Summary

  • ASIC has released Report 377 Review of advice on retail structured products, which reports in relation to a sample of personal advices given to retail clients in relation to structured products.
  • This report was foreshadowed in and follows ASIC’s May 2013 Report 340 ‘Capital protected’ and ‘capital guaranteed’ retail structured products.
  • While the advices sampled may not be statistically relevant or indicative of advice usually provided in the industry, in approximately half of the advices sampled ASIC found insufficient evidence of compliance with the (pre FOFA) 'reasonable basis for advice' requirement.
  • In those advices, ASIC identified:
    • a narrowing of the scope of advice to a single structured product,
    • inadequate consideration of the client’s needs and relevant personal circumstances and of alternative strategies or asset allocation, with a lack of diversification, and
    • unsuitable gearing recommendations or lack of evidence to support gearing recommendations.
  • ASIC has foreshadowed further surveillance with a view to enforcement action where merited.

Background

Yesterday ASIC released Report 377 1 in relation to personal advice given to retail investors in connection with structured products (Report 377).   

For Report 377 ASIC sampled 10 Australian financial services licences and five advice files per licence, which is a relatively small sample group.  The advice was not randomly selected for review – it was selected based on ASIC’s concerns about the potential for inappropriate advice.  On this basis the advices sampled may not be statistically relevant or indicative of advice usually provided in the industry.

Report 377 follows ASIC’s Report 3402 of May 2013, in relation to unlisted and unquoted retail structured products that are described as having some element of capital protection or capital guarantee  (Report 340). We reviewed Report 340 in our article ‘ASIC releases reports on capital protected products.’3

What were ASIC’s findings?

ASIC’s findings in Report 377 included that:

  • approximately half of the reviewed files complied with the (pre FOFA) ‘reasonable basis for advice’ requirement, and
  • the other files did not contain sufficient evidence of compliance with that requirement. In these files, ASIC found the following common features:
    • a narrowing of the scope of advice to a single structured product,
    • inadequate consideration of the client’s needs and relevant personal circumstances and of alternative strategies or asset allocation, with a lack of diversification, and
    • unsuitable gearing recommendations or lack of evidence to support gearing recommendations.

ASIC noted that many of the products and strategies in the advice it reviewed were highly complex, and that it was not surprising, then, that many investors may have difficulty understanding these investments and will rely on advisers to decipher the technical details and make appropriate recommendations. 

While Report 377 identified that some advisers clearly demonstrated that they had expertise in complex products and strategies, and their clients benefited from this advice, ASIC was concerned that in other cases advisers did not demonstrate expertise in the products they were recommending, or communicate the key features and risks accurately to clients.

The advice reviewed preceded the implementation of the FOFA reforms, including the introduction of a statutory best interests duty. In the current regulatory environment, advisers should expect a higher standard of review for any similar surveillance and reviews in the future.

A number of licensees have provided ASIC with information about steps taken to address issues that ASIC has identified, including in relation to internal processes and risk controls and follow up communications with clients.  In other cases, ASIC is conducting further surveillance with a view to enforcement action where merited.

The issue and distribution of complex structured products continues to attract ASIC’s attention and surveillance.