In brief: The Australian Securities and Investments Commission released its report reviewing retail life insurance advice yesterday. The report provides insights into ASIC's views on the Future of Financial Advice (FoFA). Partner Michelle Levy (view CV) and Senior Regulatory Counsel Michael Mathieson (view CV) report.
- Commission and the best interests duty
- The duty of priority
- Better position test
- Scaled advice
In its report reviewing retail life insurance advice, ASIC says that more than one-third of the 202 advice files it had reviewed failed to provide advice that complied with the law and, where the advice met the standard, it was 'barely compliant' in many cases. ASIC also found a strong correlation between upfront commissions and advice that did not comply. ASIC recommends that insurers and advice licensees review their remuneration models to encourage good outcomes for consumers. It also recommends that licensees review the training and competence of advisers providing life insurance advice and increase their monitoring and supervision.
The findings are interesting, but more interesting are the glimpses the report gives into ASIC's views on FoFA – specifically, the best interests duty, conflicts and the duty of priority and scaled advice.
COMMISSION AND THE BEST INTERESTS DUTY
The report points to a real dilemma for the regulator and, perhaps later, courts trying to interpret the best interests duty in Chapter 7 of the Corporations Act. FoFA expressly excludes commission on life insurance from the ban on conflicted remuneration (with some exceptions for insurance in superannuation). The Government was persuaded by the industry's argument that insurance was sold, not bought. But FoFA does not exclude an adviser providing advice about life insurance from the best interests duty, the duty of priority and the duty to give appropriate advice. In this report, ASIC queries whether an adviser can comply with their duties under FoFA if they are paid by commission. If that is true, it is hard to see what work the exclusion from conflicted remuneration has to do.
THE DUTY OF PRIORITY
ASIC says: 'The client priority rule means that an adviser must not recommend a product to create extra revenue for themselves whereadditional benefits for the client cannot be demonstrated.' This appears to mean that the adviser will comply with the 'client priority rule' where they can demonstrate additional benefits for the client in following their advice. The duty of priority is then reduced to a duty to make sure that the client gets more (maybe only a bit more) than the adviser. If the client won't get an additional benefit, ASIC says that 'the conflict of interest cannot be managed; it must be avoided'.
A licensee has a duty to have arrangements in place to manage conflicts of interests. The adviser does not. The adviser's duty is, in fact, to give priority to the client's interests where there is a conflict. It is not clear that they will comply with that duty if they merely identify a benefit for the client or 'avoid' the conflict.
BETTER POSITION TEST
ASIC says that adviser incentives affect the quality of advice. It found that, where remuneration was tied to product sales, the remuneration in fact created an incentive for the adviser to make a sale. The implication is that the incentive to make a sale led to poor advice that did not comply with the law. Where the advice tested was provided post-FoFA, ASIC reports that 'the advice did not comply with the best interests duty and related obligations and failed to leave the client in a 'better position'. In Regulatory Guide 246, ASIC says that it will test whether the best interests duty has been satisfied by asking whether the client would be in a better position if they follow the advice. Many people queried the correctness of this. But here ASIC seems to have created a new duty – the 'better position' test is now something that an adviser must comply with in addition to the best interests duty. This is not a correct reflection of the law.
ASIC and the Government have both made much of the ability of advisers and their clients to limit the scope, or 'scale', of advice. Indeed, the Streamlining of Future of Financial Advice Regulation purports to amend the best interest obligation to make it clear that an adviser may scale their advice. Here, ASIC identifies inappropriate scaling of advice as contributing to the poor life insurance advice it found. ASIC says that 'the obligation to comply with the best interests duty and related obligations remains unchanged' regardless of whether the advice is on a single topic. In short, advisers providing advice on life insurance still had to make inquiries into the client's relevant circumstances and, what is relevant is, in ASIC's view, very broad.
ASIC also makes it clear that it thinks that it is the adviser's job to work out whether it is, in fact, appropriate to scale advice (or more accurately, to limit it to a single topic): 'To scale advice appropriately is to apply the professional judgement of the adviser to the client's personal circumstances'.
Whatever the merits of ASIC's broader findings, its report reveals a great deal about ASIC's views on FoFA.