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Views on the introduction of a statutory 'best interests' duty for
One of the central recommendations of this committee's 2009 report, Inquiry
into financial products and services in Australia, was the introduction of
a statutory fiduciary duty for financial advisers to act in the best interests
of their clients. This measure has been supported by government since the
initial FOFA reform announcement in April 2010, and is being introduced in the Corporations
Amendment (Further Future of Financial Advice Measures) Bill 2011 as outlined
in chapter 2.
Support for a statutory 'best interests' duty for financial advisers
The evidence received by the committee in its 2009 inquiry highlighted
the clear need for a statutory fiduciary obligation for financial advisers to
act in the best interest of their clients. This has also been confirmed by
evidence presented to the committee during its ongoing inquiry into the collapse
of Trio Capital. The committee is currently preparing its report for this
inquiry, and the cumulative weight of evidence from the committee's 2009
inquiry, the Trio inquiry and the current inquiry into the FOFA legislation,
make an overwhelming case for the introduction of a statutory best interests
During the current inquiry, the committee received evidence that
stakeholders are supportive of the introduction of a statutory duty for
advisers to act in the best interests of their clients. The support for this
measure included support from industry peak bodies, consumer groups, accounting
bodies as well as Treasury and ASIC,
and was well summarised by the Joint Accounting Bodies:
The Joint Accounting Bodies believe the majority of financial
planners provide quality financial advice that is in the best interests of the
client. However, the introduction of a statutory best interests obligation will
embed this motivation in the financial advice framework to ensure all financial
planners make certain the interests of their clients remain paramount, above
and beyond those of the planner, licensee and any relevant associates. We
believe introducing this obligation will improve the public’s trust and
confidence in the advice they receive.
The committee heard that many parts of the financial advice industry
already adhere to a 'client's best interests' standard of advice. The
Association of Financial Advisers (AFA) currently imposes a 'best interests'
obligation on its members as part of its code of ethics, and the Financial
Planning Association's (FPA) code of practice requires members to place the
interests of clients ahead of their own.
The Boutique Financial Planning Principals Group (BFPPG) also noted that its
members must act in their clients' best interests as a condition of membership.
While the intent of the best interests provisions was therefore welcomed
by the industry, numerous submitters made comment on the precise nature and
scope of the duty contained in the Bill. This is discussed further below.
Formulation of the 'best interests' provisions
The 'best interests' obligation is formulated through several clauses in
the second FOFA Bill. The Bill proposes to insert new Division 2 in Part 7.7A
of the Corporations Act. This new Division contains all provisions relating to
the 'best interests' duty.
The best interests obligations are divided into several components,
- a general duty that advisers must act in the best interest of
their clients, supplemented by a series of steps advisers can take in order to
meet this duty (subsections 961B(1) and 961B(2));
- a requirement that advice given by providers is appropriate to
the client (section 961G); and
- a requirement that if there is a conflict between the interests
of the client and those of the provider, licensee or authorised representative,
the provider must give priority to the client's interests (section 961J).
The provisions of subsections 961B(1) and 961B(2), 'provider must act in
the best interests of the client' are as follows:
(1) The provider must act
in the best interests of the client in relation to the advice.
(2) The provider satisfies
the duty in subsection (1), if the provider proves that the provider has done
each of the following:
a) identified the objectives,
financial situation and needs of the client that were disclosed to the provider
by the client through instructions;
(i) 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
it was reasonably apparent that information relating to the client’s relevant
circumstances was incomplete or inaccurate, made reasonable inquiries to obtain
complete and accurate information;
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;
in considering the subject matter of the advice sought, it would be reasonable
to consider recommending a financial product:
(i) conducted 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
(ii) assessed the information gathered in the investigation;
all judgements in advising the client on the client’s relevant circumstances;
any other step that would reasonably be regarded as being in the best interests
of the client, given the client's relevant circumstances.
Additionally, section 961H provides that if, after 'reasonable inquiries'
have been made, information from the client is incomplete or inaccurate, the
provider may still give advice, but must warn the client that the advice is
based on incomplete or inaccurate information.
Proposed Subdivision F of Part 7.7A provides for the responsibilities of
licensees in relation to the best interests duty. Licensees must ensure that
their representatives comply with the best interests provisions, and that
licensees which breach the best interests provisions are subject to civil
penalties (sections 961K-961N). Subdivision G provides for the responsibilities
of authorised representatives. Authorised representatives who contravene the
best interests provisions are also subject to civil penalties (section 961Q).
Subdivision A provides that the best interests obligations apply only in
relation to the provision of personal advice to retail clients (subsection
961(1)). This means that advisers providing general advice only will not be
subject to the best interests obligations. The subdivision also includes a
definition of 'provider' for the purposes of the section; namely, 'the
individual who is to provide the advice' (subsection 961(2)).
Replacing current conduct obligations
under section 945A and section 945B
The Bill repeals sections 945A and 945B of the Corporations Act, which
deal with conduct obligations for financial advisers. As noted in chapter 1,
section 945A of the Corporations Act requires that advisers providing personal
advice must have a 'reasonable basis' for that advice, based on the relevant
personal circumstances of the client and the adviser having conducted 'reasonable
inquiries in relation to those personal circumstances' and the subject of
advice. The Explanatory Memorandum (EM) to the Bill states that the requirement
for advice to be appropriate to the client is retained in the new section 961G,
and that the process-related elements involved in this requirement have been
incorporated into the steps of the new best interests obligations found in subsection
Additionally, the EM notes that section 961H, relating to providing
advice in the event of incomplete or inaccurate information, is a replacement
of similar provisions in section 945B.
Views of submitters on the 'best interests' provisions in section 961B
Many submitters commented on the drafting and potential effect of the
best interests provisions in section 961B. The issues raised included:
- whether or not the best interests provisions amount to a
statutory fiduciary duty for advisers, as recommended by this committee's 2009
- whether the 'reasonable steps' provisions in subsection 961B(2),
particularly the inclusion of paragraph 961B(2)(g), make the duty unclear and
unworkable for advisers to implement; and
- whether the best interests obligations will adequately facilitate
the provision of limited or 'scaled' advice.
Fiduciary duty provisions
The committee's 2009 report on financial products and services in
Australia recommended that the Corporations Act be amended to explicitly
include a fiduciary duty for financial advisers operating under an Australian Financial
Services License, requiring them to place their clients' interests ahead of
The best interests provisions in the Bill are intended to directly implement
According to the EM, the Bill has taken the approach of setting out a
general duty for advisers to act in the best interests of their clients, while
also setting out a number of reasonable steps that may be taken as complying
with that duty.
Some submitters argued, however, that this approach falls short of placing a
fiduciary duty on advisers. For example, the Trust Company asserted that a best
interest duty as provided for in the Bill:
...is not a complete fiduciary obligation but one aspect of
it. A fiduciary obligation is a principle based on undivided loyalty and trust
to act in good faith and in the best interests of a client. Looked at in
isolation a best interest obligation is not as far reaching.
Furthermore, the Trust Company submission argued that the prescriptive
duty encompassed in subsection 961B(2) constitutes a duty of care rather than an
explicit fiduciary duty:
A duty of care is a requirement to meet a standard of
reasonable care and skill when performing a service or providing a product. The
standard is objective and based on what is expected of the "reasonable" person, service provider or manufacturer. A person can
owe another person a duty of care without being subject to a duty of loyalty.
The best interest duty as expressed in the Bill is a
prescriptive duty and will cause confusion and uncertainty in the industry. It
is confusing a duty of care on one hand with a duty of loyalty on the other.
The Bill attempts to address a duty of loyalty by using standards and rules
which are associated with the duty of care. These two duties cannot be
confused. It is the duty of loyalty that underpins the fiduciary obligation and
it is this duty that should be met.
The Law Council of Australia agreed with this sentiment, stating that
the steps in subsection 961B(2) 'strongly imply that an adviser's best interest
duty under 961B has been mislabelled and is more akin to the adviser's duty of
care at general law rather than their fiduciary duties'.
The Industry Super Network (ISN) also commented on this issue, noting
that the process steps outlined in subsection 961B(2) are atypical in a
fiduciary-type duty and more similar to a duty of care.
ISN advocated that the drafting of the best interests duty should be 'along
more traditional lines, which would have left it as the principles-based duty
contained in s961B(1)'.
The Australian Institute of Superannuation Trustees agreed that a broad,
principles-based fiduciary duty would have been preferable to the prescriptive
duty contained in the Bill.
The Joint Consumer Groups commented that the description of section 961B
as a best interests duty, when it is really a duty to exercise reasonable care
and diligence, may cause uncertainty and unpredictability. It stated:
...it may be difficult for courts and external dispute
resolution schemes to interpret the duty and there is a risk that their
interpretations may not further the government's policy aim.
'Reasonable steps' provisions of
As outlined above, some stakeholders queried why the best interests duty
has been formulated with both a general duty in subsection 961B(1) and the
'reasonable steps' provisions contained in paragraphs 961B(2)(a)-(g), rather
than a more general best interests duty similar to that contained in the Superannuation
Supervision Act 1993 (SIS Act).
The EM to the Bill provides a rationale for this formulation. With regards to
the process steps in subsection 961B(2), the EM states:
These steps have been set out based on the specific
conditions under which advisers currently operate. This approach is needed
given the broad nature of a best interests obligation; it may allow a provider
to demonstrate that it has complied with the obligation by providing it took
While the intent to provide a 'safe harbour' to help advisers discharge
their duty was welcomed, some stakeholders expressed concern about the specific
wording of the provisions contained in subsection 961B(2). For example, the
Financial Services Council (FSC) expressed concern that the provisions in subsection
961B(2) are drafted in a way which places an unreasonable burden of proof on
the adviser to prove that they have acted in the client's best interest. The
FSC suggested that the provisions be drawn conversely, allowing an adviser to
refute specific allegations that they have not acted in the client's best
In particular, the inclusion of paragraph 961B(2)(g) provoked much
commentary from stakeholders. Paragraph 961B(2)(g) provides that having taken
the steps outlined in 961B(2)(a)-(f), a provider must also have 'taken any
other step that would reasonably be regarded as being in the best interests of
the client, given the client's relevant circumstances' in order to satisfy the
best interests duty. Several stakeholders expressed concerns that this
paragraph adds uncertainty for advisers trying to fulfil their best interests
obligations, and that as a result, the reasonable steps provisions fall short
of providing the 'safe harbour' envisaged in the government's initial policy
The Law Council of Australia argued:
Although section 961B(2) provides that a provider will be
deemed to comply with their statutory best interests duty if they prove that
they have satisfied all of the steps in section 961B(2), section 961B(2)(g)
effectively takes away the certainty the opening words offer...In other words,
a provider will comply with their statutory duty to act in the best interests
of their client if they prove that they have acted in the best interest of
their client. The statutory defence in section 961B(2) therefore gives
providers no comfort at all that if they follow the prescribed steps they will
have discharged their obligation and leaves them with the difficult task of
determining what the statutory duty to act in the best interests of their
Several stakeholders advocated the removal of paragraph 961B(2)(g) so as
to achieve greater certainty regarding the operation of the proposed best
AMP suggested that if paragraph (g) is not removed, that it should be amended
to reflect the fact that the obligation is designed to be imposed at the time
that advice is provided.
Conversely, ISN expressed concern that the inclusion of reasonable steps
provisions hinder the goal of raising standards in the industry, noting 'there
is a significant risk that defining a professional duty through process will
result in a "tick-a-box" mentality rather than shifting financial
planning to a more professional culture'.
Treasury officials indicated that the inclusion of paragraph 961B(2)(g)
is designed to help avoid a "tick-a-box" attitude, and that paragraph
(g) was not designed to be overly burdensome for advisers:
In terms of interpretation, the problem we have ... is that
if you take out (g) you are virtually going back to a tick a box type
arrangement. With (g) it is taking any other step, so the provider satisfies
the duty and take any other step that would reasonably be regarded as being in
the best interest of the client given the client's relevant circumstances. So
it is any other step reasonably regarded.
Where the companies are worried, they say, 'We go through all
these steps and then we give good advice, something does not work out and then
we get sued over this.' I would have thought 'reasonably regarded as in the
best given the client's relevant circumstances' pretty much does it.
ASIC noted that other 'safe harbour' provisions in the Corporations Act
are more rigorous than a "tick-a-box" approach, and achieve an
increase in professionalism:
...I am aware from reading the submissions that there has
been differing views on whether the last paragraph of that particular
provision, paragraph (g), is appropriate or not and I think there is clearly a
policy decision to be made about whether or not there is to be a tick-a-box
approach in terms of how this defence is going to work or there is going to be
something more substantive. I can only point to other provisions in the
Corporations Act. For example, there is a safe harbour provision for directors'
duties provisions and it is certainly not a tick-a-box approach. It requires
people to assess things like they have made a judgment in good faith and for a
proper purpose, they do not have a material personal interest, they have
informed themselves about the subject matter of the judgment and they
rationally believe the judgment is in the best interests of the corporation.
ASIC also commented that it believed the safe harbour provisions are
adequate and that they meet the policy objective:
I think the question is: what policy result do you want to
achieve? That is really a matter for government. The stark choice I am drawing
is whether or not you want a tick-a-box approach, which you really get very
close to if the provision in (g) is removed, or whether you want to transform
this into a profession and have people exercising particular judgment in
particular cases as other professionals do.
ASIC also noted that paragraph 961B(2)(g) adds flexibility to the
reasonable steps provisions that may be useful in administering the
I might just add that there is a balance to be struck in any
of these types of provisions between providing people with certainty but also
providing some flexibility about how things are administered. If you were to
remove (g), you would remove effectively the flexibility. My experience with
these sorts of reforms is that often industry actually wants both—they want
some certainty but also some flexibility. That is I think an appropriate way to
approach that. As Mr Price has indicated, this sort of approach, where you have
a list of particular issues that must be dealt with plus a provision that
allows for other matters that might arise from time to time or might be
considered, is not unusual in other parts of the law that ASIC itself
administers. We have some experience with these sorts of issues.
Interaction with other general law
and statutory duties
The Law Council of Australia expressed concern that the formulation of
the best interests duty in subsection 961B(1) does not accord with either the
general law fiduciary duty to act in the best interests of their client, or
other existing statutory best interests duties; namely, those for
superannuation trustees and for the responsible entities and directors of managed
The Financial Services Council noted that new best interests obligations
on advisers would add to, rather than replace, existing duties for advisers:
...whilst the steps in s961B(2) are largely congruent with,
they are additional to the duty an adviser owes their client
under common law fiduciary obligations (profit and conflict rules) and at
contract law (and torts). As such advisers will operate under a number of, each
slightly nuanced, disparate legal 'best interest' obligations which adds to the
complexity and cost of the regime.
Westpac Group argued that to avoid advisers being subject to both
general law duties and the new statutory duty, the legislation should make it
clear that compliance with the best interests obligation will be deemed
compliance with the general law obligations.
The Law Council of Australia noted that in addition to general law
duties, superannuation trustees providing personal advice are subject to
obligations under the SIS Act which obligates trustees to perform their duties
in the best interests of members.
The Law Council contended that there may be situations where the new best
interests duty under section 961B conflicts with trustees' existing duty under
the SIS Act; the SIS Act requires trustees to act in the best interests of fund
members as a whole, whereas the new duty requires trustees to act in the best
interests of the individual member being provided advice. For example, if
personal advice was given that a member should switch out of the superannuation
fund (with the adviser having deemed that this is in the client's best
interest), the result of this advice may be detrimental to fund members as a
whole due to reduced economies of scale. 
Regulations may alter the best
Subsection 961B(5) of the Bill provides that regulations may be made to
add or substitute steps to those outlined in subsection 961B(2) in prescribed
circumstances. The regulations may also outline that certain steps in subsection
961B(2) do not apply to providers in certain circumstances, or outline
circumstances in which the general duty in subsection 961B(1) does not apply.
The EM explains the rationale for including these provisions in the Bill as
It is important for there to be a degree of flexibility
around the more detailed aspects of the best interests obligation because of
the diversity and complexity of the financial services industry.
This regulation-making power will allow the legislation to be
updated in a timely manner in the event that the application of a particular
step (or steps) is found to result in undesirable consequences in the light of
advancements in the financial services industry or the provision of advice in
unique and unforseen circumstances.
The Senate Standing Committee for the Scrutiny of Bills noted in its Alert
Digest No.1 of 2012 that these provisions allow the central elements of a
statutory obligation to be dealt with by regulations rather than primary
legislation, and suggested that the Senate consider whether this delegation of
legislative power is appropriate.
Concerns about increasing
professional indemnity insurance premiums
Professional Investment Services claimed that the increased obligations
on advisers under the new best interests provisions will increase the cost of
advisers obtaining professional indemnity insurance, a cost which would be
ultimately borne by consumers.
The Financial Services Council agreed, warning:
Without a defined duty and non-exhaustive conduct steps,
Professional Indemnity ("PI") insurers will become cautious for years
(whilst the new duty is tested in the courts) during which time – costs of PI
cover will remain high (higher than current costs) thereby increasing the cost
of advice for Australians without any commensurate consumer protection.
Ability for advisers to provide scaled advice under the new duty
One of the stated aims of the FOFA reform package is to increase the
availability of limited or 'scaled' financial advice to consumers. Scaled advice
is currently permissible under section 945A of the Corporations Act. The stated
intention of the new best interests obligations is to continue and expand
access to scaled advice. As explained by Treasury:
The steps [in subsection 961B(2)] are designed to facilitate
the provision of 'scaled advice' which is advice about one issue, or a limited range
of issues (as opposed to 'holistic' advice that looks at all aspects of the
client's financial circumstances). As long as the provider acts reasonably and bases
the decision to narrow the subject matter of the advice on the interests of the
client, they will not be in breach of their obligation to act in the client's
The government has expressed a clear commitment to facilitating the
provision of scaled advice, and particularly limited advice provided by
superannuation funds to their members. This is known as 'intra-fund' advice.
Announcing new rules for the provision of intra-fund advice in December 2011,
the Minister for Financial Services and Superannuation, the Hon Bill Shorten
The delivery of scaled advice is critical to achieving the
Government's objectives of promoting greater access to financial advice. This
Government is committed to providing advisers with certainty of how to provide
this form of advice in a way that meets their regulatory obligations.
The provision of intra-fund advice by superannuation funds is currently allowed
under an ASIC Class Order, which exempts funds providing intra-fund advice from
any requirements in section 945A of the Corporations Act.  This Class
Order is supplemented by an ASIC Regulatory Guide which provides further
guidance about how trustees can provide intra-fund advice.
Despite the clear policy intent to facilitate access to scaled advice, some
submitters to this inquiry contended that the current drafting of the best
interest provisions does not provide comfort for financial advisers seeking to
provide scaled advice.
In order for scaled advice to occur, advisers must be able to effectively limit
the scope of the advice provided to a client while still fulfilling their
obligation to act in the client's best interests. However, the committee heard
that current drafting of the 'reasonable steps' provisions in subsection 961B(2)
may not allow advisers to do this. In particular, paragraph 961B(2)(b) requires
providers to identify:
(i) the subject matter of the advice that has been sought by the client
(whether explicitly or implicitly); and
(ii) 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).
The EM notes that identifying the subject matter of advice sought could
be a simple process, but that:
[1.33] in some cases, particularly where the client has
complex needs or objectives, it is recognised that clients may not be
immediately able to identify the subject matter of the advice they are seeking.
In these situations, it may be necessary for the provider to enter into a
discussion with the client about what subject matter of advice would be in
their best interests. This can take into account considerations like how much
the client is willing to spend on the advice. However, the provider cannot
enter into a contract to be exempted from this obligation merely by seeking
formal agreement from the client that the subject matter of the advice that has
been given by the provider is what has been requested by the client and is
therefore in the client’s best interests. In identifying the advice that has in
effect been sought by the client (including advice implicitly sought by the
client), the provider must take into account the client's overall
The EM further states that this process of identifying the subject
matter of advice can still facilitate the scaling of advice:
[1.34] This process is designed to accommodate the provision
of limited advice (also referred to as 'scaled advice') that only looks at a
specific issue (for example, single issue advice on retirement planning) and 'holistic'
advice that looks at all the financial circumstances of the client...As long as
the provider acts reasonably in this process and bases the decision to narrow
the subject matter of the advice on the interests of the client, the provider
will not be in breach of their obligation to act in the client's best
interests. The scaling of advice by the provider must itself be in the client's
best interests, especially since the client's instructions may at times be
unclear or not appropriate for his or her circumstances.
Submitters pointed to differences in expressions used in the Bill and
EM; subparagraph 961B(2)(b)(ii) refers to the client's relevant
circumstances, while the EM claims that advisers must take into account the
client's overall circumstances when determining the subject matter of
advice. AMP Financial Services stated with regards to their ability to provide
In our interpretation of the bill at present it would be very
difficult for us to do so because of the point I alluded to earlier that, in
the way that the bill is currently drafted, we would be required to consider
the client's whole financial position, even if the client came in saying they
only wanted to consider one component of their finances.
Several submitters argued that the wording in subsection 961B(2) should
be amended to explicitly allow the provision of scaled advice.
The FSC argued that the ability to scale advice should be clearly expressed in
the legislation to provide additional clarity:
Clear express statutory recognition of the ability to scale
or scope the advice subject matter is what enables an adviser to focus their
advice investigation to the area(s) the client has identified, instructed or
agreed they want the advice to address and therefore curtail the cost of
providing the advice...Further amendment is required to s961B(2) to expressly
provide the ability to scale advice.
The ISN offered an alternative view, arguing that there is no issue with
the provision of scaled advice under the best interests obligations imposed by
There is nothing in the best interests duty as drafted within
s961B which is inconsistent with the delivery of scaled or limited scope
financial advice. Industry super funds, who have been market leaders in terms
of rolling out limited scope financial advice services to members on their
superannuation, are supportive of this duty.
AustralianSuper agreed with this position, stating that the best
interests duty is compatible with the provision of scaled advice and intra-fund
advice in its current form, and strikes the appropriate balance between protecting
consumers and providing clarity to advisers by providing steps to demonstrate
Treasury officials explained that the intent of the wording in the
legislation and EM was to help facilitate scaled advice while protecting
consumers, and emphasised that only relevant investigations would need to be
made by advisers when scaling advice. Treasury commented that the policy
intention is to allow clients and advisers to agree to the scope of advice:
...This is scaled advice. They should be able to work out
scaled advice, but I will give you an example which I put to AMP. If a person
walked through the door and said that they wanted some financial advice on how
to do some margin lending or get some contracts for difference, there must be
an obligation on a financial adviser not to just say, 'Okay—hand us over the
money, and we'll organise it for you.' The idea of the way that the legislation
and the explanatory memorandum are set out is that the financial service
provider would make enough inquiries to decide whether that was suitable or
In commentary on the use of the term 'overall' in the EM, Treasury
...I would read 'overall' down to say that if a person—say it
was someone around this table—walked into a financial adviser and wanted to do
margin lending, some enquiries would have to be made—.
However, in response to committee questioning, Treasury commented that
it would be helpful to clarify in the EM that it is 'relevant' rather than
Additionally, ASIC made it clear that it intends to provide regulatory
guidance to assist advisers in providing scaled advice in a manner which is
consistent with their best interests obligations. ASIC noted that it has
already provided guidance on scaling advice through several regulatory guides
and a July 2011 Consultation Paper Additional guidance on how to scale
advice (CP 164). ASIC will finalise its guidance on scaling advice in 2012,
taking into account the best interests duty proposed in the Bill:
Once the new obligations are in place, ASIC will continue to
provide guidance with the aim of increasing access to advice by facilitating
industry to provide scaled advice while complying with the relevant advice
obligations (as we have in the past with RG 200 and CP 164). This guidance will
discuss a range of topics, including how the fact find process in giving advice
can be either limited or expanded, depending on the complexity of the advice
Use of computer programs to deliver
The EM to the Bill notes that the 'best interests' provisions are
designed to take into account the fact that computer programs are increasingly
being used to provide advice to clients.
The Bill attempts to facilitate this when defining the 'provider' of advice by
including subsection 961(6), which provides:
A person who offers personal advice through a computer
program is taken to be the person who is to provide the advice, and is the provider
for the purposes of this Division.
Several submitters questioned the intent of this provision, noting that
the provision of scaled advice by electronic facilities may make advice
accessible to individuals who otherwise may not access it.
Despite the intent in subsection 961(6) to allow advisers to use computer
programs to give advice, the FSC commented that there is no clear guidance on
how a provider might give advice through a computer system and satisfy the best
interests obligations in section 961B. Some of the potential issues raised by
the FSC include that computer programs:
- cannot comply with a broad undefined duty to act in the best
interests of clients;
- must be able to determine the scope of advice offered, which is
not possible under the best interests obligations as drafted, which only allow
the client to scale the advice sought;
- are unlikely to be able to determine whether any information
entered by a client is inaccurate;
- will not always be able to determine whether it is reasonable to
consider recommending a financial product, or how broad a range of products the
computer program needs to consider to satisfy the best interests obligation;
- cannot take any other step that would reasonably be regarded as
being in the best interests of the client, as required by paragraph 961B(2)(g).
Further clarification may be required either in legislation or
regulations to explain how the provision of scaled advice through computer
programs or other electronic facilities can be undertaken in the context of the
best interests obligations in section 961B.
Scope of the best interests duty and proposed carve-outs
The Bill proposes limited carve-outs from the best interests obligations
for the provision of basic banking products and general insurance products.
Subsection 961B(3) provides that employees of an Australian Authorised
Deposit-taking Institution (ADI) offering advice relating to basic banking
products need to satisfy only the steps in paragraphs 961B(2)(a)-(c) in order
to satisfy their best interests obligation. Similarly, subsection 961B(4)
states that if the subject matter of advice sought by a client is solely a
general insurance product, a provider needs to only take the steps in
paragraphs 961B(2)(a)-(c) to fulfil their obligation.
Under subsections 961J(2) and 961J(3), advice provided on basic banking
products and general insurance products is also exempted from the requirement
in subsection 961J(1) that a provider must give priority to the client's
interests in the event of any conflict of interest.
The EM explains the rationale behind the provision of this limited
carve-out from the best interests obligations:
Basic banking products and general insurance are recognised
as being simple in nature and are more widely understood by consumers. This
means that there is a lower risk of consumer detriment in relation to the
provision of advice on these products. For this reason, a modified best
interests obligation more appropriately balances the benefits to consumers with
the compliance costs to providers.
Treasury explained to the committee why the limited carve-out approach
had been adopted in relation to basic banking advice. It noted that some of the
provisions relating to the appropriateness of advice in section 945A, which
currently must be adhered to by banks, had effectively been transferred across
to the new provisions in paragraphs 961B(2)(a)-(c):
What we have done with the legislation, banks are currently
subject to section 945A in the Corporations Act and that has a number of steps
that have to be taken and a requirement that the advice be appropriate. That
currently applies to the banking sector. With the revised best interest duty,
we have taken some of the process steps out of 945A and included them in the
new best interest duty and we also have the appropriate advice provision in the
new bill. What we have done is say that those steps that the banks used to be
subject to under 945A they will continue to be subject to in the new
legislation and they will also be subject to the appropriate advice test in the
Treasury concluded that 'the intention is to reflect as far as possible
the banks' current position' that is, business as usual in relation to basic
The Insurance Council of Australia welcomed the limited carve-outs
applied to basic banking and general insurance products, and agreed with
Treasury that the applicable provisions in paragraphs 961B(2)(a)-(c) largely
reflect the current requirements under section 945 of the Act.
Advice relating to basic banking
Stakeholders from the banking industry disagreed with Treasury's
assessment of the situation for basic banking products. The Australian Bankers'
Association (ABA) expressed concern that the elements contained in paragraphs 961B(2)(a)-(c),
which will still apply to basic banking products, could significantly extend
the obligations for bank staff and bank specialists, and even lead to banks
declining to provide personal advice:
As currently drafted, the carve out from the best interests
duty is unclear and not absolute, and therefore will create additional
regulation, which will likely make it too difficult and too costly for some
banks to continue to provide advice on basic banking products.
The ABA noted that banks currently pursue a variety of models for
providing financial advice, based on the differences between how factual
information, general advice and personal financial advice are regulated.
As the new best interests obligations only apply to the provision of personal
advice, the ABA argued that some banks may adopt a 'no advice' model in order
to avoid the legal and compliance uncertainties associated with offering
personal advice under the FOFA reforms,
with the effect of decreasing access to advice for consumers.
Abacus, the peak body for Mutuals in Australia, advocated for a 'clear
and unambiguous carve-out from the best interests duty for advisers on basic
Both Abacus and the ABA suggested that section 945A be retained in the
legislation for basic banking products, allowing for a fuller exemption from
the new best interests requirements for these products.
Opposition to the proposed
Some stakeholders opposed the inclusion of carve-outs for basic banking
and general insurance products altogether. The Joint Consumer Groups rejected
the notion that basic banking products and general insurance are simple and
well-understood by consumers, claiming that 'basic banking products and general
insurance products are still capable of being mis-sold, especially by advisers
with incentives to mis-sell, and poor quality advice in relation to these
products can still lead to consumer detriment'.
They also claimed that the requirement for advisers to consider and investigate
the subject matter of the advice, which is part of the current legal
obligations under section 945, is not incorporated into paragraphs 961B(2)(a)-(c).
The consumer groups asserted that this will result in 'a lowering of the
standard of advice in relation to financial products that can be considered
essential and, in fact, almost mandatory for the average consumer'.
The Trust Company argued that the exemptions for basic banking products
and general insurance products, on the basis that these products are more
simplistic in nature, are inconsistent with the goal of raising the standard
and professionalism of financial advice across the industry.
The committee considers that the introduction of a statutory best
interests duty for financial advisers to act in the best interests of their
clients is a vital reform for the financial advice industry. This duty will
help increase the professionalism of the industry and provide additional
protection for consumers.
The committee believes that the formulation of the best interests
obligation in the Bill strikes an adequate balance between providing certainty
for the industry while ensuring professional standards are raised. The
committee notes the concern expressed by some stakeholders regarding the
inclusion of paragraph 961B(2)(g), but believes this paragraph is necessary to
achieve the objective of increasing professionalism in the industry.
The committee commends the Bill for promoting the provision of scaled
advice. For added clarity, the committee believes that paragraph 1.33 of the EM
should be redrafted to refer to the client's relevant circumstances
rather than the client's overall circumstances. The committee considers
that this change, along with additional regulatory guidance from ASIC, will
allay industry concerns about the ability for advisers to offer scaled advice.
The committee considers that the limited carve-outs from the best
interests obligations for basic banking and general insurance products are
warranted and will facilitate the provision of advice relating to these
products to consumers.
4.70 The committee recommends a revised Explanatory Memorandum to the
Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011
be issued such that the final sentence in paragraph 1.33 of the Explanatory
'In identifying the advice that
has in effect been sought by the client (including advice implicitly sought by
the client), the provider must take into account the client's relevant
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