Questions and Answers: Disclosure Obligations for Financial Intermediaries

[ Last Updated 2 December 2005 ]

4 August 2005

(1) Which Advisers Are Covered by the Disclosure Obligations?
(2) What details will need to be disclosed?
(3) What Remuneration Details Will Need to Be Disclosed?
(4) Does the Disclosure Have to Be the Exact Dollar Amount?
(5) How and When Do I Have to Make the Disclosure?
(6) How Useful Is This Information to Consumers?
Appendix A: Recommended Disclosure Requirements

(1) Which Advisers Are Covered by the Disclosure Obligations?

All intermediaries are covered by disclosure obligations specific to their function. For example, those intermediaries who are offering personal financial advice or are marketing specific products have more extensive obligations than those carrying out an information-only or execution-only function.

(2) What details will need to be disclosed?

The Task Force recommends that, in general, the Investment Adviser disclosure regime in the Securities Legislation Bill should be extended to cover:

Advice on or marketing of any ﬁnancial product within the scope of the recommendations, including risk, investment property and credit. This will include most life insurance agents and mortgage brokers;
Financial intermediaries providing ﬁnancial advice without advising on ﬁnancial products. This will include some ﬁnancial planners and budget advisers; and
Information and execution only intermediaries.

For information only and execution only intermediaries, the Task Force has recommended reducing the broad requirements of the Securities Legislation Bill. These are summarised in the table [in section 8] of the final report together with the additional disclosures recommended by the Task Force. This is attached to this note as Appendix A.

(3) What Remuneration Details Will Need to Be Disclosed?

All intermediaries regardless of function will be required to disclose the nature and level of any fee that the intermediary will charge.

The proposed new section 41F of the Securities Act defines remuneration to include "a commission, fee, or other benefit or advantage, whether pecuniary or not, and whether direct or indirect; but does not include a salary or wages of a fixed amount." The same section requires disclosure of, to the extent practicable, "the amount or rate of the remuneration and the name of the person from whom the remuneration has been, or will or may be, received".

The Task Force supports extending this requirement to all intermediaries performing a personal financial advice function or a product marketing function.

(4) Does the Disclosure Have to Be the Exact Dollar Amount?

Respondents to the Task Force's Options for Change paper agreed that effective disclosure documents should be simple, clear, and concise. The Task Force supports suggestions that disclosure documents be standardised where possible, place important information prominently, provide dollar amounts rather than percentages and be clearly distinguishable from marketing material.

(5) How and When Do I Have to Make the Disclosure?

The final content and form of disclosure will need to be established.

The Task Force recommends that all intermediaries carrying out a personal financial adviser function are subject to a statutory standard to agree with the consumer in writing the amount or formula for the intermediary's remuneration. Under the Task Force's proposal, Approved Professional Bodies could require the arrangement between the intermediary and the consumer to have some or all of the following features:

All commission payable to the intermediary would belong to the consumer;
The consumer and intermediary would agree the amount or formula payable for the intermediary's services (this could be an agreed fee, an hourly rate, a proportion of funds under management, or some other agreed arrangement);
That amount or formula is all the intermediary would be entitled to unless agreed otherwise; and
If the consumer and intermediary agree, the amount payable to the intermediary by the consumer could, in whole or part, be deducted from any of the consumer's commissions received by the intermediary.

The Task Force recommends initial disclosure with an obligation for subsequent transaction-related disclosures if there is a material change in the matters required to be disclosed. Further work is required on which of the disclosure elements are suitable to initial, and which to ongoing, disclosure.

(6) How Useful Is This Information to Consumers?

The Task Force agrees that disclosure needs to be consumer focused, and analysed from the perspective of benefit to the consumer. Consistent with this, the Task Force thinks that before determining the final content and form of disclosure there is considerable value in researching consumer views on what consumers would consider useful information and what form of disclosure would be most effective in conveying that information.

Overall, the Task Force views disclosure of fees and remuneration as contributing to two positive outcomes, namely:

Assisting the management of conflicts of interest; and
Facilitating a better informed market providing opportunities for competition between suppliers in respect of fee structures and fee amounts.

Appendix A: Recommended Disclosure Requirements

Recommended disclosure requirements	Information only function	Execution only function	Product marketer function	Personal financial adviser function
Experience				Yes
Qualifications				Yes
Membership of professional bodies				Yes
Nature and scope of any professional indemnity insurance				Yes
Whether dispute resolution facilities are available to consumers		Yes	Yes	Yes
In the previous five years before the service is provided:
relevant convictions		Yes	Yes	Yes
whether the adviser has been adjudicated bankrupt		Yes	Yes	Yes
prohibitions from managing a company or business		Yes	Yes	Yes
any successful court action taken against the financial intermediary in the intermediary's professional or business capacity		Yes	Yes	Yes
whether the intermediary has been expelled from or prohibited from being a member of a professional body		Yes	Yes	Yes
The nature and level of the fee the intermediary will charge (if any)	Yes	Yes	Yes	Yes
Other interests and relationships reasonably likely to influence the intermediary in performing their function, such as relevant remuneration received from someone other than the consumer, and the amount or rate of remuneration			Yes	Yes
Details of the types of products about which the intermediary gives advice or markets and, if the intermediary only advises or markets in relation to products of a particular product generator or generators, a statement to that effect and the name of each of those product generators			Yes	Yes
Disclosure in dollar terms, on a periodic basis, of the difference between the aggregate gross returns on all investments organised though the financial intermediary, and the actual net return received by the consumer, with an explanation of the difference			Yes	Yes
To the extent practicable, total benefits to the intermediary of the consumer's business (including "soft dollar" benefits) where those benefits are not already disclosed as part of the actual gross and net gross return disclosure above			Yes	Yes
The role being undertaken by the intermediary, including a statement as to whose interests the intermediary is acting in and a description of those interests, and for product marketers, a "health warning" about the limitations in the information provided (for example, "I have not considered your personal circumstances, and accordingly, the product may not suit your needs")			Yes	Yes
Remuneration options, if any (that is, hourly rate, fee only, commission rebate) and whether any components of the remuneration are variable	Yes	Yes	Yes	Yes
Where advice or marketing relates to switching products, disclosure of remuneration to the intermediary, the cost to the client (for example, exit fees, entry fees and implementation fees), and the benefits of the alternative as against the existing product		Yes	Yes	Yes

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Printed: 25/11/2009