When a recommendation by an accountant constitutes financial product advice, and where to draw the line.

This is the second in a 4 part series, in which our Head of Financial Services Cristean Yazbeck explores the thin (sometimes, very thin) line that accountants can inadvertently cross when giving advice to their clients.

The "line" is of course the need to hold an Australian Financial Services License (AFSL) to cover the provision of that advice.

For the purposes of this series, we're assuming that the client is a retail client under the Corporations Act 2001 (Cth) (Corporations Act).

In part 1 of this series, we commented that, to the extent a person gives an opinion or a recommendation which is intended to influence another person to make a decision in relation to an SMSF (or could be seen to be so intended), that will constitute financial product advice, and hence a financial service for which an Australian Financial Services License (AFSL) is required (unless exemptions apply, such as the "accountant's exemption").

Conversely, it must be the case that if a communication falls short of being an opinion or a recommendation, it must not be financial product advice which would necessitate an AFSL (putting aside whether an exemption applies).

Communications which are merely the provision of factual information are generally recognised by the regulators as falling short of being an opinion or recommendation.

So, what's the difference between a "recommendation" and "factual information"?

Recommendations

ASIC takes the view that (Regulatory Guide 36 (RG 36), para. 23):

"If a communication is a recommendation or a statement of opinion, or a report of either of those things, that is intended to, or can reasonably be regarded as being intended to, influence a client in making a decision about a particular financial product or class of financial product (or an interest in either of these), it is financial product advice. Communications that consist only of factual information (i.e. objectively ascertainable information whose truth or accuracy cannot be reasonably questioned) will generally not involve the expression of opinion or recommendation and will not, therefore, constitute financial product advice." (emphasis added)

The key aspect of "factual information" (from ASIC's perspective) is that the communication consists of objectively ascertainable information whose truth or accuracy cannot be reasonably questioned. In the context of SMSFs, this would probably include things such as the following:

  • how to establish an SMSF
  • information about tax rates that apply with SMSFs
  • what "salary sacrifice" means when it comes to SMSFs

ASIC does, however, offer the following caution (RG 36, paragraph 24):

"...in some circumstances, a communication that consists only of factual information may amount to financial product advice. Where factual information is presented in a manner that may reasonably be regarded as suggesting or implying a recommendation to buy, sell or hold a particular financial product or class of financial products, the communication may constitute financial product advice (e.g. where the features of two financial products are described in such a manner as to suggest that one compares more favourably than the other)."

ASIC takes the view (RG 36) that a communication is likely to be "factual information" where there is no value judgement about the communication. "Value judgements" would include things such as:

  • the merits of salary sacrificing into an SMSF
  • whether an SMSF is more desirable than other investments for tax purposes.

In this regard, ASIC comments that (RG 36, paragraph 31):

"Factual information may be likely to be advice if it is presented in a way that is intended to, or can reasonably suggest or imply an intention to, make a recommendation about what a client should do."

Sounds simple in theory, but in reality most communications between an accountant and their SMSF clients will draw close to the line on whether a value judgement is being made by the accountant in relation to their clients' circumstances, even where factual information is being provided. Moreover, could it be also be said that the mere fact that the accountant sets out "factual" matters about various investment options (for example, an SMSF versus an alternate investment), is itself an implication of what the client should do, and therefore a recommendation? The line is thinner than most people think.

ASIC does offer some assistance in this regard. In one of its "frequently asked questions" (QFS 123), ASIC comments as follows in the context of accountants giving SMSF advice:

"Merely setting out options and discussing the benefits and disadvantages of each option will not necessarily involve a recommendation...It is more likely that a recommendation may be inferred where an option is presented as the only option, or other options are described in terms that indicate that the adviser considers that they will not be suitable for the investor.

For example, the regulations allow a recognised accountant to give financial product advice in relation to the establishment of an SMSF where the client has already decided to set up the SMSF and dispose of interests in another superannuation fund...in order to do this. In this instance, you would only be asked for advice on administrative issues in establishing the SMSF and arranging for the rollover of funds from the...fund to the SMSF. You would not be providing a recommendation about disposal of the client's interest in the...fund.

However, if the client has not yet made the decision to dispose of interests in the...fund, and you explain the superannuation options available, and the general benefits of the different types of fund, you should be careful that you do not imply that it would be appropriate for the client to dispose of their interests in the...fund in order to set up an SMSF. In this instance, you could be making a recommendation about the disposal of interests in the...fund, and would require an AFSL to engage in that conduct.”

Let's look at a hypothetical example of an accountant's advice to their client about an SMSF, and the differences between arecommendation and factual information.

Mary, a “recognised accountant”, is Peter’s accountant. She sets up the business structure for Peter and prepares the accounts and tax returns of the business. She reminds him that the law requires certain payments to be made for superannuation. Peter asks whether she can recommend what to do. Mary says that there are a number of options open, including establishing an SMSF or contributing to a public offer fund, and there are a number of considerations in deciding what to do. For example, SMSFs may suit people who have the capability and interest to play an active role in decisions about the assets underlying their superannuation interests (subject to compliance with investment restrictions) and public offer funds may suit those who want to rely on professional management expertise for those decisions.

Mary says that, as she is not an AFS licensee, she cannot make a recommendation about what kind of superannuation fund Peter should arrange for contributions to be made to, and suggests he speaks to a holder of an AFSL. However, as a recognised accountant, Mary can recommend whether Peter should or should not establish an SMSF.

Mary informs Peter that she knows an AFS licensee named Paul who is able to provide financial advice. Mary informs Peter that she does not receive any commissions or other benefits from Paul. Peter then goes to see Paul for advice about retirement planning. After a detailed analysis of Peter’s personal circumstances, Paul recommends that Peter should establish an SMSF. Peter is concerned that he will not have the time or the skills to run an SMSF. Paul informs Peter that an SMSF does require time and effort on the part of the trustees and that all members of the SMSF must be trustees. Peter and Paul agree that Paul will advise Peter on the underlying investments of the SMSF, but Peter will get taxation and accounting advice from a suitably qualified person. Peter decides to retain Mary as his accountant and tax adviser.

Peter asks Mary to set up an SMSF for him, and provide accounting and taxation advice in relation to establishment and operation of the SMSF. Peter explains that Paul has advised him to set up an SMSF and that he is satisfied that an SMSF is the best option for his superannuation. Mary, as a recognised accountant, also recommends that Peter establish an SMSF and informs him of his obligations as a trustee. She does not give advice about what investment strategies the SMSF should adopt.

"Recommendation" vs "factual information"

The provision of factual information about the features of different kinds of superannuation products or the skills needed to be a director of the trustee of an SMSF will also not, of itself, be financial product advice.

Mary may also give her opinion about the advantages and disadvantages of different kinds of superannuation products or about what qualities a trustee director should have, provided this opinion is reasonably necessary to, and an integral part of, advice about the establishment, operation or structure of the SMSF (see part 1).

If Mary had recommended that Peter should not set up an SMSF, Mary could still provide factual information about the different types of superannuation fund structures, but could not make any recommendation about which type of superannuation fund Peter should join.

What if Peter does not consult Paul?

Peter may decide that he does not wish to see Paul about retirement planning. He may make his own decision to establish an SMSF. If Peter has decided himself to establish an SMSF he can still ask Mary to set up the SMSF and provide accounting and taxation advice in relation to the establishment and operation of the SMSF. Mary does not need an AFSL to provide these services if she makes no recommendations about what investment strategies the SMSF should adopt.

Conclusion

Accountants should be aware of the differences between a "recommendation" and "factual information", the latter usually falling short of requiring an AFSL authorisation. However, and as ASIC warns, factual information may be likely to be considered financial product advice if it is presented in a way that is intended to, or can reasonably suggest or imply an intention to, make a recommendation about what a client should do.