The financial services industry is in the process of undergoing significant reforms in an effort to improve the trust and confidence in the financial planning sector by Australian retail investors. These reforms are the Commonwealth Government’s response to the Inquiry into financial products and services in Australia by the Parliamentary Joint Committee on Corporations and Financial Services.
The future of financial advice legislation, comprising of the Corporations Amended (Future of Financial Advice) Act 2012 (FOFA Act) and the Corporations Amendment (Further Future of Financial Advice Measures) Act 2012 (FFOFAM Act), commenced on 1 July 2012. However, compliance is voluntary until 1 July 2013.1
These tough new provisions may put good financial advice out of the reach of some consumers.
Summary of Amendments
The obligations and requirements in regard to the provision of advice were previously found in Part 7.7, Division 3, Subdivision B2 of the Corporations Act 2001 (Cth). This subdivision has now been repealed.3
The new reforms are located in the new Part 7.7A of the Corporations Act,4 and involve a number of new duties (Best Interests Duties) placed on the providers of the advice (Providers):
- Provider must act in the best interests of the client.5
- Resulting advice must be appropriate to the client.6
- Provider must warn the client if advice based on incomplete or inaccurate information.7
- Provider must give priority to client’s interests when giving advice if a conflict of interest arises.8
Contravention of the provisions governing the Best Interests Duties can amount to a contravention of the civil penalty provisions found in sections 961K,9 961L,10 and 961Q11 of the Corporations Act. The maximum amount that the court may order a person to pay for contravention of these provisions is $200,000 for an individual or $1,000,000 for a body corporate.12
In addition to this, section 961M of the Corporations Act allows a client who has suffered loss or damage because of a contravention of any of the Best Interests Duties to seek an order for compensation from the financial services licensee.13
Acting in the best interests of the client
The primary duty is arguably the duty to act in the best interests of the client.
Section 961B(2) of the Corporations Act contains a list of non-exhaustive steps14 the Provider may take to prove that they have acted in the client’s best interests. They are the following:
- identified the objectives, financial situation and needs of the client that were disclosed to the provider by the client through instructions;
- the subject matter of the advice that has been sought by the client (whether explicitly or implicitly); and
- the objectives, financial situation and needs of the client that would reasonably be considered as relevant to advice sought on that subject matter (the client’s relevant circumstances);
- where it was reasonably apparent15 that information relating to the client’s relevant circumstances was incomplete or inaccurate, made reasonable inquiries to obtain complete and accurate information;
- assessed whether the provider has the expertise required to provide the client advice on the subject matter sought and, if not, declined to provide the advice;
if, in considering the subject matter of the advice sought, it would be reasonable to consider recommending a financial product:
- conduct a reasonable investigation into the financial products that might achieve those of the objectives and meet those of the needs of the client that would reasonably be considered as relevant to advice on that subject matter; and
- assessed the information gathered in the investigation;
- based all judgements in advising the client on the client’s relevant circumstances;
- taken any other steps that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances.
Subsections (3) and (4) provide that if the subject matter of the advice sought is solely a basic banking product16 or a general insurance product,17 the provider satisfies the duty to act in the best interests of the client if it takes the steps mentioned in paragraphs (a), (b) and (c) above. The lower standard required for basic banking products and general insurance products has been included as there is a lower risk for consumers in relation to advice on these products as they are recognised as being simple in nature and more widely understood by consumers.18
Impact for the insurance community
Although these reforms can be seen as a step in the right direction when it comes to consumer protection and confidence in the financial planning sector, there are significant issues for Providers, financial services licensees (Licensees) and authorised representatives.
The primary issue is that whether or not there has been compliance with the Best Interest Duties, particularly the duty to act in the best interests of the client, depends greatly on:
- The subject matter of the advice sought by the client; and
- The circumstances of the individual client seeking the advice relevant to that subject matter.
Therefore, if the subject matter of the advice is highly complex and technical in nature (such as may be the case when providing advice regarding tax and superannuation), there would be a higher standard expected of Providers.
This would be further compounded if the circumstances of the individual client were such that additional care needed to be taken when providing the advice, for example, if the client was elderly, or had a limited understanding of the English language, etc.
This higher standard clearly poses a higher risk for those Licensees and authorised representatives that provide this type of advice. This could result in a proportionate increase in premiums or possibly exclusions from cover for the provision of this type of advice. This could, in turn, result in some Licencees and authorised representatives refusing to provide such advice or having to refer their clients elsewhere in order to act “in the client’s best interests”. Whether this will ultimately put good advice out of reach of some consumers remains to be seen.
In the meantime, Licensees and authorised representatives should implement stringent policies to implement the steps listed in section 961B(2) of the Corporations Act to ensure compliance with the Best Interests Duties. Those that do will present a better risk for those insurers who provide professional indemnity insurance in this area.
This will of course take time. However, given the 1 July 2013 deadline before compliance becomes compulsory, Licensees and authorised representatives should be taking steps now to implement the necessary policies.