Fiduciary type duties

Act in best interests of client

A provider of financial product advice to a retail client which is personal advice will now have a statutory duty which is of a fiduciary nature, namely, the provider must act in the best interests of the client when giving the advice.

It is important to note that this obligation only applies to personal advice and not general advice. The test of what is personal advice has both a subjective and objective test. Personal advice will be given where either:

  • the provider of the advice has considered one or more of the person’s objectives, financial situation and needs (otherwise than for the purposes of compliance with the AML/CTF legislation) (the subjective test), or
  • a reasonable person might expect the provider to have considered one or more of those matters (objective test).

Care always needs to be taken if personal advice is not intended to be given particularly because of the objective test.

The legislation then sets out what the provider must do if they are to be acting in the best interests of the retail client although the prescribed matters are not limited to what may be required for the provider to be acting in the best interests of the retail client.

These prescribed requirements put a heavy onus on the provider of personal advice. This includes if it is reasonably apparent that the client’s objectives could be better achieved or needs met if the client obtained advice on another subject matter then the client must be advised of that fact in writing. Something is reasonably apparent if it would be apparent to a person with a reasonable level of expertise in the subject matter of the advice were that person exercising care and objectively assessing the information given to the provider by the client. There is also a requirement to either conduct a reasonable investigation into the financial products that might achieve or meet the client’s objectives or needs or if another individual has made such an investigation and the provider has access to that investigation, assess the information gathered in such an investigation.

Conflicts of interest

In addition to acting in the best interests of the client, there is a duty imposed on the provider of the advice to ensure that if there is a conflict between the interests of the client and the interests of the provider, the interests of the client must be given priority. In relation to licensees and authorised representatives, there is also an objective test imposed in that if they ought to know there is a conflict of interests then they must give priority to the client’s interests.

The above duties are similar to those imposed on a trustee to act in the best interests of the beneficiary and not put itself in a position where its interest or duty, or its duties to different beneficiaries, conflict, or where there is a significant possibility of conflict except where the trust deed otherwise provides or the beneficiaries give their informed consent. No doubt some of the case law in relation to trustees will find its way into the interpretation of these fiduciary style obligations imposed on the provider of personal advice.

Use of approved product lists

The use of approved product lists by providers is now affected by this new obligation. Although there is no requirement of the provider to carry out an investigation of a product that is not on the approved list, nevertheless the provider must advise the client in writing that the provider cannot recommend a product from the approved list that might achieve or meet the objectives or needs of the client and must not advise the client to acquire a product that is on the list. Otherwise the provider will not be acting in the client’s best interests.

Resulting advice must be appropriate to the client

The provider of the personal advice must only provide advice if it would be reasonable to conclude that the advice is appropriate to the client had the provider acted in the best interests of the client.

Warning of incomplete or inaccurate information

If it is reasonably apparent that the information relating to the objectives, financial situation and needs of the client on which the provider’s advice is based is incomplete or inaccurate the provider must provide a warning to the client of that fact and because of that the client should consider the appropriateness of the advice having regard to the client’s objectives, financial situation and needs.

Charging of on-going fees to clients

There is now a change in relation to how providers of financial services charge ongoing fees to their clients. An on-going fee arrangement is an arrangement under which a retail client agrees to pay a fee however described or structured and the fee cannot reasonably be characterised as relating to advice that at the time the arrangement is entered into has already been given. This will cover the former practice of trailer commissions.

Firstly the client is given the right to terminate the on-going fee arrangement at any time. Penalty clauses in relation to such termination are void.

Secondly the client must be given a fee disclosure statement at least 30 days before the disclosure day which is:

  • if no fee disclosure statement has been given to the client in relation to the on-going fee arrangement since the arrangement was entered into, the anniversary of the day on which the arrangement was entered into, or 
  • if a fee disclosure statement has been given to the client in relation to the on-going fee arrangement since the arrangement was entered into, the anniversary of the day on which a disclosure statement in relation to the arrangement was last given to the client.

Thirdly, a renewal notice must be given to the client at least 30 days before the second anniversary on which the arrangement was entered into and then on each second anniversary thereafter. During this 30 day period the client can do three things, namely renew the arrangement, not renew the arrangement or do nothing. Only in the first event will the arrangement be renewed. In the case of the latter 2 the arrangement will come to an end within a further 30 day period. Positive action by the client is required in order for the arrangement to continue beyond each second anniversary period. The provisions are referred to as “opt-in” because the client has to effectively opt-in for the provider of the service to benefit from the on-going fee arrangements after each 2 year period.

However there are transitional provisions so that the new on-going fee arrangement provisions only apply to such arrangements that are entered into on or after 1 July 2012 or in the case of certain risk insurance policies in superannuation, 1 July 2013.

Compliance programmes

The providers of advice to retail clients will need to revise their compliance programmes to ensure compliance with the new regime.