...it is the context of the advice which is more influential on
many consumers than the [general advice] warning.
Financial product advice is divided into two types: personal advice and
Personal advice is given in circumstances where the provider has, or should
have, considered the person's objectives, financial situation and needs.
Only one aspect of the person's relevant circumstances needs to have been
considered for the advice to be personal advice.
General advice is advice that is not personal advice: it is a
recommendation or opinion that does not consider a person's relevant
ASIC makes the following distinction:
General advice about a financial product will not be personal
advice if you clarify with the client at the outset that you are giving general
advice, and you do not, in fact, take into account the client's objectives,
financial situation or needs.
Advice that is likely to be general includes the material provided at
investment seminars and in marketing brochures and when advertising a
particular financial product or product range.
In this chapter, the committee looks at general advice in the context of
agribusiness MIS. It considers whether the regulatory regime around the marketing
of this product to retail investors was sufficiently robust to protect such
investors. The committee also examines the role and responsibilities of
research houses and the independent experts who rated MIS.
Regulations regarding the provision of general advice
Providers are required to warn clients that general advice does not take
into account a person's objectives, financial situation or needs: this warning
is known as the 'general advice warning'.
For example, a PDS is general advice and should contain an explicit statement that
it 'does not take into account the investment objectives, financial situation,
or the particular needs of any potential investor'. In this regard, ASIC
provides the following guidance:
When you are giving general advice to a client, in addition
to giving a general advice warning, it is good practice to take reasonable
steps to ensure that the client understands upfront that they are getting
general advice and not personal advice. You should take reasonable steps to
ensure that the client understands that you have not taken into account their
objectives, financial situation or needs in giving the general advice. This
will avoid confusion and help the client to understand the nature of the advice
they are getting.
ASIC informed the committee, however, that despite the obligation to
give a general advice warning;
...there are still instances when clients do not properly
understand the nature of the advice they are receiving. Slickly presented
seminars with high pressure selling tactics are an example of this.
Recent inquiries—notably the legislation committee's inquiry into the
Corporations Amendment (Streamlining of Future Financial Advice) Bill 2014 and
the FSI—have considered the distinction between general advice and personal advice
and the extent to which consumers understand the difference. A particular
question raised during the inquiries was whether the term 'general advice'
conveys adequately the nature of, and obligations associated with, the
provision of general advice.
The committee's inquiry into the Corporations Amendment (Streamlining of
Future Financial Advice) Bill 2014 received submissions and testimony
expressing concern that consumers were often not cognisant of the nature of
For example, Mr Mark Rantall, CEO of the FPA, noted that many consumers do not
appreciate that general advice does not consider a person's relevant
As long as the differences between general advice and
personal advice are insufficiently clear to consumers, general advice will be
perceived as a less costly form of personal advice.
Mr Alan Kirkland, CEO of CHOICE, took the view that it was unrealistic
to expect all consumers to understand the differences in the regulation of
general advice and personal advice:
We depend on consumers to work out, 'That's general advice,
so there is a lower bar and I should be much more cautious'...It is just not
realistic to expect the consumer to understand that distinction between
personal and general advice.
Noting the concerns about the possible misuse or misunderstanding of the
term general advice, the committee recommended in June 2014 that:
...the government give consideration to the terminology used in
the Explanatory Memorandum and legislation (for example, section 766B), such as
information, general advice and personal advice, with a view to making the
distinction between them much sharper and more applicable in a practical sense
when it comes to allowing exemptions from conflicted remuneration.
In its interim report, released in July 2014, the FSI noted the
committee's recommendation about making the distinction between general advice
and personal advice clearer to consumers. It stated further:
One issue with general advice is whether it is properly
labelled. Some submissions argue that some of the conduct regulated as general
advice could more accurately be described as sales information, advertising or
guidance. The aim of this relabelling would be to give consumers a clearer
indication of what is involved.
The FSI report called for submissions on the proposal to rename general
advice as 'sales' or 'product information', and to mandate that the term
'advice' could only be used in relation to personal advice.
In the second round of submissions to the FSI, most stakeholders agreed
that the term general advice was often confusing to consumers but there was no
consensus on the term that should be used instead of general advice. The
Australian Bankers' Association stated that the industry 'acknowledges that
general advice is not widely understood to be financial advice by consumers'.
The FPA, which has consistently argued that the regulation of general
advice was insufficient, suggested that the term 'general advice' should be
replaced with 'product sales', 'general information', 'financial product
information' or another term which clarifies the distinction between product
sales and financial advice. In its second-round submission to the FSI, the FPA
Framing general advice as financial advice plays into the behavioural
aspects of financial decision-making by giving the impression that the advice
has a reasonable basis or is appropriate for the client, and thereby exposes
retail investors to decisions made under uncertainty about the regulatory
framework for that advice.
As with many other problems in the Australian financial
system, our reliance on a disclosure-based regulatory approach has contributed
to this confusion. While a general advice warning is required to be issued when
providing general advice, it is the context of the advice which is more
influential on many consumers than the warning.
In the FPA's view, financial products, particularly complex financial
products such as interests in MIS, should 'not be promoted or sold in
circumstances where retail clients may reasonably believe that they are being
offered advice that takes into account their personal circumstances'. The FPA also
suggested that 'financial products should not be promoted or sold in
circumstances where the consumer protection framework that applies to the
individual is ambiguous'.
In its final report, released in November 2014, the FSI noted:
...consumers may misinterpret or excessively rely on guidance,
advertising, and promotional and sales material when it is described as
'general advice'. The use of the word 'advice' may cause consumers to believe
the information is tailored to their needs. Behavioural economics literature
and ASIC's financial literacy and consumer research suggests that terminology
affects consumer understanding and perceptions.
While recommending that general advice be renamed, the FSI's final
report did not suggest a particular term to replace general advice: instead, it
recommended a more appropriate term be chosen through consumer testing.
It considered that the benefits to consumers from the clearer distinction
between general advice and personal advice would outweigh the costs of consumer
testing and the costs of updating existing disclosure documents.
In its response to the FSI report, the government agreed to rename
'general advice' to improve consumer understanding. It noted that it would
consult with a wide range of stakeholders and conduct consumer testing before
finalising the new term.
The committee welcomes the government's undertaking to replace the term
'general advice' with one that clarifies the distinction between product sales
and financial advice. It is not convinced, however, that renaming the term in
and of itself provides adequate consumer protection particularly in
circumstances where the product producer uses seminars and dinners to promote
the product. The committee heard numerous accounts of growers, who attended
seminars or promotional dinners, being encouraged to sign up to invest in
It has highlighted the role that these investment seminars had in influencing
investors and is particularly concerned about the way in which scheme promoters
used high pressure or hard selling techniques during so called public
'information' or 'educational' sessions. This advice would be classified as
general advice. Industry Super Australia drew attention to the risk stemming
from the use of general advice to push complex products such as forestry MIS.
The committee takes this opportunity to cite similar concerns about
general advice given during investment seminars or 'wealth creation' sessions
by property spruikers detailed in the committee's report on land banking.
In this highly charged environment around information or promotional
events, there should be clear obligations on the promoters engaging in this
type of marketing to ensure that potential investors are fully aware of the
risks carried by the product they are promoting. Investors must have access to
full and accurate information about the product and be discouraged from signing
up before they have the opportunity to seek independent financial advice—that
is receiving personal advice. In this respect, however, the committee heard of
occasions where the financial adviser was very much part of the promotional
The committee recommends that the government consider not only renaming
general advice but strengthening the consumer protection safeguards around
investment or product sales information presented during promotional events.
The committee recommends that ASIC strengthen the language used in its
regulatory guides dealing with general advice. This would include changing
'should' to 'must' in the following example:
You must take reasonable steps to ensure that the
client understands that you have not taken into account their objectives,
financial situation or needs in giving the general advice.
According to the FPA, referral networks played a significant role in the
massive consumer losses from Timbercorp, Great Southern, and other widely
marketed schemes. It noted that referral advice was not regulated by the
Corporations Act even where major financial decisions were at stake because this
advice did 'not of itself constitute a financial product recommendation'. It
was concerned with the role of business models that rely on referral networks providing
adequate consumer protection.
In addition to recommending replacing the general advice definition with
a term that would not pose the risk of misleading retail clients about the service
they are being provided, the FPA recognised the need to:
investigate the role that referral networks played in the
distribution of failed forestry and agribusiness managed investment schemes;
examine whether consumers are adequately protected from referral
strategies intended to transition between legal and regulatory frameworks of
varying levels of consumer protection.
In light of the concerns about the lack of understanding about the role
that referral networks had in selling agribusiness MIS without appropriate
consumer protections, the committee recommends that the government's
consideration of 'general advice' also look closely at the role of referral
networks and determine whether stronger regulations are required.
The FPA maintained that other gatekeepers, such as research houses, had
also failed their obligations to retail investors.
It observed that in the case of forestry MIS collapses and the resultant massive
consumer losses, the shortcomings of gatekeepers within research houses, AFS
licensees, responsible managers, and product issuers have been understated.
In this regard, the FPA raised an important matter that warrants close
consideration—the role of research houses in promoting the agribusiness MIS.
Role and function of experts'
Research or experts' reports provide another important source of
information for financial advisers and investors in agribusiness MIS and were often
a major selling point for agribusiness MIS. For example, Dr Judith Ajani
explained that typically PDSs for plantation MIS do not include 'any direct
statement or information about forecast project returns'. Instead, she noted,
that relevant information was presented in 'an independent (forestry
consultant) expert's report included in the PDS, but limited to forecast wood
yields and prices'.
The committee has considered, and commented on, the unreliable yield
projections contained in prospectuses and PDSs in agribusiness MIS.
An RE would normally engage external experts to provide potential
investors with independent opinion on what they 'consider to be reasonable
agricultural performance parameters' for the scheme. For example, in 2008,
Great Southern explained that the soundness of an MIS project structure was 'further
ensured by independent research houses'. It then described the work of those
Assessment of the project viability by these credit rating
agencies is extremely thorough and all assumptions used in the MIS operator's financial
model under scrutiny, including past performance, management skills and an
assessment of the MIS company's corporate governance. A range of sensitivities
is provided whereas the potential investor is being made aware of the
assumptions the project is most sensitive to (i.e. commodity price or yield or
both)...Project weaknesses and benefits are highlighted as applicable throughout
the report culminating to what the research house considers to be a reasonable
rate of return for the project and a project rating is finally issued.
These independent reports were a critical component of the marketing
strategy. Mr Bryant noted that insurers would not have given any adviser
indemnity insurance unless they had something like the research report to back
up their decision to recommend it to their clients.
Mr Peterson, general manager of distribution at Timbercorp from September 2004
to December 2009, explained further:
...if you were a dealer group, whether you were owned by ANZ,
NAB, CBA or Westpac, or whatever dealer you belonged to, for the research
committees to put your product on the APL, the approved product list, they
needed a research report from AAG, Adviser Edge or Lonsec. Without those
reports, they would not put the Timbercorp, Great Southern or Macquarie
Forestry projects on their approved product list.
Representatives from FPA highlighted the importance of having robust
research sit behind any analysis of products. Mr Rantall told the committee
that he had sat on approved product committees for 30 years and noted the
reliance placed on research that 'comes across your desk'.
Thus, research reports perform a valuable 'gatekeeping' function in the
financial advice industry for both financial advisers and retail investors by:
identifying products to consider for inclusion on approved
assisting financial advisers to formulate financial advice for
retail investors; and
providing research for use directly by retail investors in making
It is also important to note that the ATO advised the committee that
part of the process of issuing a product ruling involves the applicant providing
an independent expert's opinion on the scheme that go to matters such as
management decision on the location, species and number of trees. The ATO
relies on these opinions when it is considering whether the investors 'are
carrying on a business for determining the deductibility of expenditure'.
Opinions for hire
Although often cited as independent research, product issuers commission
such work as a way to promote their products. This user pays business model, whereby
the product issuer directly reimburses the researchers, has the potential to undermine
the independence of their findings. There may well be a conflict of interest—an
incentive for researchers to downplay the negative aspects of the scheme they
are reviewing and provide positive ratings.
In the context of a research report provider rating a scheme, ASIC
explained further the nature of the potential conflict of interest:
...the conflict arises as a result of the RE generally paying
for the rating and providing the research report provider with information
about the product, including, but not limited to yield information. The
research report provider should manage any conflict that may arise as a result
of these arrangements. If they fail to do so, ASIC may take action to sanction
them, such as administrative action.
In its 2009 report, the PJC referred to the practice of product
producers obtaining opinions for hire. It recognised that independent experts
had a critical role in promoting an agribusiness scheme but that questions had
been asked about the independence and quality of their advice.
The same concerns were again raised during this current inquiry.
The committee has noted that the projected yield rates for some
agribusiness MIS were overly ambitious, and that this fact became increasing
apparent as earlier plantations were harvested. The committee has also noted
that some schemes were located in unsuitable areas—poor soil or removed from
vital infrastructure—or involved the wrong species being planted. Yet, expert
reports did not reflect such concerns. In this regard, ASIC informed the
committee that in the past it found:
...investment products that failed (including agribusiness
schemes) were either highly rated or the subject of very recent positive recommendations
by research houses just before the product failure.
ANZ referred to ratings given to Timbercorp:
In the two years leading up to Timbercorp's collapse in 2009,
external research houses with experience in forestry and non-forestry managed
investment schemes rated Timbercorp investments as 'Investment Grade' or above.
A number of witnesses were particularly concerned about the apparent
lack of independence of experts commissioned to report on MIS. Ms Jan Davis,
former CEO of the Tasmanian Farmers and Graziers Association, informed the
committee that the prospectuses were 'always written by people who had a vested
interest' and paid by the proponents of the scheme.
Mr Cornish similarly thought there was a problem with so-called 'independent
advisers', such as Adviser Edge and AAG, that were giving non-commercial
schemes four out of five stars and whose ratings were included in prospectuses.
He cited a magazine that went out to financial planners at the time, including
their list of 4½ and five stars. He cited one in particular that AAG rated 4½
out of five stars, despite the scheme having 'some really interesting corporate
governance issues'. He stated further that they were producing investment
support advice that was clearly flawed and further 'these organisations were
paid—even though they called themselves 'independent'—by the promoters to
provide this information'.
In summary, Mr Cornish argued:
...where you have the so-called keepers of the keys or the
people who base the ratings, saying, 'This is an investment that you would
invest in', being paid by the promoter, you have, simply, a breakdown in proper
due diligence being carried out.
Mr Tom Ellison was also critical of the research reports. He noted that
some of the AFSL had in-house research houses but others relied on external reports.
For example, he informed the committee that most of the advisers in Tasmania
relied on research reports from Aspect Huntley, whom he thought had given a 4½
star rating to an FEA product. He was of the view that a Perth based company
was commissioned to undertake research and was pushing Great Southern, Gunns
and FEA and rating them all five stars.
Mr Ellison indicated that some of the independent research he had seen was
'basically cut and pasted from the promoters' promotional material'.
Mr John Lawrence attributed the damaged caused by failed MIS to, first
and foremost, the promoters who organised the schemes but also the
professionals who signed off on opinions that formed part of the PDS.
Similarly concerned about the reliability of experts' reports, Mr Samuel
...the Timbercorps and Great Southerns etc and the so-called
agribusiness investment houses, who were paid to promote their schemes, were
never subject to any independent government audit as to the veracity of the
claims that were being made in their promotional literature and their ASIC and
ATO sanctioned PDSs.
Mr Bryant, who was employed by Timbercorp to deal with the research
houses to obtain the necessary reports, suggested that the research houses
provided advisers with a 'Teflon raincoat'.
He explained that the process for engaging a research house would normally
involve a fee of around $35,000 per report. Basically, according to Mr Bryant, Timbercorp
furnished the research houses with all the information that they requested and
the houses, while relying on forestry or horticultural information, did not
undertake independent analysis.
Mr Bryant also indicated that it was common practice for a company to avoid
engaging a research house that may not provide the required rating. He referred
to some companies not approaching Lonsec for certain projects because 'they
knew that Lonsec would not give them the rating they wanted'.
He gave the example, where:
...there were certain projects Great Southern did not get
Lonsec to do, like their trees, because they knew that Lonsec would not give
them an investment-grade rating.
He noted further that 'other research houses like Mercer and Morningstar
refused to rate these sorts of projects'. Mr Bryant observed:
You have to remember that the research houses, whilst they
did not check the pH or get an agronomist's report and those sorts of things,
they did write the reports based on information provided by the promoter—in the
case of Timbercorp products, Timbercorp. They did get out of their offices and
go and kick the dirt and have a look, and they did have some very fine young
minds working with them who had masters in agri et cetera and understood a
little bit about what they were looking at. That can be a defence for them and
it can be a negative for them as well.
Mr Jeff Morris was also critical of the research houses that played
their part in the marketing of agribusiness MIS by 'providing defective product
ratings, on which these professional advisers sought to rely and used to help
sell these products'.
The FPA maintained that, as important gatekeepers, research houses had neglected
The FPA suggested that research houses should be included in a review of
the obligations of the main gatekeepers in the creation, operation, marketing,
and distribution of forestry and agribusiness managed investment schemes.
It argued that ASIC must have the legislative power to hold each participant
accountable for the responsibility they have to the consumer for the
'gatekeeper' role they play, and the consumer's compensation needs.
In 2012, ASIC issued a regulatory guide with the intention of creating
'an environment where the research produced by analysts for clients is
objective, clear, fair and not misleading'.
This objective is consistent with international regulators as set out in the IOSCO's
Statement of Principles for Addressing Sell-side Securities Analyst
Conflicts of Interest.
Two of the core measures in this statement of principles have particular
relevance to this inquiry into agribusiness MIS. They are designed to hold
analysts to high standards of integrity by:
imposing general legal obligations on analysts and/or the firms
that employ analysts to act honestly and fairly with clients; and
prohibiting analysts and/or the firms that employ analysts from
acting in ways that are misleading or deceptive.
The IOSCO also suggested the following additional measures for its
members to consider:
imposing 'fit and proper' requirements or otherwise prohibiting
individuals with criminal records or demonstrably compromised integrity from
being employed, indefinitely or for a period of time, as analysts;
requiring analysts to take periodic examinations designed to test
analysts' knowledge of their legal and ethical duties;
making the disciplinary records of analysts public;
requiring analysts to disclose their professional credentials in
research reports distributed to investors;
requiring analysts to define the terms they use when making
requiring analysts to include in their reports a discussion of
the assumptions underlying their recommendations and a sensitivity analysis to
help investors understand how changes to these assumptions may affect the
While ASIC's Regulatory Guide RG 79 on research report providers is
helpful in providing a useful guide on measures that research providers and
product issuers commissioning reports should employ, the language is tame. For
example, in respect of due diligence ASIC writes:
We expect AFS licensees (including advice providers) to
conduct appropriate due diligence in choosing a research report provider...
Moreover, ASIC informed the committee of the incentives and sanctions
that exist for research houses and experts to make sure that their ratings are
objective and well-founded:
...the incentive for research providers is compliance with
their general licensing obligations and general conduct obligations such as the
prohibitions against misleading or deceptive conduct.
ASIC also noted that it had not reviewed the conduct of research houses
since the last revision of RG 79 in December 2012.
The committee acknowledges that there are numerous participants who
offer products or services within the financial advice value chain that influence,
directly or indirectly, consumers' decisions on financial matters. It
particularly notes that research houses and subject matter experts produce
reports containing important information for financial advisers and investors
in agribusiness MIS. Under the user pays model, the experts' opinions may be
biased by the remuneration offered and the promise of further business. In the
committee's view, research houses and experts providing opinions should be held
to high standards of honesty and integrity. In this regard, the committee notes
the relevant IOSCO statement of principles governing integrity and ethical behaviour
and is of the view that they should apply and have force in Australia.
The committee is concerned that the message about compliance and
adhering to high ethical standards is not reaching all participants in the industry.
In respect of research houses and subject matter experts
providing information or reports to the market on financial products such as
agribusiness MIS, the committee recommends that the government implement
measures to ensure that IOSCO's statement of principles governing integrity and
ethical behaviour apply and have force. In particular, the committee recommends
that the government consider imposing stronger legal obligations on analysts
and/or firms that employ analysts to rate their products, to act honestly and
fairly when preparing and issuing reports and applying ratings to financial
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