The best interests duty appears to have regulatory deficiencies which could be described as the elephants in the room, according to David O’Reilly.
The term ‘best interests’ in relation to financial advice has been bandied around by various people since the introduction of Choice of Superannuation legislation.
While the term ‘best interests’ struck a chord with consumers, how the term was used and understood before the Future of Financial Advice (FOFA) reforms only loosely reflected its legal meaning.
My purpose in writing this article is to seek to provide greater certainty and identify issues that still, in my view, need to be addressed by Government.
The new best interests requirement for financial advice has been subject to parliamentary discussion and debate.
However, there still remains a high level of practical uncertainty as to the boundaries of the new requirements and what they mean.
I acknowledge that formulating a statutory best interests test is difficult and also that best interests, a common law fiduciary duty, has been the subject of numerous past court cases – and that absolute certainty may be an aim but is difficult to achieve.
While best interests is not defined in the Corporations Act 2001 (Act) as amended by FOFA, the Government should be commended on seeking to provide greater certainty by:
- Clearly setting out the scope of the best interests requirement;
- Providing guidance by way of the checklist (section 961B(2)); and
- Providing an explanation of the best interests concepts of ‘reasonably apparent’ (section 961C), ‘reasonable investigation’ (section 961D), and what would reasonably be regarded as in the best interests of the client (section 961E).
Industry criticism on the lack of certainty has focussed on the ‘any other step’ checklist requirement in the section 961B(2)(g).
My view is that no greater certainty is provided at common law, so I don’t think that repealing section 961B(2)(g) advances the concept of advisers providing financial advice and acting in the best interests of their clients.
I am, however, critical of what appears to be regulatory creep and deficiencies in the best interests regime which do result in legal uncertainty, and which could be described as elephants in the room of the statutory best interests regime.
Regulatory creep
In terms of regulatory creep, I refer to situations where Government and/or the Regulator act in a manner that exceeds their legal mandate under the Act.
Such actions are referred to as being ultra vires or beyond their powers. Section 961B(1) of the Act limits the operation of the best interests requirement to ‘the provision of personal advice (the advice) to a person (the client) as a retail client’.
Personal advice is defined in section 766B of the Act to be ‘financial product advice’, which is defined to mean advice intended to influence a person making a decision in relation to a particular financial product or class of financial products.
This provides the statutory boundary for the operation of the best interest requirements in the Act.
I was, therefore, surprised to read in the Australian Securities and Investments Commission’s (ASIC’s) Consultation Paper 182 – Future of Financial Advice: Best Interests duty and related obligations:
- The statement that Government was consulting on regulations relating to the application of the best interests duty where advice is sought about a product that is not a financial product; and
- Examples that did not involve the provision of financial product advice.
Given that regulations can only be made and the law validly administered within the defined boundaries in the Act, I question the validity of any such proposed regulations, or the relevance of examples in the consultation paper that don’t involve the provision of financial product advice.
These actions only go to introduce greater uncertainty in the administration of, and compliance with, the new law.
The concept of a retail client is, subject to statutory exclusions, well understood. In this regard it is important to remember that individual superannuation clients are always retail.
Deficiencies in the ‘best interests’ regulatory regime
My primary criticism of the statutory best interests regime is what I see as the lack of a level playing field and a lack of clarity as to how the best interests obligation interacts with the practical provision of limited or scaled advice, including intra-fund advice.
I note that ASIC is doing its best to address the legal uncertainty administratively through its current review of RG 200 Advice to super fund members, and that superannuation fund trustees providing intra-fund advice do provide a valuable service to some clients.
However, the lack of a level playing field arises simply because superannuation fund trustees providing personal advice to their clients/members are not permitted to consider a client’s financial interests outside of the superannuation fund.
In other words, the trustee is effectively relieved of the catch-all obligation in section 961(2)(g) of the Act, otherwise considered to be an essential element of the best interests requirements.
In a superannuation context, why not simply recognise the trustee is acting in the client’s interest in advising on the relevant investment options within the fund, and avoid the fiction created by implying in the mind of the client/member that the trustee is subject to the same best interests requirements as other financial advisers?
There cannot be one level of best interests for trustee and another level for financial advisers.
When financial advisers and trustees are operating in the same advice arena, having different sets of best interest rules is misleading and disingenuous.
In relation to clarity, the operation of the best interests checklist presents challenges to the provision of limited or scaled advice where a client has already provided information on a full fact find.
If limited or scaled advice is to be permitted within a best interests context, section 961B(2) should be subject to a separate section explicitly permitting the provision of limited or scaled advice where the client has otherwise been subject to a full fact find by the adviser, and the client acknowledges that all of their relevant circumstances may not be taken into account.
A great majority of financial advisers have always acted in the best interests of their clients. Remove the uncertainties and ensure a level playing field operates and it will be business as usual for financial advisers and clients who continue to benefit from their services.
David O’Reilly is the general counsel at Fiducian Portfolio Services Limited.
