Part II—Promoters and producers of MIS—advisers, product issuers, ratings
experts, lenders and class action lawyers
The growers who took advice to invest in MIS were convinced
of the soundness of their decisions and the integrity of those who marketed the
schemes. As one grower stated it 'looked legitimate', asking 'After all, what
was there to lose?' In this part of the report the committee examines the
promotional aspects of MIS; the conduct of advisers who recommended the
products; the developers and promoters who produced, managed and rated the
schemes; the banks that lent to the investors and the lawyers who advised
borrowers to cease repayments on their loans.
The committee considers weaknesses in the regulatory regime
that left investors exposed to poor financial and legal advice.
Financial advice and advisers
We had no experience in this industry. However we trusted our
accountants as we did not believe that they would be recommending an investment
which was high risk and not in our best interests.
Advisers occupy an influential position when it comes to the small
investor making a financial decision. Australia's regulatory framework recognises
the vulnerability of the retail investor to financial advice and places a heavy
reliance on the conduct of advisers and on mandatory disclosure to protect retail
investors from receiving bad advice.
As noted in the previous chapter, clients gave great weight to their
advisers' recommendations and, even against their own inclinations, invested in
inappropriate products that they did not fully understand. In this chapter, the
committee looks at financial advisers and the regulatory framework governing their
advice, in particular, its adequacy in protecting consumers from unsound advice.
Agribusiness and financial advice
Financial advice has a specific legal and regulatory meaning. Financial
product advice means a recommendation or a statement of opinion, or a report of
either of those things, that:
is intended to influence a person or persons in making a decision
in relation to a particular financial product or class of financial products,
or an interest in a particular financial product or class of financial
could reasonably be regarded as being intended to have such an
When most of the growers who made submissions invested in MIS, their
financial advisers were required, under section 945A of the Corporations Act, to
have a reasonable basis for advice. Until recently, this section, the so-called
'know your client' provisions, required advisers to recommend products in the
light of their knowledge of clients' individual needs and circumstances.
In other words, the adviser must have been able to demonstrate that they
complied with two central obligations—know their client and know their product.
Licensees and their advisers were also required to ensure that the advice given
to the client was appropriate.
Deficiencies in advice
It is important to note that an awareness of shortcomings in the
promotion and selling of agribusiness MIS date back to 2001 and 2002, when
identifiable concerns about these schemes were surfacing. At that time, ASIC
had formed the view that certain agricultural investment schemes often sold as
tax driven schemes left 'much to be desired in terms of their marketing,
promotion and operation'. It told the committee in 2001 that, as a percentage
of the managed investments industry as a whole, the number of compliance problems
in the agribusiness schemes area was high.
In 2003, ASIC again expressed concerns about the quality of advice and
disclosure in relation to the promotion of tax-effective mass-marketed schemes
in the primary production managed investments sector. In particular, ASIC was
the questionable commerciality of some of the schemes;
at times, the poor quality and absence of adequate disclosure;
occasional inappropriate or misleading advice; and
payment of high commissions in excess of market norms for other
retail investment schemes.
Yet, over the next five years or so, interests in the agribusiness MIS
continued to be promoted and sold, drawing in significant numbers of retail
investors right up to the collapse of the major schemes. Evidence also shows
that the problems known to exist in 2001 and 2003 persisted. The committee has
provided many examples of advisers misleading their clients on the risks
involved in investing in MIS or where they allowed, even encouraged, their
clients to hold incorrect assumptions about the safety of the product and/or
loan. Most of these advisers held an AFS licence or were an authorised
representative of such a licensee.
Under the Managed Investments Act 1998, scheme promoters must
hold a licence to operate the scheme and must obtain a separate authorisation
in order to give advice relating to a scheme. The law allows a licensed dealer
or adviser to issue a 'proper authority' to a representative, who is thereby
authorised to act on behalf of the licensee. The licensed dealer has responsibility
for ensuring that such representatives comply with the law and possess appropriate
educational qualifications and experience.
Furthermore, the licence holder is obliged to notify ASIC of any proper
authorities that they issue and is responsible for ensuring that such representatives
meet ongoing training requirements. ASIC maintains a register of all proper
Statement of Advice (SOA)
If personal advice is given to a retail client, the provider (i.e. AFS
licensee or authorised representative) must give the client a statement of
advice (SOA). An SOA must set out the advice and the basis on which it was given.
It must also contain:
the name and contact details of the provider of the advice;
information about any remuneration (including commissions) or
other benefits that the provider and related or associated persons or entities may
receive (these amounts must be disclosed in dollars unless otherwise permitted
by ASIC relief); and
information about other interests, associations or relationships
that might be expected to be or have been capable of influencing the advice.
The SOA, which is to assist a client understand, and decide whether to
rely on the advice they have been given, must be given to a client when
financial product advice is provided.
The CPA informed the committee that although ASIC expects that an SOA is set
out in a clear, concise and effective manner, they have become:
...an unnecessarily long and complex compliance document used
by the industry as part of the audit trail for protection from potential
litigation. SOAs—in their current form, do little to enhance the consumer's
understanding of the advice they are receiving. While an SOA must be tailored to
the needs of each client, one option may be to explore what efficiencies could
be achieved through industry consultation.
It should be noted that a number of investors mentioned that at the time
of signing up for the scheme they were not provided with, or in some cases not
aware of, SOAs, financial service guides or general advice warnings.
For example, Mr Huggins told the committee that he was:
...aware of instances where no SOA was provided at all...the SOA
was provided after the investment was made or the SOA was grossly deficient
(sometimes being little more than a marketing style document that has
apparently been produced by the promoter of the scheme).
The committee has already mentioned the confusion and apparent lack of
investor awareness about their loan arrangements. One such couple indicated
that they were in possession of very few SOAs and certainly none that
stipulated that loans were to be taken out in their name without their
knowledge and 'funded by our margin lending dividend bank account'. They
explained that their adviser was doing exactly that and cited an SOA for Citrus
2004 which outlined a loan for $80,000 but they were unaware that loans were
taken out in their name for citrus, almond and olive or forestry schemes.
Furthermore, investors were poorly equipped to appreciate the
information contained in the disclosure documents. One couple who did receive a
SOA and PDS explained:
We were never encouraged to read them or seek independent
advice. We were led to understand that we were purchasing lots of units of
trees. There was little information provided regarding the nature of the
investment. The language of the Statement of Advice described our purchases as
'LOTS' and 'Grovelots'.
As such we believed we were investing in physical assets that
would provide some financial relief in the event of failure of the business.
In particular, they noted that in their SOA there was no mention in
sections on project specific risks and revenue and financial risks of their
exposure to debt should the business fail.
Many growers who wrote to the committee contended that they were the
targets of white collar crime.
The words they commonly used to describe the financial advisers and accountants
who enticed them to invest in the failed MIS included dishonest, unethical and self-serving.
One investor maintained that she needed protection from a shonky product that
was sold by 'an unscrupulous, greedy financial planner'—'merely a product
...did not have my interests at heart. We need another system
to protect consumers!
Another couple, who also saw themselves as victims of an unprincipled
financial advisor, informed the committee that their adviser had 'a one size
fits all' approach to his clients.
We received inappropriate and misleading advice for our
situation as retirees, being balanced investors seeking a modest income so we
would not have to rely on a government pension.
According to one grower, Timbercorp never hinted at any danger or risk
to their investments. He went on to state that the only worrisome risks were
fire, windstorm and hail which were covered by the yearly insurance payment.
...acknowledged all investments have risks but they were
minimal and to give additional weight to her advice she said she was putting her
money in as well.
Similarly, another couple informed the committee that they enquired
about the risks but were told if there were any issues the RE would change
hands and their investment would be safe unless there was a long term drought,
which made sense to them at that time.
Some investors were told that their investment was conservative and there was
Another couple informed the committee that their adviser had encouraged them to
mortgage their freehold home and investment properties and to use the funds to
invest in these tax deductible schemes.
The overwhelming view among the growers who wrote to the committee was
that the products should not have been offered and sold to them.
Inappropriate risk for investor
A number of submitters were unaware of the risky nature of the
investment indicating that their adviser conveyed a very different impression.
One of the most concerning aspects of the advice was the disregard shown
for the investor's risk profile and interests. Many suggested that the advice
was inappropriate, unsound and contrary to their financial situation: that they
were poorly advised and their adviser lacked duty of care.
They spoke of how their financial planner ignored their risk profile: that they
were placed in a high risk investment when they required a low risk one. Mr Mazzucato
informed the committee that his financial planner classified him as a 'sophisticated
investor'. When he told his accountant of this fact, the accountant was shocked
and advised Mr Mazzucato that to be deemed a sophisticated investor he needed
assets of over $2.5 million and an income in excess of $250,000 per annum—both
of which were far from the case at the time.
One man informed the committee that:
My wife's risk profile was determined to be 'conservative'
and yet our financial planners within the Navra Financial Services/Navra Group
Pty Ltd inappropriately advised us to invest our funds in highly-geared, high
risk investments on high interest rates even though my wife was not in a working
capacity. We are not financial planners and therefore we trusted their advice.
Overall, in their assessment the financial planning industry was one
...hardworking Australians, everyday mums and dads, are being
duded by predators, wolves dressed up as lambs, who prey on their innocence and
lack of knowledge.
One investor maintained that his adviser group should not have
recommended and then 'deceptively' implied that the investments were suitable
for his financial situation'.
Another investor spoke of being coached through the questionnaire 'until my
profile matched the requirements for the investment'. She stated further:
I was completely naïve to why this was necessary. I did not
realise that she was protecting herself by me being seen to be compliant.
Another adviser actively discouraged a woman from putting money into
superannuation. According to her confidential submission, the adviser informed
her that the problems with superannuation, among other things, was that it was
'locked away'; she could not access it if needed; she did not have enough money
to make it viable and further 'there was no guarantee to whom it would be paid
when she died'.
The committee has noted that many of those who wrote to the committee
were not financially well-off with little to no investment experience. But even
those who were high income earners were entitled to receive sound professional
advice from their financial adviser. One such high-income earner acknowledged
that he received a tax benefit from his MIS investments but now had accumulated
a significant debt arising from the MIS investments. He stated that his adviser
only ever suggested investing in MIS and never promoted other investments.
According to this investor, he now has virtually no superannuation, no
diversification in his investment portfolio; a huge MIS debt; and is struggling
to pay rates, school fees and tax.
There are many cases where the investor clearly did not understand the
agreements they were entering and the adviser appeared to do nothing to
disabuse clients of false impressions. Indeed, evidence presented throughout
this report so far strongly suggests that some financial advisers actively
fostered misconceptions. Five glaring examples of the misunderstandings allowed
to go uncorrected were that:
the schemes were government endorsed by the ATO and ASIC;
the investment was sound, safe and would return long term benefits;
the investor was actually purchasing a piece of land as per the
the investment funds would be used to plant trees or crops; and
the loan used to finance the investment was affordable,
self-funding and non recourse.
Poor advice in the extreme
The FPA held very strong views on the standard of advice that was
provided to retail investors in MIS by some financial advisers. Firstly, it
questioned the quality of advice provided by a representative who is limited to
recommending only one product, such as the numerous references to accountants
who were an authorised representative of an MIS. Secondly, the advice ignored the
fundamentals of good financial advice, in particular the importance of
diversification—'Do not put all your eggs in the one basket'. The FPA noted:
Those financial planners or accountants who recommended that
their clients invest a majority or 100 per cent of their assets into a forestry
management investment scheme, particularly using leverage, would not be
According to a FPA survey completed in 2009, FPA members who advised on
forestry and agribusiness managed investment schemes, recommended that their
clients limit the maximum on the whole in those investments to 'around 10 per
cent, with some having rules that capped it as low as two per cent'.
Mr Neil Kendall, Chair FPA, explained that a five to 10 per cent exposure would
give anyone in the situation of a product failure 90 per cent of their
Another important principle concerned the 'judicious use of debt'.
Mr Mark Rantall, CEO FPA, explained that debt 'can be your friend,
but it can be your foe':
When you borrow and the assets that you borrow against disappear,
or their value drops...you need to be in a position to service that debt. Clearly
in these instances...there was inappropriate screening of people's ability to pay
and inappropriate people were put into these products—and were also leveraged
In his view, a responsible financial planner would have recommended
capping both the MIS and the debt at a 'relatively low level'.
The investors who made submissions to the inquiry received advice that defies
some of the most basic and fundamental tenets of sound investing. The advice
failed to promote portfolio diversification; played down the value of building and
protecting a superannuation nest egg; mismatched the product to the investor's risk
profile (recommending high risk products to low risk profiles); and placed the
adviser's own interests ahead of those of clients. In some cases, potential
investors were advised to divert funds intended for superannuation; not to
invest in property; and to overcommit including borrowing up to 90 per cent through
a full recourse loan in a speculative venture without considering that the
project may fail to deliver as promised.
During the period under the committee's consideration, investor
protection required only that investors be fully informed of the fees and
commissions that applied: that there was 'no prohibition against charging high
commissions'. Even though the Corporations Act clearly stipulated that
commissions must be disclosed, this area of corporate governance in 2001 still
exhibited many transparency related concerns. ASIC told the committee in 2001 that
out of 91 prospectus documents investigated by ASIC:
...30% did not disclose the commissions payable or the
percentage of commission payable.
The matter of high fees and commissions, raises two areas of concern—the
incentive for an adviser to recommend a product for personal reasons (better
remuneration irrespective of the merits of a product); and the siphoning of
funds away from the investment. In this chapter, the committee is concerned
with the influence that commissions exerted over the quality of financial
Early concerns about commissions as
a perverse incentive
As early as 2001, ASIC had identified high up-front management fees and
commissions as a major area of concern in agribusiness MIS.
Again in 2003, ASIC was aware of the payment of high commissions in excess of
market norms for other retail investment schemes.
At that time, it undertook surveillance to determine whether there was a link
between the receipt of high commissions by financial advisers and the provision
of inappropriate or misleading advice to investors to buy into such schemes.
It found that:
...there appears to be a correlation between primary production
scheme promoters paying high commissions to advisers and those advisers providing
inappropriate financial advice when they recommend those products to clients.
In ASIC's view, this correlation indicates that there may be instances of a failure
by advisers to manage conflicts of interest, where their personal interests in recommending
a product supersede the client's need for good and appropriate advice.
Commissions paid to advisers were generally around the 10 per cent
Former Timbercorp officer, Mr Peterson, informed the committee that advisers
who were writing a lot of business would seek higher commissions by implying
that otherwise they would support another scheme. He described the situation as
'almost like a bidding war'.
In 2008, the NFF also identified the potential for high commissions to
provide undue incentive for planners to invest client dollars in such schemes.
Adviser Edge, an investment research house that specialised in agribusiness, raised
concerns about MIS. In 2008, it suggested that adviser commissions were too
high in both 'an absolute and relative sense'. In its view, 10 per cent
commissions were among the highest in the financial planning industry, stating further
that there were:
...many financial advisers [who] do not have a strong knowledge
of the agricultural sector, and hence there is a tendency for investment
decisions to be based more heavily on the level of commissions, rather than the
strength of the project.
Adviser Edge submitted that closer regulation of the level of
commissions and marketing fees to advisers would 'result in less bias towards
investments paying high commissions'.
Many investors, who wrote to the committee, referred to the commissions
paid to advisers for selling MIS and were convinced that the practice was a
factor underpinning poor advice. In the words of one couple, the promoters:
...used smooth talking financial planners to sign up investors
under the guise of giving a comprehensive, 'well thought out' financial plan
and at the same time pocketing substantial commissions. These commissions were
paid in advance despite many of the investments projected to be cashflow
positive only after 10 years or so.
Another indicated that:
We were easy targets for smooth-talking advisors whose greed
is contemptible. Holt Norman misrepresented the facts about our investments and
neglected to mention they were benefitting from muti-tiered commissions and
trailing bonuses, as rewards for pushing these products.
Looking back, many investors can now plainly see that the advice they
received was compromised by fees associated with the product, which eclipsed
their adviser's requirement to act in their best interests.
Mr David Huggins, a lawyer representing his client who had invested in an MIS, contended
that the high level of commissions paid by these schemes distorted the advisory
process. In his assessment, the scheme promotors had formed the view that it
...necessary for high levels of commissions to be paid so as to
induce advisers to provide advice about them—the issue being that it was
apparent to advisers that there was a high level of risk associated with these
products and they needed to receive substantial commission payments to, in
effect, compensate them for the risk that their clients would suffer loss as a
result of investing in these schemes and blame their adviser for this
Another investor indicated:
In hindsight I find that the advice provided by my accountant
was biased based on his vested interest which outweighed his requirement to act
in my best interests. (Due to the heavily incentivised fees associated with the
Mr Tom Ellison, financial analyst, observed that a financial planner
selling a managed investment product has a much greater incentive to get a 12
per cent commission, particularly when the success or otherwise of the product
would not become known for a number of years. Moreover, the product could be
sold every year—'it was not just a one-off'.
Based on years of experience in the financial services industry, Mr Jeff Morris
advised that the level of commission alone for agribusiness MIS should have 'sounded
a note of caution about their bona fides'. Furthermore, he reasoned you could
gauge how bad it was by the level of commission payable:
...the commission was there precisely to seduce the judgement
of these experts.
AgriWealth similarly noted that most of the individual investors in MIS
forestry projects who had suffered financial hardship were retail investors and
were often persuaded by the financial advisers to invest in the schemes. It
The financial advisers often had a conflict of interest in
providing advice to retail investors in so far as they received commissions,
sales incentives, etc from the promoters of those schemes. Those incentives
were not always disclosed to the retail investors in an open and honest manner.
Where MIS products continue to be offered to retail investors
there needs to be tightening of regulation around the actions of financial
advisers, financial planners, etc. Full and frank disclosures must be made by
advisers to retail investors.
Mr Michael Bryant reminded the committee also about the soft dollar
payments, now outlawed, that were also used to entice advisers to sell
products—races, grand finals, expensive dinners.
The MIS illustrated clearly how the payment of commissions as
remuneration for advisors providing financial advice could compromise that
The concern about financial advisers receiving commissions for their
services has been well aired over recent years and the reforms intended to
remove this type of incentive payment have been implemented. The FOFA reforms
recognised that product commissions:
...may encourage advisers to sell products rather than give
unbiased advice that is focused on serving the interests of the clients.
Financial advisers have potentially competing objectives of maximising revenue
from product sales and providing professional advice that serves the client's
As such, FOFA imposed a ban on the receipt of remuneration that could
reasonably be expected to influence the financial product advice given to
Based on evidence presented during this inquiry, some witnesses
expressed concerns about any proposed relaxation or watering down of these reforms.
Indeed, some identified the need for additional reforms. For example, Industry
Super Australia (ISA) was concerned about any possible amendments to the
legislation that would result in 'the re-emergence of practices such as
conflicted remuneration which were central to the mis-selling of forestry MIS
such as Timbercorp'.
The committee recognises that the FOFA reforms may well have remedied
one of the most pernicious incentives underpinning poor financial
advice—commissions. The evidence clearly highlights, however, the importance of
ensuring that there are no loop holes in this legislation that would allow any
form of incentive payments to creep back into the financial advice industry.
The committee recommends that ASIC be vigilant in monitoring the
operation of the FOFA legislation and to advise government on any potential or
actual weaknesses that would allow any form of incentive payments to creep back
into the financial advice sector.
Holding financial advisers to account
Advisers were not at fault in accepting high commissions. They were,
however, in breach of the Corporations law by not disclosing such information. Licensed
financial advisers were required to disclose to their clients all commissions attached
to the sale of particular financial products and hence any possible conflicts
A number of submitters maintained that their adviser did not disclose the
substantial commission they were receiving, including trailing commissions.
For example, Mr Peter Mazzucato did not know that his adviser had obtained
secret commissions to promote the Timbercorp investment scheme.
Likewise, Ray and Maree Wilde were certain that no mention had been made
of the 10 per cent commission their adviser would receive. They noted that the
Timbercorp documents refer to five per cent.
This tendency to gloss over or to fail to disclose commission is
consistent with the pattern of poor behaviour of some financial advisers that included,
as chronicled in this report, downplaying risks, failing to disclose material
facts about loan arrangements, allowing the perception to take hold that the
products were government endorsed, high pressure selling, overly optimistic
projections about the products performance, and ignoring the client's risk
profile. The matter of holding financial advisers to account for providing unsound
advice is covered in greater detail in the following chapter.
Role of accountants
A number of people providing advice on MIS were accountants. For
example, during the Great Southern proceedings, the court was told:
Most, if not all, investors in Great Southern projects sought
advice from an external accountant and/or a financial planner prior to
investing. However, not all accountants held their own AFSL and often did not
want to because of the additional compliance costs. By appointing external
accountants as Authorised Representatives of GSS [Great Southern], these
accountants were able to act under GSS's AFSL and were able to provide their
clients with financial product advice without having to obtain their own AFSL.
Accountants occupy a privileged position, especially with long-term
clients, where often they have established a good relationship and have insight
into their client's financial affairs. In this regard, one investor captured
the sentiments of a great many of the investors who wrote to the committee when
My then accountant was my trusted adviser at the time, having
been my accountant for some years, and I regularly took his advice on business
and taxation issues as I was involved in a family business.
One submitter, however, drew attention to the blurring of
responsibilities between the roles of an accountant and a financial adviser providing
For example, a lawyer acting on his client's account alerted the committee to
his concerns about the conduct of an accountant. For a number of years, his
client had been using the services of an accounting firm. An employee of that firm
had been appointed as an authorised representative of Rewards Projects Limited,
which held an AFSL and was the RE for the Rewards Group Premium Timber Project
2009. According to the lawyer, it appeared that the employee used knowledge of his
client's financial affairs—information gained as a result of acting as the
client's accountant—and access to his client, in terms of providing advice
about taxation related issues, as a means of marketing the investment to him.
The pertinent issue being that the alleged tax effective nature of the
investment was the primary means by which it and similar investments were
marketed to clients. Relevantly, the lawyer noted that:
...issues concerning the quality of financial advice are usually
thought of in terms of advice provided by financial planners. However, in my
experience, accountants had a substantial involvement in the marketing of
agricultural managed investment schemes to clients. In this regard, I assume
that the promoters of these schemes viewed accountants as being a useful
distribution channel for their products because their alleged tax effective
nature would be relevant to issues that accountants were already discussing
with their clients.
In the lawyer's view, the practice of accountants providing advice about
MIS was 'generally improper', as 'accountants' knowledge of their clients'
taxation affairs was used as a means to market tax effective investments
Furthermore, the accountants were often authorised to provide advice by the
scheme's promoter. In his opinion:
...a real issue arises as to whether it is appropriate that a
person can, in effect, be authorised by the promoter of a scheme to solely
provide advice about that scheme (the issue being that the accountant is acting
as little more than a salesman for a particular financial product rather
than as a financial advisor). More generally (as was the case here), these types
of arrangements can leave clients with limited options should they receive poor
financial advice—the issue being that if the promoter fails the client will not
be able to pursue the promoter by way of an external dispute resolution scheme such
as the Financial Ombudsman Service (in these circumstances, the only remedy
likely to be left to the client is to commence proceedings in a Court against
the accountant which can be problematic for a number of reasons).
Clearly, accountants were in a position to use knowledge of their
client's financial affairs to offer unsolicited advice. For example, one
investor informed the committee that the MIS investment was brought to his
attention and recommended to him during an unrelated appointment for business
Another couple said that their adviser was t heir trusted accountant who had
been looking after their business affairs for many years. They stated that they
now know that their accountant was not giving advice but selling products from
which he profited and were clearly unsuited for their financial situation.
One investor spoke of his financial adviser's 'grossly conflicted role'
as a Great Southern representative. He argued that the adviser's 'inside
knowledge' of his affairs enabled the adviser, based on the tax returns he had provided,
to present the investor to Great Southern Finance as credit-worthy.
A number of investors named certain advisers who had recommended
investing in a particular MIS. During the course of the inquiry, the committee
provided ASIC with the names of those advisers. According to ASIC, although referred
to as advisers, one business, an accounting firm, did not hold an AFS licence nor
was it a corporate authorised representative. Two were authorised
representatives of a few MIS but recorded as investors rather than advisers and
another was an authorised representative of Timbercorp Securities Ltd and
Rewards Projects Limited. ASIC's understanding was that:
...all of the Timbercorp Securities Limited authorised
representatives were qualified accountants and only authorised to provide
general advice to investors.
But, according to the investors, these individuals or accountants did
provide personal advice and facilitated the investment into the MIS.
Concerned about the possible lack of a robust regulatory regime
governing accountants giving financial advice, especially an accountant who was
an authorised representative of an agribusiness MIS, the committee put specific
questions to the Treasury, ATO and ASIC. Their responses clearly spelt out the
obligations on accountants or tax agents providing financial advice.
It should be noted that since the introduction of the FOFA reforms,
financial advisers and accountants providing personal advice must act in their
client's best interest and prioritise the client's interest over their own.
According to ASIC:
These new requirements should reduce any possible conflicts
of interests in circumstances where accountants have information about a
client's tax position and are providing financial product advice. This is because
the adviser must put the client's interests ahead of their own.
The Tax Practitioners Board (TPB), which is responsible for regulating
tax agent services, is aware that some tax agent services are provided in the
context of the provision of financial advice. It informed the committee that
any person/entity providing such advice for a fee or reward needs to be
registered with the TPB as a tax agent or tax (financial) adviser. According to
the TPB, all tax practitioners who are registered with the TPB must comply with
obligations under the Tax Agent Services Act 2009 (TASA), which among
other things, includes a legislated Code of Professional Conduct. Under this
code a tax practitioner must act lawfully in the best interests of their
TASA commenced on 1 March 2010.
Despite recent reforms, and in light of the numerous references to tax agents
providing advice on agribusiness MIS and on borrowing to invest in such
schemes, the committee has lingering concerns about the regulatory regime
covering accountants/tax agents providing this advice.
In light of the evidence and the concerns expressed about possible
conflicts of interest and blurring of responsibilities in situations where a
tax agent provides financial advice, the committee believes that this area of
financial advice or advice on borrowing should be reviewed. Clearly, there are
important lessons to be learnt from the experiences of investors who acted on
advice from their accountant or tax agent.
While noting the 1 July 2016 expiry of the 'accountants'
exemption' under Regulation 7.1.29A of the Corporations Regulations 2001, the
committee recommends that the Treasury look closely at the obligations on
accountants or tax agents providing advice on investment in agribusiness MIS
(or similar schemes). The intention would be to identify any gaps in the
current regulatory regime (or the need to tighten-up or clarify regulations) to
ensure retail investors are covered by the protections that exist under FOFA
and that the level of regulatory oversight of tax agents or accountants
providing advice on agribusiness MIS (or similar schemes) does not fall short
of that applying to licensed financial advisers.
The committee has established that some advisers failed comprehensively
in adhering to the requirements to know their client and the product they were
recommending, and to have a reasonable basis for their advice. Evidence
indicates that, in numerous cases, advisers and accountants withheld important
information, particularly about the high risks involved; wilfully downplayed
risks; and exaggerated the returns on investment. They put their own interests
above those of their clients in giving poor advice, which resulted in their
clients sustaining substantial financial losses. Such advisers seemed more
intent on selling a product because of the attractive commissions they could
earn rather than providing their client with appropriate advice.
The committee has referred to recent reforms, such as banning conflicted
remuneration, that should help to lift the quality of financial advice. In the
following chapter, the committee considers other consumer protection measures including
the educational standards and qualifications of financial advisers and the
overall culture in the financial advice industry.
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