The first tranche of FoFA proposals deal with three main issues: introducing a “best-interest” duty, bringing in an opt-in requirement and increasing ASIC’s powers.
Best interest duty
The accounting profession has long believed that financial advisers, just like accountants, have always had an overriding duty to act in the best interest of their clients. We believe that it is important that this requirement be enshrined in legislation. We have therefore supported the Government in introducing the “best interest” duty. If taken to heart by advisers and enforced by ASIC it will be the single most important change brought about by the FoFA reforms. However, it is now up to both advisers and ASIC to make the most of the new beginning.
In simple terms the “best interest” duty requires that advisers always put the interests of their clients ahead of all other interests, including their own and that of their licence holder. This requires the adviser to consider and set out not only the positives of any advice but also the negatives of any new advice and the consequence of both making a change and also not making a change. Only where it can be shown that it is in the best interest of the client can the adviser be sure they have met the new legislative requirement.
Proposed Section 961C requires that: “The provider must act in the best interests of the client when giving the advice” and that this is demonstrated by:
- identifying objectives and needs of the client
- identifying the subject matter of the advice
- talking with the client to identify any additional information to ensure proper advice can be given
- determining if the adviser has the skills and capacity to provide appropriate advice given the issues above
- determining if the client’s needs could be better achieved through something other than a financial product (eg pay down debt)
- conducting a reasonable investigation of potential financial products to meet the client’s need or assessing the recommendations of another to see if they suit the client’s needs, and
- weighing up the pros and cons of any advice, including whether it is better to not make changes to the client’s current investment portfolio and then only recommending a new or altered product recommendation where it can be shown to be in the client’s best interest to make such a recommendation.
The requirements to be considered, we believe, are appropriate without being excessive and are issues that should have always been considered when providing financial product advice.
Extent of advice
The one concern the accounting bodies have relates to the issue of limited advice. Where a client has only asked in relation to a specific type of advice or product, how far does the adviser have to go in considering other issues to fulfil their obligations? We are seeking clarification on this question when the client has set express limitations on the advice they are seeking.
One example is in relation to whether to set up a self-managed superannuation fund (SMSF). Just because the client has asked the adviser to set up an SMSF does not mean the adviser isn’t required under the best-interest duty to consider other forms of superannuation and whether an SMSF is really in the best interest of the client. If the client is advised against an SMSF but insists on setting one up, the adviser must then act on their client’s instructions. However, one interpretation of the best interest duty would be that the adviser can refuse to act on their client’s instructions. This would seem absurd.
A reasonable approach
The Joint Accounting Bodies believe the best interest duty should include a “reasonable steps” qualification so that financial planners would only be required to take reasonable steps to discharge their duty. However, the Explanatory Memorandum clearly states the steps required under section 916C are not exhaustive and are not intended to operate as a checklist for compliance with the best interest obligation. This raises the possibility that an adviser could be held liable even where they have taken reasonable steps. Just as tax agents should only be required to take reasonable steps to ascertain a client’s tax position, planners should be able to rely on a reasonable steps defence when dealing with limited scope advice.
The accounting bodies believe that a best interest duty is to be preferred to a fiduciary duty. While we believe that in some ways they are alike, the legal definition of a fiduciary duty is subject to a variety of interpretations and it is preferable to have a framework which is simple to understand. We believe best interest is preferable because it is more easily understood and does not come with the legal baggage that fiduciary duty has. For these reasons we would like to see the APESB, when it finalises APES 230, adopt the best interest duty over the current proposal for a fiduciary duty.
Opt-in requirement
Opt-in is one of the more controversial issues and one that is being opposed by many financial planners. In its most simple form opt-in is the requirement that a client agrees or “opts in” to receiving ongoing advice for a fee. This is to ensure that if a client is going to pay ongoing fees they are aware of this, agree to it and actually get something for that fee. Currently with trailing commissions many financial planners receive ongoing fee income from clients they have either never met (having bought the ongoing fee base) or have not seen in many years.
We believe that it is important that there is an ongoing relationship between the adviser and clients. We believe that financial advice needs to be less about the product and more about the advice. This can only be done by having a proper understanding of the client’s individual needs. We would also argue that the best interest duty requires the adviser to have an intimate understanding of their client and the client’s needs. This cannot be maintained without regular ongoing contact with the client. Therefore if the adviser is having regular contact with the client there should be no problem with opt-in.
The APES 230 proposal for accountants providing financial advice would be for at least annual opt-in. This will usually be done through the use of an engagement letter setting out the terms of the engagement, including costs. As accountants are used to having an ongoing client relationship, and understand this is the only way to truly understand their client’s needs, we see no concern with the opt-in proposal.
We would like to see the planners take a more client-centric view when considering opt-in. We believe it is integral to ensuring they meet the best interest test that an ongoing relationship exists, that this relationship is documented and that clients understand what they are paying for. Opt-in every two years is, in our view, the minimum required to maintain the best interest requirements.
We are concerned at efforts to further water down these requirements – particularly the message it sends that the financial planners have not truly changed to a client-centric advice model. Therefore regardless of what the law requires, we will be pushing members to have an annual renewal with their clients and to develop a strong client relationship based on providing a range of services the client wants and values.
ASIC regulatory powers
ASIC believes the current law has limited its ability to act proactively. It says that the current law means it must finalise its investigations and make a formal finding before it can ban a person. ASIC believes that it needs the law changed to allow it to take action where it “believes” a licensee is “likely to contravene”.
ASIC believes the proposed powers will assist it to take necessary action earlier or to even use the threat of such action to modify behaviour.
The IPA, as part of the Joint Accounting Bodies’ response to the tranche 1 proposals, has supported these measures. The far-reaching failures in Storm indicate a need for the regulator to act early. However, we have also said that while ASIC should have these powers, it needs to set out in a regulatory guide how it will interpret the new provisions and the types of situations that it will use them.
These are very broad powers and it is important that they are not abused. While not wanting to limit ASIC’s power to act, it is important that the market is aware how these powers are to be used, otherwise there is likely to be concern.
Once these changes are enacted, it will be important for ASIC to show it is willing to act, rather than blame deficiencies in the legislation.
A step in the right direction
The IPA therefore welcomes the first tranche of proposals. They do not address some of the more thorny issues, particularly the accountants’ exemption replacement, but they do contain some necessary reform measures. In particular best interest duty, if properly enforced, will be a welcome change for those seeking financial advice that is in their interest and not their adviser’s. However, change is not brought about simply by changing the law. It must change the behaviour of advisers as well as the regulator.
The IPA has developed its financial services platform to assist members to deal with the changes brought about by the FoFA reforms.
