What does the best interests duty mean?
What does the best interests duty really mean? What does it require advisers to do?
The best interests duty, like the other FOFA reforms, arose from the ashes of Storm, Trio and Westpoint where the clients were left worse off, if not bankrupt, as a result of the “advice”. The second reading speech introduced the reverse concept of the advice leaving the client better off, by emphasizing that “… the vast majority of financial planners do see their role as making their dealings with customers such that … the customer is better off than if the customer had never sought financial advice to begin with…” (emphasis added).
The use of the word “customer” is unfortunate. Obviously the Minister should have said “client”. But semantics aside, this concept of the best interests duty requiring advice to leave the client better off than otherwise has been picked up and expanded by ASIC. In Part E of RG 175, at paragraphs 224 to 230, ASIC in effect re-defines the best interests duty as a duty to provide advice that a “reasonable advice provider” would believe is intended to leave the client in a better position.
ASIC glosses this basic idea by adding that advice does not have to be perfect, subsequent investment performance is not relevant (ie the advice must be tested at the time it is provided, not at a later time,) and the advice must consider the client’s objectives, financial circumstances and needs.
A safe harbour?
Much has been made of the so called “safe harbour” in sub-section 961B(2).
This safe harbour is supposed to protect advisers from the imprecise nature of the best interests duty by stipulating certain tasks which, if attended to, tick off the best interests duty. To be protected by ‘safe harbour’ rules, the adviser must identify:
- the client’s needs and objectives, financial situation and
- what advice is being sought and
- the objectives, financial situation and needs of the client.
Then the adviser must:
- make reasonable enquiries to ensure the client information is complete and accurate
- assess whether the adviser has the expertise to provide the advice (and if not decline to act)
- investigate what financial products that might achieve the client’s objective and
- base all judgments on the client’s relevant financial circumstances.
The idea is the adviser is protected if they can tick off each specified process. These processes, translated into English, require the adviser to consider what advice is sought by the client and the client’s “relevant financial circumstances”, and to research any financial product recommended to the client to ensure they match the client’s needs.
But the safe harbour is an illusion. It’s actually no protection at all. This is because ultimately sub-paragraph 961B(2)(g) kicks in to require the adviser to take “any other step” that would reasonably have been regarded at the time, presumably by someone like ASIC’s “reasonable advice provider”, to have been in the client’s best interests.
This means you can tick all those boxes as hard and as often as you like, but if after all that ASIC still says there was something else you should have done to make your client better off you are in breach of the Corporations Act and are exposed to statutory penalties and civil remedies.
So you end up back where we started. The most that can be said at this time is that, according to ASIC, to satisfy the best interests duty you have to show that a reasonable financial planner would at the time the advice was provided agree that the advice was likely to leave the client in a better position than otherwise would be the case.
It’s all about the client being better off as a result of your advice. Nothing else matters.
Perhaps ASIC sums it up at paragraph RG 175.224 and 225 where it says;
“RG 175.224 : Consumers who seek financial advice expect that their adviser will act in their best interests and that, as a result, the advice provided will leave them in a better position.
RG 175.225 : When assessing whether an advice provider has complied with the best interests duty, we will consider whether a reasonable advice provider would believe that the client is likely to be in a better position if the client follows the advice.)