What a difference a word makes. Consider for a moment the difference between the words “any” and “all”.
The best interests duty of the Future of Financial Advice (FoFA) laws – section 961B of the Corporations Act, or the so-called “safe harbour” steps (see below) – have caused considerable disquiet within the financial planning community, for a few reasons.
Section 961B(2)(g), or “little g”, as it is sometimes called, requires that to prove they have acted in the client’s best interests a financial planner must have “taken any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances”.
Add that to the fact that from July 1 this year ASIC’s “facilitative approach” to enforcing FoFA compliance will come to an end, and the onus on financial planners would seem to ratchet up considerably.
Objections to the catch-all nature of little g revolve around how general the step seems to be. But a key message at the Financial Planning Association’s national roadshow over the past couple of weeks has been that the catch-all provision is in effect, and has been since amendments to FoFA were defeated in the senate last year, and planners have to comply – but it may no be as cripplingly onerous as first thought.
Think about the words
The message from the FPA’s general manager of policy and conduct, Dante De Gori, is “just think about the wording”.
“Take any other step,” De Gori says.
“It doesn’t say take all other steps. It’s not [saying] do everything under the sun – it’s take any other step.”
The difference in this context between any and all is absolutely massive. Whereas little g has in some quarters been interpreted as being so broad as to be meaningless and therefore as having the potential to expose financial planners to near-limitless liability, the FPA’s view seems to radically simplify the approach that planners need to take.
De Gori concedes that there is not yet a black-and-white answer to how to comply with little g; but he says the key is to apply professional judgement to determine what else, in addition to the six other steps in S961B(2), is reasonable to do at the time advice is given.
To make matters even simpler, the FPA has come up with four key steps:
1. Start with a professional client engagement – set out clearly what is and what is not included in the scope of your advice.
2. Include your strategy recommendations – not just single-product advice. Strategy first, product second.
3. Recommend to your client, and document in your statement of advice, the need for your advice to be reviewed – and suggest when it should be reviewed.
4. Offer, and document in your SoA, to provide additional advice to your client on the things that your current advice might not cover. Or, offer to refer the client to someone who can do that.
Until and unless little g is tested in the courts, the FPA and De Gori’s suggestions constitute probably the best way to approach the issue of meeting the best interests duty requirements of FoFA.
The full rationale for the FPA’s thinking – and a detailed explanation of its proposed approach – is available in a booklet, Taking other steps: best interest advice in a strategic world, produced for its current roadshow.
THE BEST INTERESTS DUTY
Corporations Act 2001 – section 961B
Provider must act in the best interests of the client
(1) The provider must act in the best interests of the client in relation to the advice.
(2) The provider satisfies the duty in subsection (1), if the provider proves that the provider has done each of the following:
(a) identified the objectives, financial situation and needs of the client that were disclosed to the provider by the client through instructions;
(b) identified:
(i) the subject matter of the advice that has been sought by the client (whether explicitly or implicitly); and
(ii) the objectives, financial situation and needs of the client that would reasonably be considered as relevant to advice sought on that subject matter (the client’s relevant circumstances );
(c) where it was reasonably apparent that information relating to the client’s relevant circumstances was incomplete or inaccurate, made reasonable inquiries to obtain complete and accurate information;
(d) assessed whether the provider has the expertise required to provide the client advice on the subject matter sought and, if not, declined to provide the advice;
(e) if, in considering the subject matter of the advice sought, it would be reasonable to consider recommending a financial product:
(i) conducted a reasonable investigation into the financial products that might achieve those of the objectives and meet those of the needs of the client that would reasonably be considered as relevant to advice on that subject matter; and
(ii) assessed the information gathered in the investigation;
(f) based all judgements in advising the client on the client’s relevant circumstances;
(g) taken any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances.
