Traps of transitioning to a limited licence

Accountants sometimes make off-the-cuff statements to clients about the need for life insurance or the benefits of holding securities in pension phase for tax reasons. Technically statements like this are financial advice, but it’s generally understood it’s been occurring anyway. ASIC has included 'class of product' authorisations on the limited licence to make these activities lawful.

Some accountants, however, are only seeking authorisations for SMSF advice, either because they don’t understand the class of product authorisations, or can’t identify when a statement is advice.

Accountants who don’t obtain those authorisations can’t say things like “you need life insurance”. Instead, they can only give factual information about what life insurance is and what it does. In general, many accountants categorise financial advice statements as “factual information” or make comments like “it was just a stock tip” or “I just told him what I’d do”. These statements are regulated advice. Sometimes accountants categorise the advice as 'tax advice', but it can still be regulated financial product advice.

New advice requirements

The best interests duty will apply to accountants under the AFS regime. One area ASIC scrutinises heavily is whether an adviser has sufficient records to demonstrate the advice is appropriate. If accountants don’t keep detailed records and file notes, they won’t be able to demonstrate the advice is in the best interests of the client – and they will also breach the licence condition requiring records to be kept for at least five years demonstrating compliance with each step in the 'safe harbour' test.

Connected to the best interests duty is the conflicts of interest obligation. Of course, it is more challenging to act in the best interests of a client where a conflict exists. This will particularly concern the new ‘one-stop shop’ style accountants, who recommend an SMSF, and then move the client around through their finance, property and SMSF administration departments for assistance on the rest of the transaction. These types of arrangements will be subject to a higher degree of ASIC scrutiny under an AFS regime.

Old requirements in the spotlight

Regulation under the AFS regime puts accountants squarely in ASIC’s sights. This means failure to comply with pre-existing requirements could also be a concern. Some examples include:

• Misleading or deceptive conduct – this obligation already applies but will now be more closely monitored. ASIC is already cracking down on the SMSF space and calling various businesses, including accountants, to answer for misleading statements about SMSFs on websites. Once accountants hold a licence or are authorised representatives, such breaches will also affect their licence, as it will be a breach of the licence conditions;

• Consumer credit regulation – accountants are in the unusual position of being able to suggest specific loans to corporate SMSF trustees, but not individual trustees, with an Australian credit licence. This is not necessarily well understood, and accountants who suggest loans or financiers to trustees for LRBA arrangements may find themselves in hot water with ASIC for breaches of the National Credit Code as a result of ASIC checking on compliance with AFS requirements.

Financial services offered as a ‘convenience’

Many accountants currently do things like open bank accounts or handle share applications for select clients. The current exemption often means they can do this because they don’t yet meet the threshold test of ‘carrying on a financial services business’, which triggers the need for an AFS licence. Once an accountant has a licence, however, they can only provide the financial services for which they are authorised – and a limited licence won’t allow an accountant to open bank accounts or make share purchases on behalf of clients.

Changing accounting practices

Most accountants currently charge fixed-fee or hourly rates, but there has been substantial discussion about how accountants can manage the cost of compliance and charge fees that reflect the value they provide, particularly in respect of the incidental advice clients currently receive for free.

One option is to move to an annual service fee package, like many financial planners do, and charge clients for annual reviews of the adequacy of SMSFs and assistance with strategic advice and investment plans. This enables accountants to ‘annualise’ some of their client fees into recurring revenue.

However, the consequence of such an arrangement is that it would trigger a fee disclosure statement and opt-in requirements. These particular obligations are not much discussed currently because they don’t apply to the majority of accountants. There is a risk that early adopters of new fee models could fall foul of these requirements if they are overlooked or slip from the mind with the passage of time.

These traps make it critically important that accountants undertake more training than simply RG146 – training such as a Responsible Manager Masterclass or Statement of Advice training, that focuses on what a financial service is, and how this applies to accountants, together with details of the disclosure and other licensing obligations. This will go a long way to equipping accountants to avoid these pitfalls.

Jaime Lumsden Kelly, solicitor director, The Fold Legal