The proposed Future of Financial Advice (FoFA) reforms seek to impose a new statutory fiduciary duty on financial advisers, meaning they must put the client’s interests first. For the first time, this principle will be enshrined in legislation as a specific duty. While a new law sends a message, we believe this will need to be accompanied by cultural change in the financial advisory industry to embrace the spirit of the new duty, including removal of practices that may compromise its application.
The Self-Managed Super Fund Professionals’ Association of Australia (SPAA) also recommends that all individual advisers be required to be members of a professional association that promotes high professional standards.
Of course, while a concept like fiduciary duty sounds like a commonsense obligation for a professional, it is important that it work effectively with existing laws and business practices.
The common law already imposes a duty of care on advisers such that: “If someone possessed of a special skill undertakes, quite irrespective of contract, to apply that skill, a duty of care arises”, according to the Hon Sir Anthony Mason, a former Chief Justice of the High Court of Australia and SPAA patron. Sir Anthony presented a paper on professional negligence and the proposed fiduciary duty at the SPAA National Conference. I include his comments in this column as he will be assisting SPAA to develop policy on fiduciary duty which will become part of our professional standards.
According to Sir Anthony, the standard of care for a professional adviser is one of “reasonable skill appropriate to the position and status of the adviser”. This duty extends to provision of information and advice, though he says courts may make a distinction where a sophisticated investor is seeking information, rather than advice, and making their own investment judgement on the basis of information supplied.
The fact that an investor is selling products to a client does not mean the adviser is not under a duty of care. Even a salesperson may be under a duty not to recommend a high-risk product without pointing out that risk.
Common law also addresses conflicts of interest which may impede a duty of care. For example, if a financial adviser recommends a product for which he is remunerated by the product provider, the adviser is vulnerable to a finding of negligence, simply because a court or tribunal may conclude that the adviser put his own financial interest ahead of the client’s. More importantly, disclosure of an adviser’s interest is not an answer to a claim of negligence, Sir Anthony says.
That’s how the courts define a duty of care, but how is this enshrined in legislation?
Section 12ED of the ASIC Act 2001 states that in every contract for supply of financial services to a retail investor, there’s an implied warranty that this will be rendered with due care and skill. This is a principle that reinforces the common law duty of care and seeks to void clauses which try to limit or exclude the liability of a financial adviser.
Chapter 7 of the Corporations Law then imposes obligations on financial services licensees and their authorised representatives concerning financial advice. They have to investigate the client’s circumstances (s945A) and provide advice appropriate to the client. A client can claim loss or damage as a result of non-compliance.
Sir Anthony has suggested the new fiduciary duty and s945 could be married as one option. An alternative which would achieve a better outcome would be to mould a new section – like ss180-184 of the Corporations Law – which deals with duties of directors and corporations and adds an express provision for ‘’known or should have known” as a best interest duty.
For an adviser to defend themselves against an action based on the new fiduciary duty, it is proposed that they be able to say “they took reasonable steps to give appropriate advice”. For that defence to stand up, they would need to show that they went beyond the approved product list (APL) of remunerated products and identified some outside it, if need be. This could be problematic. Advisers also have an obligation to their licensee to only recommend products on that licensee’s own APL. A key reason for this is to minimise product risk and is often a condition of professional indemnity insurance.
Andrea Slattery is the CEO of the Self-Managed Super Fund Professionals’ Association of Australia (SPAA).
