Quality of Advice legislation – Treasury removes proposed regulatory burden on superannuation trustees

On 4 July 2024, Treasury agreed to make further amendments to the proposed section 99FA of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) in the Treasury Laws Amendment (Delivering Better Financial Outcomes and Other Measures) Bill 2024 (Cth) (Bill), significantly decreasing the proposed regulatory burden on superannuation trustees regarding when they may deduct financial product advice fees from members’ superannuation.

Herbert Smith Freehills has advised the Financial Services Council (FSC) on changes to the Bill. The response by Government is consistent with our recommendations.

Proposed amendments to legislation

The existing section 99FA of the SIS Act prevents a trustee from charging an individual member for financial product advice unless the charge is paid according to an arrangement with the member, the member has expressly consented to being charged, and the trustee holds that consent.

The Bill proposes changes to section 99FA which are said to clarify the law for payment of advice fees from members’ superannuation accounts in the interests of facilitating better access to advice.

The first version of the Bill repealed the existing section 99FA and put forward a new section 99FA which superannuation trustees must satisfy before advice fees can be deducted from individual members, as follows (section 99FA(1)):

1. The financial product advice is personal advice and wholly or partly about the member’s interest in the fund;
2. The amount charged does not exceed the cost of providing financial product advice about the member’s interest in the fund;
3. The member has consented to the costs and the trustee has deducted the cost in accordance with the terms of that consent;
4. If the arrangement under which the advice is provided is ongoing, applicable requirements under Division 3 of Part 7.7A of the Corporations Act 2001 (Cth) are met;  
5. If the arrangement is not ongoing, the consent or request satisfies particular requirements set out in section 99FA(2); and
6. The trustee has the original request or consent, or a copy of the same.

Industry response

The first two criteria, in section 99FA(1)(a) and (b) (Items 1 and 2 in the list above), received significant industry criticism. Industry was concerned that they imposed a significant regulatory burden on trustees for compliance.

Section 99FA(1)(a) and (b) were absolute, objective standards, which would require trustees to review, and positively confirm that the advice was personal advice, was wholly or partly about the member's interest in the fund, and that the amount did not exceed the cost of providing advice. If the trustee did not confirm these criteria, and it was discovered that the advice did not comply at a later date, the trustee would be in breach of the SIS Act.

This standard could produce unintended consequences, including unreasonable due diligence, additional risk for trustees, and magnified costs, which would ultimately be borne by members. These consequences could lead trustees to limit the amount of advice provided to members, which would directly contradict Treasury’s policy intention under the Quality of Advice Review.

We also raised an additional point around the fact that the original drafting for section 99FA only allowed trustees to deduct the actual costs of advice incurred by a third-party adviser, and not any profit element for a third-party advice practice.

Herbert Smith Freehills, working with FSC and the industry, raised these concerns regarding the Bill as part of the Senate process.

Government response

Treasury has since confirmed that Item 2 of Schedule 1 to the Bill will be amended to:

1. omit language in section 99FA(1)(a) requiring relevant financial product advice to be wholly or partly about the member’s interest in the fund; and
2. repeal section 99FA(1)(b), requiring the amount charged to not exceed the cost of providing financial product advice about the member’s interest in the fund.

This position has been adopted on the basis that these requirements replicate existing, broader trustee obligations housed under the sole purpose test and best financial interests duty.

In our view, the new drafting of section 99FA is neutral and permissive as to how a trustee can satisfy itself that monies outlaid from the fund in relation to advice are appropriately expended, provided the trustee acts prudently and reasonably. This means that the trustee could satisfy itself that it will not breach section 99FA through a number of possible reasonable measures, including:

• information provided by the member;
• information provided by a licensee or adviser;
• the trustee investigating and obtaining its own information;
• the trustee’s own ongoing monitoring of advice; and
• audits and spot checks of advice, done by the trustee or a third-party reviewer.

The point is that there is no one single mandated source of truth or technique which the trustee must deploy, such as reviewing statements of advice. This is a very welcome outcome and one which is good for trustees, and for encouragement and stimulation of member’s access to quality and affordable advice. We consider there is still more work to be done to assist trustees. Section 99F remains unchanged in the Bill. However, we welcome these positive steps to make it easier for trustees to provide advice.