‘Poor drafting’: KC reignites s99FA debate in expert legal opinion

In what Association of Independently Owned Financial Professionals (AIOFP) executive director Peter Johnston called “arguably the best investment the AIOFP has made on behalf of its members and the wider advice community”, the association has released an expert legal opinion on section 99FA of the SIS Act from Bernard Quinn KC.

According to Quinn, the new s99FA has not fixed the issues that Quality of Advice Review (QAR) lead Michelle Levy identified.

In Recommendation 7 of her final report, Levy put forward the need for changes to the SIS Act that would “provide superannuation trustees with more certainty about paying advice fees agreed between a member and their financial adviser from the member’s superannuation account and ensure that advice fees are not paid in breach of the SIS Act and are not taxable benefits for members”.

“In my opinion, the new section 99FA remains problematic from a regulatory and compliance perspective,” Quinn wrote in the opinion.

“This is essentially because it fails to faithfully and clearly implement the relevant recommendation of the Quality of Advice Report, namely Recommendation 7, and will accordingly not achieve the central objective of that recommendation.”

The crux of Levy’s recommendation, Quinn wrote, was to change the law to enable trustees to pay advice fees from a member’s account for personal advice about the member’s interest in the fund “on the direction of the member”.

“Recommendation 7 did not contemplate that such payments remain conditional upon anything other than a member’s informed consent,” he wrote.

“In particular, it did not contemplate any compliance burden upon superannuation trustees as a condition of authorising payment other than ensuring that the member’s consent had been obtained.”

Indeed, the KC argued that aside from using the term “recommendation 7 amendments” as a descriptor for the s99FA changes, “the form of the provision does not reflect the essence of Recommendation 7 or the objective of minimising red tape for superannuation trustees”.

Framed as a prohibition with exceptions

During the Senate economics legislation committee hearings in June, Nathan Hodge, the head of submissions for the Law Council of Australia superannuation committee, said the legislation did not achieve the government’s stated policy intent nor that of the QAR.

“The government’s response [to the QAR final report] in June 2023 was that superannuation trustees would be provided with legal clarity regarding current practices for payment of advice fees … Proposed section 99FA remains drafted as a prohibition,” Hodge said.

“It contains no express permission to pay advice fees, and accordingly there’s no improvement in legal clarity regarding the payment of advice fees.”

In Quinn’s opinion, the version of the changes that made it through Parliament and subsequently received royal assent retains this flaw.

“In particular, section 99FA is drafted as a general prohibition subject to a suite of exceptions rather than being expressed as permissive but subject to the single condition of informed consent,” he wrote.

“This leaves open the possibility that several of the paragraphs of the new section 99FA(1) and (2) may be construed by courts and regulators strictly so as to continue to require trustees to scrutinise aspects of the statements of advice provided by financial advisers to fund members.”

The only fix for the lack of clarity regarding how the provisions would be executed would be a legislative amendment that “altered the form of the provision from prohibitive to permissive and expressed the power to pay personal advice fees to financial advisers from superannuation funds as being conditional only on the member’s informed consent”.

The regulators have been consistent in their communication around how they view super fund trustee obligations regarding advice fees, pointing to joint letters from 2019 and 2021 as indicative of how they would proceed going forward.

Speaking at an FAAA roadshow event in Sydney in May, ASIC commissioner Alan Kirkland assured that the corporate regulator does not see a need for superannuation trustees to verify every statement of advice (SOA).

“We’ve been trying to provide some early guidance in relation to the issue … around the obligation of superannuation trustees, to clarify that under those proposed reforms, as under the current law, it’s not our view that super trustees are required to check every statement of advice and we’ll continue to do our best to make that clear,” Kirkland said.

However, the Australian Securities and Investments Commission’s (ASIC) release of Report 781 less than a week later, in which the regulator warned against “inadequate oversight of advice fee deductions”, raised eyebrows among the advice sector.

Quinn noted that, “without clear and unambiguous direction or guidance from ASIC and/or APRA to the contrary”, super trustees could opt for a more stringent reading of the legislation.

“Many prudent trustees may receive advice to, and will likely, take a conservative approach to the operation of the provision to minimise risk of contravention rather than focusing on facilitating payment requested by members for the timely provision of ‘good’ advice by their financial advisers,” he wrote.

‘Legitimate privacy concerns’

A consistent argument against even a risk-based sampling approach to SOA checks, which is how many super fund trustees are likely to operate as things stand, is that there are potential privacy breaches brought about through the sharing of SOAs.

Labelling these “legitimate privacy concerns”, Quinn argued that as clients often seek advice beyond that relates to their broader financial position, there are ethical issues for financial advisers.

“They may also seek advice about other superannuation funds, non-superannuation investments, insurances and strategies. Such advice is likely to contain information that is personal and confidential to the client, unrelated to the affairs of the fund and to which the trustee does not have access,” Quinn wrote.

“That information would also be irrelevant to the discharge of the trustee’s obligations under section 99FA. This may, in turn, raise concerns about the potential breach by financial advisers of ethical obligations owed to clients to maintain confidentiality over information and advice.”

Calling a process of obtaining informed consent to share the information “inefficient and intrusive” for the client, Quinn added that “an approach to the construction of section 99FA that avoids these privacy concerns would be preferable, and regulators, and hence trustees, ought place weight upon this consideration”.

He concluded that, ultimately, the approach of the courts and regulators will play a large role in whether the “poor drafting” of s99FA results in outcomes for superannuation trustees, fund members and financial advisers that are inconsistent with the intent of Recommendation 7.

“A correct approach to statutory construction should ensure that such guidance does not impose upon superannuation trustees any burden of considering the substance of statements of advice from financial advisers to fund members,” Quinn wrote.

AIOFP response

Quinn’s opinion, which was instructed by Hamilton Locke partner Simon Carrodus on behalf of the AIOFP, was received positively by Johnston.

“We conclude that ASIC, Treasury, the Minister’s office and all sides of politics could not have fully understood what they were constructing or voting on, and the legislation should be unilaterally abolished,” he said.

“Conversely, if anyone did fully understand what they were doing they should NOT be working for or funded by taxpayers and consumers to act in their best interests.”

Taking aim at the “second tier Canberra public service legal minds recommending substandard policy outcomes to politicians”, Johnston said consumers and businesses “deserve better than this”.

“In future we suggest the government instructs ASIC and Treasury to seek advice from KCs like Mr Quinn to eliminate unintended consequences and other poor outcomes for consumers with policy initiatives before parliamentary consideration,” he said.

AIOFP technical chair Lionel Rodrigues, who had previously noted the changes to s99FA still “fail to provide statutory clarity”, added that the legislation as passed missed an opportunity to simplify the advice process for super members and advisers.

“The new section 99FA is inconsistent with the aims and intent of QAR Recommendation 7. Simply put, to cut red tape, it was recommended that advice fees be paid ‘on the direction of the member’,” Rodrigues said.

“The QAR did not stipulate any further conditions. The reality is that due to poor legal drafting, the intent of Recommendation 7 has not been achieved, resulting in higher opportunity costs for the member and an opportunity lost to make quality financial advice accessible and affordable.”

The AIOFP had flagged its intention to challenge the legal validity of s99FA in May, seeking an initial legal opinion from Carrodus before obtaining a KC’s opinion to “back-up our view that the legislation is flawed, unworkable and not in the best interests of consumers”.

Carrodus told ifa at the time that many of the problems with the new version of s99FA were also present in what was, at the time, the current version of the legislation, and blocking the legislation would have meant the industry was “left with the status quo, which is also not ideal”.

“The changes to s99FA don’t really move the needle. The industry was looking for something more significant and [Minister Stephen Jones] really hasn’t provided that,” Carrodus said.

“He’s dropped the ball on Recommendation 7, even though his media releases say, ‘We’re streamlining it, we’re implementing it’. He’s missed an opportunity here.”

Given this, it is little surprise that the last-minute amendments to s99FA, moved by the minister just hours before the first Delivering Better Financial Outcomes (DBFO) legislation passed both houses of Parliament in June, have done little to allay the AIOFP’s concerns.

Johnston also told members he had forwarded Quinn’s expert legal opinion to other associations for consideration.