The proposed new statutory duty to act in the best interests of the client arises out of Recommendation 1 in the Ripoll Report.
Recommendation 1 was in these terms: ‘That the Corporations Act be amended to explicitly include a fiduciary duty for financial advisers operating under an AFLS, requiring them the place their clients’ interests ahead of their own’.
The Ripoll Report assumes than an adviser can provide advice not in the client’s best interests, yet comply with Section 945A. This problem should be put at rest by amending Section 945A as the report suggests.
It would, however, be confusing to call the new statutory duty a ‘fiduciary’ duty, as such a description will only suggest, quite wrongly, that the new duty is associated with the negative duties of a fiduciary – one, not to put himself in a position of conflict of interest and duty; and two, not to make an unauthorised profit out of the fiduciary relationship.
In essence, the obligation to act in the best interests of the client requires the adviser to put the client’s interests ahead of the adviser’s interests – for example, his entitlement to remuneration on recommended products – and the interests of any third party as well.
“If he is not prepared to recommend a product beyond his own list, he should refer the client to another financial adviser”
But the duty of the financial adviser to the client cannot be limited to the obligation to put the client’s interests ahead of the adviser’s interests and the interests of others. The financial adviser must be required to provide advice that is appropriate, having regard to the client’s instructions and the circumstances of the client, which the adviser knows or ought to know.
In this respect, one alternative is to marry the duty to act in the best interests of the client with the existing provisions of Section 945A. Another alternative would be to mould the new section 945A in the light of the provisions of sections 180 to 184, dealing with the duties of directors of corporations. This alternative would require some surgery on sections 180 to 184, because the complex duties of a director are different in kind from the specific duty that a financial adviser owes to a client.
What is more, there is no reference in the context of directors’ duties to a requirement for the exercise of skill – which is an express or implied element in any formulation of a financial adviser’s obligations. Moreover, the references in these sections to ‘business judgement’ and ‘proper purpose’, while appropriate to a director, are by no means apt in the case of the financial adviser.
That said, Section 945A could build on the business judgement rule, which is the defence provided for by Section 180 subsection 2 – though modifications would be needed, as I shall point out.
It is proposed that a financial adviser should be able to avail himself of a defence of having taken ‘reasonable steps’ to give appropriate advice to the client. Under this defence, an adviser would need to establish that, in considering the client’s circumstances, he went beyond the adviser’s list of [recommended] products, and identified a reasonable range of products outside that list – though he would not be expected to have knowledge of every possible product.
He might well need to show that he made appropriate enquiries to ascertain whether there were particular products to meet the special needs of the client. And in most cases, he might need to show that he drew the client’s attention to products not on his [recommended] list. The onus of establishing a defence, according to the proposal, would be on the adviser.
If an adviser were to recommend a product on his own list, he would probably need to establish why it is better suited than, or as well suited, to the client’s needs, as available competing products. If he is not prepared to recommend a product beyond his own list, he should refer the client to another financial adviser. Indeed, the proposed new regime may well impose such an obligation on the adviser.
