Licensees will need to do a much better job of equipping advisers with the tools to justify product recommendations after the Hayne royal commission – or risk prosecution – a prominent financial services lawyer points out.
“Advisers have excellent tools to assist them to understand and compare product features and benefits, but all too often, the information generated by these tools are not used effectively in advice documents to demonstrate why the recommended product will meet the client’s objectives or, in the case of replacement recommendations, be more likely to do so than the client’s existing product,” The Fold Legal chairman Claire Wivell Plater said.
The ability and willingness of advisers to manage conflicts of interest featured heavily in Commissioner Kenneth Hayne’s interim report findings, which were published on Friday, as did the regulators’ inability to detect and prosecute actions driven by conflicts.
Further, Hayne makes it clear in the interim report that ASIC was ineffective at prosecuting advisers and licensees for practices that resulted in clients ending up in the wrong investment products.
Behind Hayne’s headline-grabbing phrases, in which he called out “greed” and the practice of putting “profits before people”, there’s a strong message for licensees that product recommendations need to be much more thoroughly justified as in clients’ best interests.
“I believe advisers will need to make much stronger quantitative arguments to satisfy the best interests duty,” Wivell Plater said. She added that many current approaches would almost certainly be called out by regulators, particularly in light of Hayne’s findings.
“Ongoing service fees will be an interesting area”, she said. “Hayne has been very critical of vaguely defined ongoing service arrangements, where fees are charged invisibly and there is little oversight or accountability regarding whether the services are delivered… Hayne has posed the question of whether ongoing service arrangements should be renegotiated annually,” she added.
In Hayne’s words from the interim report: “…[t]o treat the client’s interests as foremost is to do no more than comply with the duty that the client is owed. That is, Section 961J is no more than a restatement of the duty imposed by Section 961B to act in the best interests of the client. When taken together, the two provisions presuppose that conflicts of interest can not only be ‘managed’ but are to be (and more importantly, can be) resolved by giving priority to the client’s interests.
“To speak in the abstract of conflicts between the interests of a financial adviser and the interests of the client does not reveal – and may even obscure – the way in which those interests intersect and conflict.
“The interests of the client are to obtain the best financial advice reasonably available. More particularly, if the advice is for the client to acquire some financial product, it is in the client’s interests to obtain the best product: best in the sense that it is fit for purpose but best in the sense also that it is the cheapest and – as far as can reasonably be determined – the best performing product available.”
Case studies heard during the second round of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry brought to life examples of where a lax approach to best-interests duty has resulted in bad advice.
“Look at what’s being said by Hayne and look at the trajectory of financial services reform over the years – starting from the presupposition of the Wallis [Financial System] Inquiry – the advice industry was built around the fact that disclosure would be a sufficient way to avoid conflicts of interest but it’s clearly not,” Wivell Plater said.
While the law as it stands today requires advisers to provide services efficiently, honestly and fairly, advisers have continually been able to obfuscate their duty to clients in favour of their own self-interests, Robert M.C. Brown, who is a member of the Australian Government Financial Literacy Board, a chartered accountant and a columnist for Professional Planner, commented.
“The law needs to be very clear and comprehensive about remuneration conflicts,” Brown said. “If it were, most of the disclosures, compliance regulations and other complex ‘band-aids’ would not be needed, thus substantially reducing the cost of running a financial planning practice, to the benefit of both consumers and clients.
“When faced with the short-term need to make a dollar by receiving conflicted remuneration, as opposed to a general, long-term and somewhat vague duty, most advisers will go with the short-term financial need and then create a compliance-based paper trail that makes it very hard for a regulator to achieve comprehensive, industry-wide reform.”
Civil penalties will become more common for licensees once Hayne hands down his final recommendations, the interim findings and Wivell Plater suggested.
“Too often, entities have been treated in ways that would allow them to think that they, not ASIC, not the Parliament, not the courts, will decide when and how the law will be obeyed or the consequences of breach [will be] remedied,” Hayne stated. “Attitudes of this kind have not been discouraged by ASIC’s approach to the implementation of new provisions of financial services laws.”
At the time of the second round of hearings, ASIC had not commenced civil penalty proceedings against an adviser in the previous five years and had never instigated a civil penalty proceeding against a financial adviser for a breach of the best-interests duty, Hayne pointed out.
In the previous 10 years, ASIC had commenced six civil penalty proceedings against Australian financial services licensees, of which four were commenced in 2018, the royal commission heard in April. In all, ASIC had undertaken only one criminal action against a licensee in 10 years, despite a recent report finding that in 75 per cent of customer files reviewed, advisers had not demonstrated compliance with the best-interests duty.
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