'Fiduciary duty' a potential minefield

Financial advisers paid a salary by a product manufacturer, such as those employed by banks, may find they cannot continue their client relationships if a purist definition of ‘fiduciary duty’ is introduced in the Corporations Act, a prominent financial services lawyer has warned.

The Parliamentary Joint Committee on Corporations and Financial Services (PJC) has recommended the Corporations Act be amended to explicitly include a fiduciary duty for financial advisers operating under an Australian Financial Services Licence (AFSL).

There remains significant uncertainty about what such a change could mean for the financial advice industry. Principal of Townsends Business and Corporate Lawyers, Peter Townsend, notes there is currently no strict definition of the term ‘fiduciary duty’.

Townsend said under a purist definition of fiduciary duty, even the presence of a conflict of interest is unlawful. This means advisers faced with conflicts of interest, such as being remunerated by a product provider, would have to withdraw from the relationship with the client, Townsend said.

“And that leads you to where your employed planners are, because they have a conflict every day of the week.”

Townsend agreed that a strict interpretation of fiduciary duty could wipe out the existing structure of the product manufacturer-aligned advice industry. The majority of Australian financial planners are aligned in some way to a financial product manufacturer.

At the other end of the scale, Townsend said, is a more relaxed definition of fiduciary duty. This would allow a conflict to exist as long as the adviser can prove the client’s interests were put first. But while a softer definition would allow salaried planners to continue under their current arrangements, meeting the definition would be difficult for those with restrictive Approved Product Lists (APLs).

“The smaller the APL, and the more the product manufacturer’s products are on that APL, the harder it’s going to be to prove that the advice given had nothing to do with the conflict the [adviser] had, let alone that

they acted in the [client’s] best interest,” Townsend said.

“That means that the banks will have to work harder at their APLs and displaying the benefits of their products.”