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
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
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
identifies the subject matter of advice sought by the
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
takes any other reasonable steps in light of the client's
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
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
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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