandem with these do not become effective until 10 January 2025.

The trustee will not be able to charge against a member’s interest in the fund the cost of financial product advice provided to the member unless:

• the advice is personal advice;
• the trustee charges the cost in accordance with the terms of a written request or written consent from the member;
• if the arrangement under which the advice is provided is an OFA, the OFA requirements and deduction (and arranging deductions) requirements are met;
• if the arrangement under which the advice is provided is not an OFA, the request or consent satisfies further requirements (which I have set out below);
• the trustee holds the request or consent, or a copy of it.

A note to the provision in the legislation reminds the reader that the trustee must act in the best interests of the beneficiaries and comply with the sole purpose test in paying advice fees from super.  You will recall that this test states that a super fund must be maintained for one or more core and ancillary purposes.  These relate to the provision of benefits at retirement, old age, ill-health, and death.[i]

The following requirements were nearly included in the above list but removed by the Parliament after concerns were expressed about the compliance burden that would be faced by super trustees if they had to check these items in relation to every piece of advice funded.

• the financial product advice is wholly or partly about the member’s interest in the fund; and
• the amount charged does not exceed the cost of providing financial product advice about the member’s interest in the fund.

The note about best interests and sole purpose test reflects the Parliament’s ultimate view that these requirements will effectively mean the above two bullet points are met in any event.

The further requirements for advice fees paid other than under an OFA are that the written request or consent from the member must include:

• the name and contact details of the member;
• the name and contact details of the provider of the financial product advice;
• the name of the fund from which the cost of the advice is requested to be paid;
• a brief description of the services the member is entitled to receive under the arrangement;
• a request from, or consent by, the member for the cost of the advice to be paid by the trustee and charged against the member’s interest in the fund;
• either:
  • the amount to be paid for the advice; or
  • if the amount to be paid for the advice cannot be determined at the time the request is made, or the consent is given, a reasonable estimate of that amount and an explanation of the method used to work out the estimate;
• either:
  • the amount to be charged against the member’s interest in the fund; or
  • if the amount to be charged against the member’s interest in the fund cannot be determined at the time the request is made, or the consent is given, a reasonable estimate of that amount and an explanation of the method used to work out the estimate;
• the member’s signature; and
• the date the request is made or the consent is given.[ii]

The pre-existing position is that parameters for this consent are set out in ASIC Superannuation (Consent to Pass on Costs of Providing Advice) Instrument 2021/126.  These new parameters appear in the legislation and are a little different to the pre-existing ones.

The Minister may make a form for this request/consent and if they do, the trustee must use it.

If the cost of financial product advice is shared between the member and other members of the fund, these provisions do not apply and the trustee needs to have regard to a different set of provisions.

How super trustee’s obligations may impact advice licensees

The trustee’s obligations are relevant to you because an industry or retail super trustee may:

• from time to time, ask you for evidence that personal advice has been provided in return for the fee being charged – to satisfy itself that it is meeting its obligations;
• from time to time, where the advice is provided under an OFA, ask you for evidence that the OFA requirements and arrangement for deduction requirements have been complied with – to satisfy itself that it is meeting its obligations; an
• for advice provided other than under an OFA, ask for your input into the request/consent document.

They are also relevant to you to the extent that you will not want to cause any SMSF super trustee clients to breach their regulatory obligations.

These requirements apply to super trustees from 10 January 2025, regardless of whether the arrangement (whether an OFA or other kind of arrangement) under which the advice is given was entered into before or after that date.  But, for arrangements entered into prior to this date, a written consent complying with the old requirements is satisfactory until the earlier of 10 January 2026 or the day the arrangement is terminated, renewed or varied.[iii]

Some of this sounds quite similar to what was already in place for super trustees.  Key changes to note are:

• the fact that only fees for personal advice can be paid from super in relation to a member (whereas previously general advice fees could also be paid in this way);
• the relevant provision of the SIS Act has been reworded to reflect that the fee is charged ‘against the member’s interest in the fund’, whereas previously the reference was to passing on the cost of advice to a member – this is presumably to make it clearer that this is a form of ‘client pays’ (which is a relevant consideration for conflicted remuneration purposes) and should not be regarded as a payment by the trustee in itself; and
• a reference to ‘request’ has been added as an alternative to ‘consent’.

Changes have also been made to the Income Tax Assessment Act 1997 to accommodate the payment of fees from super in relation to personal advice.  These changes are designed to provide legal certainty that payments of certain personal advice fees by a super trustee from the member’s interest in the fund are deductible from the super fund’s assessable income and are not a superannuation benefit for relevant members.

Administration of the new provisions has been conferred on ASIC, despite most of the SIS Act requirements being administered by APRA.  This is worth noting for advice licensees, as it means that, if ASIC identifies problems with the ways personal advice fees are being paid, it is fairly quick and easy for it to pivot and focus on any advice firm or adviser involved, as these are also in its usual remit.

Obligations for advice licensees and representatives

When it comes to the circumstances in which a trustee is permitted to pay an amount out of super for a member receiving advice, don’t be fooled into thinking that only the trustee is on the hook here – not just for the above reasons, but also for the ones which follow.

As part of the DBFO Act conflicted remuneration reforms, clarification has been made that payment to a licensee or representative from a client’s super account is not conflicted remuneration where the payment relates to personal advice provided to the client by the licensee or representative.  Ms Levy recommended that a specific provision be inserted in the legislation making this clear, rather than licensees and representatives having to rely on the not-so-well-drafted client pays exemption (outlined above).[iv]

However, be very careful about understanding how and when this exemption applies.  It only applies where the benefit is:

• given to the licensee or representative by a trustee of a super fund;
• given in relation to personal advice, which is provided by the licensee or the representative to a client, about the client’s interest in the fund; and
• charged against the client’s interest in the fund, or against the interests of the client and other members of the fund.[v]

If you receive payment from a client’s super, it could be conflicted remuneration if it does not meet the bullet points listed above.  If you want to be able to receive fees from a client’s super account, you must make sure that you only do this where the fees are for personal advice relating to the client’s interest in the fund.  If you do not tick these boxes and the payment otherwise meets the definition of conflicted remuneration, you are in trouble.

For some licensees, this means giving up lucrative arrangements under which they receive fees from super for the provision of general advice.  For others, it means being more careful about ensuring that the client’s super account is not used to pay for personal advice in relation to other super funds or topics other than superannuation, such as life insurance outside super or investments outside super.  You may need to change your advisers’ habits and monitor their practices closely on this front.

At first blush, these requirements seem ominous.  But, remember, you only need to meet them where the payment would otherwise meet the definition of conflicted remuneration.  Also, there might be times where you are providing advice or other financial services to the trustee of a super fund in its own right (rather than to an individual member).  In that case, the client pays exemption may apply.

Author: Samantha Hills (Partner)

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[i] Section 62 SIS Act.

[ii] In fact, the section only refers to the date the request is made but one would assume that the intention is that it alternatively include the date consent was given.

[iii] Section 3, Part 1, Schedule 1, DBFO Act.

[iv] She also noted that the interpretation of the client pays exemption in the Corporations Act 2001 as allowing the payment of advice fees from super was problematic given that the Superannuation Industry Supervision Act 1993 did not specifically authorise a member to direct the super trustee to pay an advice fee on their behalf.  Her recommendations included a fix to the SIS Act to address this, and the DBFO Act obliges.  But note that the conflicted remuneration change is already active, whereas the SIS Act change will not become active until 10 January 2025.

[v] The ability for the fee to be charged against the interests of the client and other members of the fund is limited by section 99F of the SIS Act, which places strict limitations on the trustee in this regard.  Where charged against the client and other members of the fund, this advice is known as intra-fund advice.