Hints from ASIC chair James Shipton that the regulator will extend its infamous Report 562 from the big five to the broader advice market will bring a renewed focus on the two areas the regulator dislikes most, according to The Fold Legal’s Simon Carrodus.
Speaking at the IMAP conference in Sydney, Carrodus said that advisers most commonly fail at sufficiently researching financial products and accounting for a customer’s individual circumstances.
“There’s a lot of places in the seven steps (to safe harbour) that advisers can go wrong. In my experience, these are the two that come up again and again,” Carrodus said.
Carrodus’ experience matches the frustrations of Shipton, who remarked in Report 562: Financial advice: Vertically integrated institutions and conflicts of interests that there were two areas that led to a customer file demonstrating that it did not comply with best interests duty.
“That is, where the adviser had not demonstrated that they had: (a) sufficiently researched and considered the customer’s existing financial products; and/or (b) based all judgements on the customer’s relevant circumstances,” Shipton noted.
While the original January 2018 report – which revealed a headline figure of 75 per cent of customer files being non-compliant – was focused only on the big five banks and AMP, Shipton indicated that Australian Securities and Investments Commission was looking to extend the research, which could see small to medium sized advice practices come under the same spotlight.
Four months later, in May, Shipton delivered a keynote address at the Australian Council of Superannuation Investors Annual Conference in Sydney and gave his first real hint that the review would be extended: “Much of what we saw in the financial advice round of the Royal Commission hearings was based on the work of our Wealth Management Project,” Shipton said. “We intend to accelerate and expand this intense program.”
Then, in July, during a speech on “The trust deficit and superannuation” delivered at the Financial Service Council’s annual council summit in Melbourne, Shipton spoke of the need for a “wholesale review of conflicts of interests in firms, sectors and markets to identify, manage and, if appropriate, remove every single conflict of interest.”
Carrodus thinks the chances of an expanded review are likely, especially in light of the Hayne Royal Commission’s.
“I think it would be naïve of us to think this will affect only the big end of town, not the small or medium sized business. The same conflicts do affect smaller licensed businesses,” Carrodus said.
In addition to the two areas Shipton identified that advisers need to improve on, Carrodus flagged the need for advisers to explain why their recommendation is likely to leave the client in a better position.
“The adviser just has to have a pretty coherent narrative at the time to say ‘at the time, for these reasons, according to my analysis, this will leave you in a better position’, Carrodus said. “That should be captured in the file and summarised in the SoA.”