The best interests duty – set out in Div 2 of Part 7.7A of the Corporations Act – replaces the current requirements to provide appropriate advice and warn clients if information is incomplete or inaccurate.
Unlike the current requirements in s945A and s945B of the Corporations Act, the best interests duty is imposed on the actual adviser, not the licence holder, and any breaches are civil, not criminal, in nature.
So, what is the best interests duty?
Four major components exist:
- The adviser must act in the best interests of the client (which can be shown by following certain steps)
- The advice must be appropriate to the client’s needs and situation
- The client must be warned if advice is based on incomplete or incorrect information
- The adviser must prioritise the interests of the client over all other interests.
A modified best interests duty applies to basic banking products and general insurance, where the steps taken to show you have acted in the best interests of the client are curtailed.
A safe harbour will exist in relation to best interests where advisers follow appropriate steps in giving advice
These steps are:
- Identify the objectives, financial situation and needs of the client
- Identify the subject matter of the advice being sought and the objectives, financial situation and needs of the client relevant to this subject matter
- If it is apparent that information from the client is incomplete or inaccurate, make enquires to fix those defects
- Consider whether the adviser has the expertise and competence to provide the service; if not, they must decline
- If it is reasonable to suggest financial products, then assess which products best suit the client
- Base all judgements in advising the client on the client’s relevant circumstances
- Take any other step to act in the client’s best interests.
If an adviser can show they have followed these steps and acted reasonably then they will have safe harbour to say they have acted in a client’s best interests.
ASIC is also of the view that acting in the client’s best interests means the advice must leave the client in a better position. This improvement must be more than trivial and be of value to the client, though it need not always be a financial benefit – for instance, the client can be made aware of circumstances important to their situation.
In summary, the advice that is given must be shown to be appropriate to the client and the client’s needs – and the adviser must show that they have prioritised the needs of the client over the interests of all others.
The new best interests duty and related obligations will become mandatory from 1 July 2013.
