Much has been written about the Future of Financial Advice (FOFA) reforms to the Corporations Act 2001 (Cth), which became mandatory on 1 July 2013 (they were voluntary from 1 July 2012). The objectives of the reforms are to improve the trust and confidence of Australian retail investors in the financial services sector and improve access to advice.
These reforms have increased the obligations owed by financial advisers to retail clients, and the potential risk for the insurers of those financial advisers.
As these reforms have only been mandatory for less than a year, caution needs to be taken when defending and advising on a claim made by a retail client against a financial adviser as to when the subject advice was actually given.
The Changing Regime
The Old Law
Previously, the obligations placed on financial advisers were found in sections 945A and 945B of the Act. These sections imposed obligations on financial advisers to:
- ensure that the advice was appropriate;
- take reasonable steps to ensure compliance with the obligation to provide appropriate advice only;
- warn clients if the advice is based on incomplete or inaccurate information.
A failure to comply with these obligations not only entitled clients to civil remedies under section 953B of the Act, but was also an offence (see section 1311(1) of the Act).
The New Law
Sections 945A and 945B have now been repealed and replaced with the new Part 7.7A in the Act and in particular sections 961B, 961G, 961H and 961J therein. These sections impose obligations on financial advisers to:
- act in the best interests of the client in relation to that advice;
- provide personal advice that is appropriate to the client;
- warn clients if the advice is based on incomplete or inaccurate information;
- give priority to the interests of the client in the event of conflict between the interests of the client and interests of either the individual providing the advice, the licensee, or the authorised representative (or an y associate of these entities).
Importantly, the obligations in (a) and (d) above are new and section 960A now prevents parties from contracting out of these sections.
Section 961M of the Act still entitles a client to civil remedies against a financial adviser who fails to comply with these sections. However, rather than being an offence as was previously the case, a failure to comply with these sections may amount to a contravention of a civil penalty provision (see sections 961K and 961Q).
The Government is not yet finished with the FOFA reforms and has released consultation drafts of legislation to further amend Part 7.7A and the associated regulations. In particular, these changes will remove the ‘catch-all’ provision from the best interests obligation in subsection 961B(2)(g), which provides that a financial adviser must prove that they have “taken any other step [in addition to the six preceding ones] that … would reasonably be regarded as being in the best interests of the client”. The reason for removing this subsection is to address the concerns that it creates significant legal uncertainty and renders the safe harbour created by subsection 961B(2) unworkable for financial advisers due to its open-ended nature.
The best interests obligation will further be amended to facilitate the provision of low-cost scaled advice. Rather than requiring the financial adviser to identify the objectives, financial situation and needs of the client that would reasonably be considered relevant in providing the advice sought by the client (the current subsection 961B(2)(b)(ii)), the financial adviser will only have to identify the objectives, financial situation and needs of the client that the client discloses to the provider (the new subsection 961B(2)(ba).
However, as these amendments are only in the consultation phase (submissions close 19 February 2014), financial advisers will need to continue to comply with the best interests obligation in its current form.
What Does this Mean?
With the introduction of the FOFA reforms, financial advisers now have a higher standard to meet when providing advice to retail clients. What may have satisfied the requirements under the old sections 945A and 945B of the Act, may not be enough to satisfy the requirements under the new sections 961B, 961G, 961H and 961J of the Act. This in turn creates a greater risk for insurers of those financial advisers.
As these reforms have only been mandatory for less than a year, caution needs to be taken when defending and advising on a claim made by a retail client against a financial adviser as to when the subject advice was actually given. This is because a financial adviser should not be held to the higher standard now imposed for advice given prior to the introduction of the FOFA reforms.