Licensees currently reviewing their operating frameworks are set for a busy week with guidance on conflicted remuneration and codes approval expected later today (Wednesday) or on Thursday.
This final underpinning of the Future of Financial Advice (FoFA) reforms has been eagerly awaited by the industry and will reveal comprehensive details of the new environment after final guidance on the best interests duty was released in December and fee disclosure in late January.
Tim Nethercote, a partner at financial services lawyers Holley Nethercote, told Professional Planner Online he was looking forward to the detail contained in the conflicted remuneration guidance.
He acknowledged that the Australian Securities and Investments Commission (ASIC) had been “pretty good” at getting its guidance papers out to the market in a timely fashion.
Specifically, Nethercote is interested in seeing the regulator’s final view on grandfathering within the conflicted remuneration guidance after the earlier discussion paper went into great detail on this issue.
Asked for his thoughts on the Association of Financial Advisers (AFA) proposing a two-part code-approval process that would mean AFA members are subject to a core principles-based first part of the code but who can then chose to belong to part two, which would allow them to obviate the need for opt-in, Nethercote said the idea had merit.
Reread, reflect and consider
AFA chief executive Brad Fox will soon have a response from the regulator after an ongoing dialogue.
“We are therefore very carefully considering the views of advisers and licensees in deciding whether the AFA should have a comprehensive code, that is ASIC-approved, or whether it makes far more practical sense to have a two-part code, with only the part relevant to obviating the need for opt-in approved by ASIC,” he said recently.
Nethercote (right) said client feedback on the earlier best interests and fee disclosure final guidance had been mixed.
“On fee disclosure, we would like some clarity on disclosure day, specifically determining this and setting a new one,” he said. “Also the industry needs guidance on how deep we need to go into past records to determine this.”
Nethercote added that clarity is also needed on the amount of information needed on the disclosure statement.
However, it is the best interests duty where Holley Nethercote strongly suggests planners and licensees alike take the time to reread, reflect and consider the legislation and the ASIC guidance.
“We need to remember that it is not just ‘best interests’ that we should be thinking about,” said Nethercote.
“Bests interests and the safe-harbour steps are one thing, but the advice still needs to be appropriate and, in ASIC’s view (RG175.346-347), this requires the client to be in a better position if they follow the advice and is a higher standard than what is set down in s945A of the Corporations Act 2001.
“Also, the client’s interests must be prioritised over the adviser’s and licensee’s interests. What is clear from RG175.372 is that advisers will not be able to meet the best interests obligations by simply providing disclosure or having the client consent to a conflicted arrangement.”
Nethercote added that the test for best interests looks a lot like the Better Off Overall Test (BOOT) under the Fair Work Act 2009. However, FoFA goes further.
“Not only does the client have to be better off from receiving the advice if acted upon, the adviser must also prioritise the client’s interest,” he said.
“Licensees should review their conflict-of-interest management framework to specifically address the requirement to prioritise the client’s interests when providing personal advice.”
“prioritise the client’s interests when providing personal advice.” In other words, provide independent financial advice