The Government's Future of Financial Advice (FOFA) reforms are to introduce a number of changes to retail client advice. A new best interests duty, which specifies what steps advisers are required to take, will apply to all personal advice given to retail clients and is a key element of the reform package.

The Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 was introduced to the Federal House of Representatives late last week and contains the best interests duty.

Various industry groups expressed concern that the duty, as expressed in exposure drafts of the FOFA reforms, would inhibit the ability of advisers to provide scaled advice. Scaled advice is advice which is limited to specific subject matters (such as superannuation, insurance or a share portfolio). It is seen as a way of making financial advice more accessible, as it is likely to be cheaper than holistic advice about all of a person's financial circumstances.

The Government has always said that FOFA was not intended to do away with scaled advice and that the best interests duty and scaled advice were compatible.

The Bill introduced late last week significantly reworked the best interests duty in response to industry concerns. The changes from the exposure drafts were intended to clarify that scaled advice can be provided, however there remain differing views across the industry about whether the amendments go far enough.

Regardless of whether or not further amendments are needed to the Bill, it appears likely that scaled advice will remain a feature of the financial planning landscape post FOFA. However, advisers attempting to provide scaled advice will need to take care in fulfilling the best interests duty.

Under the Bill as tabled, an adviser will have fulfilled the best interests duty where he or she:

  • identifies the client's circumstances on the basis of their instructions
  • identifies the subject matter of advice sought by the client
  • identifies the client's circumstances that are reasonably relevant to advice on that subject matter
  • makes reasonable inquiries about the client's relevant circumstances where it is reasonably apparent that the client's instructions were incomplete or inaccurate
  • ensures that he or she has the requisite experience to provide advice on the subject matter
  • before recommending a financial product, conducts a reasonable inquiry about financial products that might meet the client's needs and objectives that are relevant to the subject matter
  • bases his or her judgements on the client's relevant circumstances
  • takes any other reasonable steps in light of the client's relevant circumstances.

Under the exposure drafts, advisers were also required to advise clients if their needs could be better met by obtaining advice about other financial products or by taking other action. These obligations have been removed.

Guidance about the meaning of the best interests steps that remain is provided in the Explanatory Memorandum to the Bill and further clarification may be provided by the Australian Securities and Investments Commission in due course.

What is clear already, however, is that the legislators are expecting that advice will only be limited to particular subject matters as a result of informed discussions between the adviser and the client, and not just through a standard form disclaimer. Furthermore, the adviser will still need to consider the appropriateness of the client seeking advice only about that subject matter. For example, where a retail client seeks advice about investing in highly leveraged contracts-for-difference using funds borrowed against the family home, it may be reasonable to expect the adviser to query the appropriateness of such a limited advice.

The Bill, together with the Bill that implements tranche one of the FOFA reforms, have not yet passed through Parliament. Tranche two was referred to the Parliamentary Joint Committee on Corporations and Financial Services, as tranche one has been.

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