Submission on: Consultation Paper Best Interests Duty and Related Obligations Update to RG175. Submission: Association of Financial Advisers Ltd

Transcription

1 Submission on: Consultation Paper Best Interests Duty and Related Obligations Update to RG175 Submission: Association of Financial Advisers Ltd 20 September, 2012

2 20 September 2012 Prashanti Ravindra Senior Lawyer Strategic Policy Australian Securities and Investments Commission Level 5, 100 Market Street Sydney NSW Dear Ms Ravindra, Submission on Consultation Paper Best Interests Duty and Related Obligations Update to RG175 The Association Of Financial Advisers Limited ( AFA ) has been serving the financial advising industry for over 65 years. Its aim is to provide members with a robust united voice, continually improve practices and focus firmly on the exciting, dynamic future of the financial advising industry. The AFA also holds the client to be at the centre of the advice relationship and thus supports policies that are good for consumers and their wealth outcomes. With over six and half decades of success behind it, the AFA s ongoing relevance is due to its philosophy of being an association of advisers run by advisers. This means advisers set the agenda, decide which issues to tackle and shape the organisation's strategic plan. The AFA has been actively engaged in the FoFA debate, and will continue to respond to the ongoing release of regulations and regulatory guidance. This submission has been prepared by the AFA on behalf of its members. 2

3 Overall View In this submission we have provided a lot of specific feedback on Consultation Paper 182. At a high level, the AFA is broadly supportive of the paper, subject to resolution on the areas of concern discussed in this paper. We have also taken the opportunity to focus upon areas where we believe that the expectations could be made clearer. In this consultation paper, a number of examples have been provided. Whilst we are supportive of the inclusion of examples, it is often an area where misunderstandings can arise. For this reason, we would like to highlight through this paper the specific examples where we believe there is the greatest risk of misunderstanding. The guidance on the best interest duty is particularly important as it will have broad implications for licensees and advisers, and will set the standard for quality advice. Our key areas of concern are as follows: Clarity that consideration of products not on the Approved Products List (APL) is only required when the client s current product is not on the APL or there are no suitable products on the APL. In the context of the best interests duty and appropriate advice, we seek further guidance on putting a client in a better position and fit for purpose. There is uncertainty with respect to giving priority to the interests of the client where conflict exists between the adviser s interests and that of the client. There is a risk that example 16 might be suggesting that the adviser can only select the cheapest product. This requirement about giving priority to the interests of the client is new and might lead to a level of confusion. The AFA is supportive of the Best Interests Duty, although somewhat concerned about the lack of clarity in certain areas. We in particular have opposed Section 961B(2)(g), the other steps test, due to the lack of detail around what was required. We note your discussion on 961B(2)(g) and appreciate that there are no new additional and significant requirements that will be captured under this obligation. Specific Points of Feedback In addition, and prior to responding to questions by ASIC, we offer the following specific feedback: RG 175.A1 states that Personal advice, by its nature, is generally relied on by retail clients who may suffer significant loss if the advice is conflicted or is not of good quality. The suggestion here is that conflict will lead to significant loss. Conflicts of interest are very common in the financial services industry and conflict in itself will not necessarily result in loss. In most advice situations, if conflict leads to a sub-optimal outcome, then it is most likely to be limited to a fee differential rather than a significant loss. Cases related to conflicts of interest that lead to significant loss are very isolated. This statement might be misunderstood or used inappropriately. We note at RG 175.A16 the intent, when administering the best interests duty, for ASIC to consider a range of other obligations including contractual obligations, trustee duties and responsible entity duties and obligations. We seek further information on how this might be applied. 3

4 Responses to ASIC Questions In the sections below, we have provided responses, in a tabular form, for the 5 sets of questions raised by ASIC. Guidance on the Best Interests Duty (s961b9(1)) B1Q1 We support the provision of guidance to assist in complying with the best interests duty (s961b(1)). The legislation includes no definition of best interests duty and provides very little detail. Thus guidance is essential. B1Q2 We agree in principle that the provision of advice should result in the client being in a better position if the client acts on the advice provided. We note that this is an outcome measure, where the legislation is largely process based. We further make the point that there is a need for greater clarity as to what a better position is, which might be best supported by the provision of a few examples that reflect common advice situations. The assertion that this can be assessed objectively may not always be the case. The value of some product features may be dependent on the client s needs and objectives, and there will also be cases where some features are supportive of the recommendation and others are not. In example 1, the 50% fee differential makes it somewhat compelling, but in reality the fee differential is likely to be much less and thus a range of other features need to be considered in assessing the position. Example 4 appears to imply that ASIC will view advice that includes non-product-specific strategies more favourably than advice that does not. This comment may inappropriately lead to various groups building this into their processes, when it may be irrelevant to the client s circumstances. Improved clarity is required on this point. We note the point about a one-size-fits-all outcome, however this needs to be viewed in the context that some advisers have a tight focus and their promotion and referral arrangements lead to a predominance in the provision of advice to one type of client. We note the point that the test of best interests is based upon what occurred at the time the advice was given and is not a retrospective test based upon information that was not available at the time the advice was given. It is also important to be clear that the best interest duty only applies at the time the advice was given and is not an ongoing duty that applies in the absence of further advice. We believe that guidance on this point should be provided. The distinction between the best interests duty obligation in s961b(1) and the safe harbour process steps in s961b(2) remains a point of uncertainty. The provision of good quality advice is to a large extent based upon good process. The best interests obligation (s961b(1)) provides no insight into the process required, which makes it difficult for any adviser to seek to comply with this obligation simply by asserting that the client is in a better position. B1Q3 The real test of the quality of advice is whether it has met the needs of the client. It is possible to contemplate situations where advice could lead to a client achieving what they want, but not necessarily being in a better position. One case might be where an adviser gives the client confidence to decide to spend more of their income or to arrange to make donations to charities. In both cases this raises questions as to whether the client would be in a better position. The exemption in RG 175.A30 gives some insight into this issue, however it does highlight potential problems in a simple reliance on a measure of whether the clients is in a better position. 4

5 Guidance on the Best Interests Duty (s961b9(1)) (cont) B1Q4 The contents of RG 175.A34 raises a genuine question about the benefit of seeking to define these four steps or actions, where the safe harbour already defines the steps that are required to meet the best interests duty. These four actions are already largely addressed within the safe harbour steps. Further, we would make the point that it may not be possible for the scope to include all the issues required to meet the client s objectives, financial situation and needs. It may not be practical to address all these issues at a particular point in time, or the adviser may not be competent to address all issues. B1Q5 We believe that further guidance is required around situations where the net material benefit to the client is less clear or where some factors are favourable and other factors are negative. As mentioned above, we believe there is a need for clarity as to the ongoing obligations of the adviser, including at the time of review. B1Q6 It is difficult to be prescriptive, in this case, as this requirement is somewhat unclear on the processes involved. At a high level, it is clear that advisers will need to give due consideration as to whether the client is in a better position in the context of the recommendations made. 5

6 Guidance on the Safe Harbour for the Best Interests Duty (s961b9(2)) B2Q1 We support the provision of guidance to assist in complying with the safe harbour for the best interests duty (s961b(2)). This section of the legislation will have a substantial impact upon the advice process followed within licensees and the training of advisers. Some of the requirements under the safe harbour steps are new obligations, so guidance is important. B2Q2 We agree in principle to the guidance, subject to the following points: Example 5 on calculators requires further clarification. What form of personal advice is being provided by means of a calculator? Under the section on assessing the expertise of the advice provider, further clarification is required as to how an adviser should respond if they form the view that they are capable of providing advice with respect to some of the scope defined with the client, but not all. In an increasingly complex and specialized world, this issue is likely to become increasingly common. It would then be possible to refer the client to another suitably qualified adviser for the rest of the scope. It may also be possible for the adviser to get input from an expert to include in the SoA. Is this form of sub-contracting, acceptable under this obligation? RG 175.A93(b) appears to imply that an adviser needs to give consideration to products not on their own licensee s APL. We understand that this will be required if the client s current product is not on the APL, or the APL does not include a product suitable to meet the client s needs. It should not be a requirement in any other circumstance. RG 175.A100(b) refers to investigating products beyond what they recommend, however the meaning of this appears unclear. As stated above, we note the effort in seeking to provide clarity with respect to what is required under s961b(2)(g), the other reasonable steps obligation. RG 175.A111(b) is somewhat unclear as it suggests providing strategic recommendations when a product recommendation is included. It would be clearer if it was explicitly stated that this was strategic advice related to the product recommendation, rather than implying it was additional advice. Example 11 adds to this confusion, as it is unclear what piece of the advice is a strategic recommendation. Some of what has been included under s961b(2)(g) could be included elsewhere, in that if it is required, then it should be required in all cases. Requirements such as recommendations of reviews and offers to provide advice on other issues identified, both make sense. However further guidance is required as to the specific situations where this might be required as part of the s961b(2)(g) obligation. Licensees and advisers need clarity as to what is required under s961b(2)(g) and in what circumstances it is required. B2Q3 As a professional association, we will not be involved in the design or redesign of the advice process within licensees, however we hold the view that most licensees are going to place a strong reliance upon the steps in the safe harbour requirements. The safe harbour steps provide a much greater level of clarity in comparison to compliance with s961b(1), in the absence of greater guidance. 6

7 Guidance on the Safe Harbour for the Best Interests Duty (s961b9(2)) (cont) B2Q4 As stated above, the AFA does not have advice processes, however we feel that there will be a limited number of licensees who would rely on other processes. B2Q5 As a professional association this question is not applicable to us, however we would like to make the point that there is no legislative obligation to verify client information. It is, however, common for an adviser to seek copies of current product statements and insurance cover. When it comes to product switching it is particularly important to be confident of the exact details of the current arrangements. Verification is more likely required for loan products, including margin lending. Some advisers are also active in mortgage broking where verification is now required. A form of verification also occurs under the AML/CTF requirements. B2Q6 The requirement to verify information is potentially applicable in the circumstances where it is reasonably apparent that the client s relevant circumstances are incomplete or inaccurate. This situation may lead to an adviser seeking information to confirm the client s situation. This will only apply where the matter is directly related to the scope of the advice as agreed with the client. Should the client refuse to provide further information, then the adviser needs to make the decision as to whether they should proceed with providing the advice or not. A lack of understanding of the clients true relevant circumstances may impact the ability to provide advice. B2Q7 Not Applicable. B2Q8 Guidance in this area should not be required. An adviser can, through the conventional fact-find process, determine whether these issues are important to the client or not. It is stated in the current RG that this is a matter of best practice. It also needs to be noted that this issue is largely applicable to investment and superannuation, where investment options are selected, rather than insurance advice. B2Q9 In our view there is a need for greater clarity in some of the guidance, rather than additional guidance. For specific comments please see above. B2Q10 These new obligations are most likely to lead to changes to existing processes. We expect these changes to be quite substantial, however we will leave this question to licensees to respond to. 7

8 Providing Appropriate Personal Advice(s961G) B3Q1 We support the provision of guidance to assist in complying with the appropriate advice obligation (s961bg). Prior to FoFA, appropriate advice was included under s945a, which provided some detail as to what was required. B3Q2 We agree in principle that fit for purpose and putting the client in a better position should be key determinants of appropriate advice. We note however that there is little detail provided about the nature of fit for purpose. In the context of the section on tax implications, we would like to make two points: It may be possible for an adviser to sub-contract some complex taxation related matters to an accountant who works within their business. The Tax Agent Services Act only prevents an adviser from completing a tax return or representing a client with the ATO. Example 15 suggests that an adviser would need to refer a capital gains tax calculation to a registered tax agent. This is not necessarily the case. A number of advisers would have the necessary skills and knowledge to do a CGT calculation. B3Q3 The AFA believes that it would be beneficial to provide further guidance on the requirements for fit for purpose. In addition, it would be good if further examples could be provided. B3Q4 The appropriate advice obligation is somewhat similar to the s945a obligation, so it is likely that any changes to processes would be limited. We will leave this question to licensees to respond to. 8

9 Prioritising the Interests of the Client (s961j) B4Q1 We support the provision of guidance to assist in complying with the obligation to prioritise the interests of the client (s961j). This is a new requirement, and one where the legislation provides very limited clarity. Thus regulatory guidance in this area is essential. B4Q2 We remain uncertain as to whether this is a satisfactory outcome. We question the circumstances in relation to RG 175.A140 and A141, where we would like greater clarity as to where a conflict exists, however the advice provider was unaware of it. The example in RG 175.A141 does not appear to make sense as this would be in breach of the advisers disclosure obligation. Without justification or explanation around the concept of information barriers, we question this element. The requirement with respect to being guided by what an advice provider without a conflict of interest would do, is somewhat problematic. Conflicts of interest are very common in the financial advice industry. There are very limited situations where there is no conflict of any form that exists. Another factor that is important is the extent of the conflict. Where the conflict is likely to have no direct impact on remuneration, then this is a very different situation form one where there is a sizable remuneration implication. Given the prevalence of conflicts of interest and the fact that the industry has largely worked effectively within this context for a number of years, it may be difficult for an adviser to put themselves in the position of an adviser with no conflict of interest. Example 16, could be made clearer by reference to the type of fees that are referred to. It is assumed that these are product fees, in a post FoFA environment. In reality, no two products are identical, which makes this example somewhat unrealistic. There may be a range of factors that lead to the selection of the slightly more expensive product. To state that the adviser should recommend the less costly product is oversimplifying this situation and may run the risk that the assumed meaning is that the adviser should always recommend the cheaper product. This is a very significant issue for many advice businesses. The other unknown from this example is how the adviser came to the point of identifying these two products were they both on the advisers APL? If not then we go back to the issue of the need to look for products outside of the existing APL. There is also a genuine issue that might flow from this point about the selection of products on APL s. This issue is further reflected in Example 17. With RG 175.A148(a) there needs to be greater clarity as to what the additional benefits need to be assessed against. Is this a reference to an existing product or other products on the APL or even other products not on the APL? B4Q3 It is not clear to us in responding to this question that conflicting interests have been listed. We believe that it would be beneficial to provide some coverage of the typical conflicts of interest that exist and the implications of these conflicts. B4Q4 Whilst we do not speak as a licensee, we do want to register our concern about the complexity of information barriers and also the potential implications for meeting disclosure obligations. We question the need for this part of the guidance and seek further clarification on the type of conflicts where an information barrier might be an appropriate solution. 9

10 Prioritising the Interests of the Client (s961j) (cont) B4Q5 Further guidance is required in this area as it is new and potentially has substantial implications. It would be beneficial to have more examples and coverage of specific conflicts and guidance on how they should be managed or avoided. Coverage of issues such as over-servicing and non-financial-product recommendations are beneficial. The value of the guidance, in terms of what an adviser with no conflicts would do, is of limited apparent value. B4Q6 Process changes will be required under this obligation. The key areas are going to be the consideration of what an adviser with no conflict will do and the record keeping with respect to conflicts of interest and particularly product selection. Complying with the Modified Best Interests Duty B5Q1 Whilst this section of the legislation is unlikely to have any implications for our members, we still support the provision of guidance to assist in complying with the modified best interests duty. B5Q2 The guidance on the modified best interests duty is very limited and largely just includes repeating the requirements under the legislation. It would be better if there was more coverage of the information gathering requirements, and specific examples that clarify what is required and where it is acceptable to reduce the information gathering activity. B5Q3 As stated above, more guidance on information gathering and related examples would be beneficial. B5Q4 As stated above, the modified best interests duty is not expected to have any impact upon authorised representatives or their licensees. This guidance is directly related to the operation of banks and general insurance brokers. 10

11 Conclusion The AFA is broadly supportive of the direction of CP 182, however is seeking refinement and clearer direction in certain areas as addressed above. The introduction of the best interests duty will have significant implications for the financial advice industry and is likely to result in some major changes to advice processes. For advisers, this part of the FoFA legislation will involve significant change management activity. Accordingly, we believe that an education series run by ASIC, covering the new requirements, would be very valuable. We thank ASIC for the opportunity to discuss this Consultation Paper on 13 September 2012 and look forward to continuing to work together as the new RG 175 is finalised. Should you have any questions, then please do not hesitate to contact me on (02) Yours sincerely, Phil Anderson Chief Operating Officer Association of Financial Advisers Ltd 11