The Future of Financial Advice (FoFA) reform’s best interest duty has left a hole for legal liabilities due to its unclear definition, according to Richard Batten, financial services regulatory expert and partner at Minter Ellison Lawyers.
The duty, confirmed in the draft FoFA legislation as starting on July 1, 2012, requires a person providing personal advice to act in the best interests of the client where “the objectives, financial situation and needs of the client must be the paramount consideration when providing advice”.
Batten says the industry is voicing its concerns regarding advisers and compliance teams struggling with many uncertainties when best interest is put into practice.
“The difficulty I have, as a lawyer, with the drafting is the worst of both worlds in the sense that we have a principle-based drafting…that doesn’t say how to comply with it, just says you must do it,” Batten says.
“Then secondly, we have a long shopping list of things that must be complied with as a minimum standard that’s not a defense, that’s not telling you, ‘If you do these things you would’ve complied with the duty’.
“On that side, we have a very prescriptive, detailed piece of legislation that will inevitably lead to adviser and adviser groups needing to satisfy every single one of those items in any particular situation, building all the processes and procedures around all the support for advisers, monitoring, supervision and potentially a lot of additional training in relation to all those different requirements.”
Maged Girgis, financial services regulatory expert and partner at Minter Ellison, says there is still fundamental confusion in the courts where they’ve had to explain what best interest “didn’t mean”.
“When you look at the steps that you’re required to discharge with this duty as a minimum, most of those steps don’t actually have anything to do with best interest – they’re all standards of care,” he says.
“So what they’ve done here is really scramble the egg.
“I think it’s a missed opportunity on the part of the Government to really clarify that relationship between an adviser and a client, and really give some sense of delineation between these different roles.”
The prescriptive nature of the steps also raise questions about advisers’ ability to provide scaled, or scoped, advice, Girgis says.
“There are elements within the steps that [are] not particularly well crafted around that idea of agreed scope,” he says.
“There’s a real question mark about what this is going to mean practically on a day-to-day level for the availability and accessibility of that concept of scoped or scaled advice.”
Batten says the concept of best interest has been understood from a collective point of view, “typically in that context where you have a group of people whose interests you have to look after”.
“What we don’t really know is that best interest means as a one-on-one relationship,” he says.
“So the concern is, it’s an overriding duty…and it’s not defined in the legislation.
“They don’t say, ‘And therefore, that’s what best interest is’.”
These guys are spot on…….and if you think the lawyers are confused then what chance do us mere mortal planners stand? Scaled advice is a myth under the current arrangement. On the one hand the Government is saying we have the ability to give scaled advice about one particular area that the client requests. The suppporting explanation of the best interest duty says that a planner must make all reasonable enquiries to understand the client’s circumstances and if they think that additional advice is required then it must be so…..or else refuse the engagement. So the options are tell the client what they need (not necessarily scaled advice) or go broke!