ASIC has undertaken a bit of a survey of licensees who provide financial product advice to retail clients to see how they are faring a year into FoFA. (If you wish to read the report go to: Report 407 Review of the financial advice industry’s implementation of the FOFA reforms or the accompanying press release.) Despite the media attention given to the best interests duty and the ban on conflicted remuneration, it turns out that fee disclosure is a real focus (and headache) for licensees. ASIC reports on many complaints by licensees about the difficulty and cost of complying with the obligation to provide annual fee disclosure to clients. Licensees also query their value to clients, with some reporting that they had not seen any change in the behaviour of their clients as a result of the disclosure notices. This might mean that their clients are happy with the service they are getting, or that they don't read or understand them. More interesting to us are the statements in the report about:
- the 'better position test';
- advice fees; and
- vertical integration.
The 'better position' test
ASIC asked participants in the survey how they measured whether their advisers were ensuring that clients were left in a better positionas a result of the advice they received. We didn't know they had to.
The idea of an adviser putting their client in a better position comes from ASIC's Regulatory Guide 175 where ASIC says that 'Consumers who seek financial advice expect that their adviser will act in their best interests and that, as a result, the advice provided will leave them in a better position.' This seems to be the wrong way around – a client shouldn't merely expect their adviser to act in their best interests since the law, in fact, requires the adviser to do so when they provide the advice.
On the other hand, the law does not require the advice provided by the adviser to leave the client in a better position, despite ASIC's expectation. Nevertheless, ASIC goes on to say in RG 175: 'When assessing whether an advice provider has complied with the best interests duty, we will consider whether a reasonable advice provider would believe that the client is likely to be in a better position if the client follows the advice.'
And true to their word, it appears they have. And consistent with feedback on the 'better position test' posed by ASIC in its consultation paper on RG 175, it remains a difficult test to apply. ASIC reports that licensees said they applied the better position test to their advisers' advice by considering whether:
- there was evidence of a material improvement in the client's position;
- the advice was linked to a client's goals and objectives;
- the advice took multiple factors into account; and
- the advice resulted in lower fees or cheaper products.
It is not clear how taking into account a client's goals and objectives or multiple factors indicates that the client will be in a better position as a result of the advice, but ASIC did not suggest there was anything wrong with this approach. ASIC also does not report any licensee asking why they had to ensure that clients were left in a better position as a result of the advice provided by their advisers.
The report notes that a greater proportion of licensee remuneration is from 'advice fees'. Because advice fees are often based on assets under management or assets under advice, ASIC says that 'there may be a risk that adviser remuneration remained linked to product sales and may therefore be reasonably expected to influence the advice'.
This is an interesting statement because it appears to acknowledge that advice fees would be regarded as conflicted remuneration if they didn't satisfy an exemption (being a benefit provided by a client for advice). And, of course, that makes sense. If an advice fee could not be reasonably expected to influence advice, it would not satisfy the definition of conflicted remuneration in the first place and the exemption would not be needed. But by identifying this as a 'risk', ASIC also suggests that advice fees should not in fact be reasonably capable of influencing advice.
We have some sympathy for ASIC – it can be impossible to step through some of these logically without the whole shebang starting to unravel. It really doesn't stand up to close scrutiny.
Finally, the report notes the complaint from a smaller licensee that '[FoFA] has taken away commissions, but yet failed to address the structural conflicts in the banks'. Tied licensees defended vertical integration by referring to the stringent research supporting approved product lists and the strength of their training and compliance regimes. They also pointed to their approved product lists containing managed funds issued by a variety of managers. However, the report also indicates that approved product lists often included only a single platform (operated by the licensee's parent or related company) and only a single insurer (also being related to the licensee). On this, ASIC makes no comment. The live issue is whether the Financial System Inquiry will.