Australia: Are you FOFA ready? Scaled advice and its interaction with the new best interests duty

Key Points:

Financial advisers can give scaled advice under the FOFA reforms but they will need to do so carefully and meet four key requirements.

The Australian Government's Future of Financial Advice (FOFA) legislation commenced on 1 July 2012 and compliance will be mandatory from 1 July 2013.

One of the goals behind the FOFA reforms has been targeted specifically at removing barriers to the affordability of financial advice. In addressing this goal the concept of "scaled advice" has been expanded.

In this article we will look at the key aspects of what scaled advice is, the obligations relating to providing it and how it interacts with the new best interests duty.

The trade-off between full financial advice and affordable financial advice

When the FOFA reforms were announced in April 2010, the Government expressed its concern about access to and affordability of financial advice.

The Government in introducing these reforms has recognised that advisers giving financial advice face a trade-off between the cost of financial advice on offer against its complexity. It is precisely this trade-off which often leads to the provision of inadequate advice. In fact, in ASIC Report 279 about retirement advice, it was noted that 39% of advice given was poor and failed to meet legal requirements.

The report states that this failure often occurred because clients believed that they were receiving comprehensive advice, whereas the adviser had limited the scope of the advice for various reasons. It would be safe to assume that one of the reasons for this scaling was presumably advisers considering affordability to their clients.

The formulation of the best interests duty was of particular concern to advisers, in light of the inevitable trade-off that existed. The best interests duty requires that advisers look at the needs of their clients and make wide investigations into their goals and interests. The investigative process that the best interests duty requires is on its face, a process that appeared to be at odds with the idea of scaled advice, which looked only at a set of limited issue(s) that the client wished to address. However, ASIC has clarified these issues though the new Regulatory Guide 244 and the updates to Regulatory Guide 175. In this guidance, ASIC has allowed for scaled advice to be given, provided certain requirements, which are discussed in this article, are met.

What is scaled advice and what obligations are imposed when giving scaled advice?

Scaled advice is personal advice that is limited in scope, either by being in response to a limited range of issues or by addressing a specific area of the investor's needs. ASIC has clarified that all advice is scaled in some way and has suggested that the appropriate way to look at personal advice is to see it as positioned on a spectrum, with one side being fully comprehensive and the other, fully scaled.

One of the fundamental goals of the FOFA reforms has been to produce a uniform approach to the provision of high quality advice. As such, scaled advice is subject to the same legal requirements as advice that is fully comprehensive.

In providing advice, including scaled advice, advisers must be mindful of the requirements imposed on the giving of that advice in Part 7.7A of the Corporations Act. The adviser must have:

  • acted in the best interest of the client when providing them with personal advice (section 961B);
  • provided the client with appropriate advice (section 961G);
  • warned the client if the advice is based on incomplete or inaccurate information (section 961H); and
  • prioritised the interests of the client ahead of other interests (section 961J).

ASIC has also confirmed that the obligations imposed on advisers are scalable – that is, what is required of an adviser in order to meet their legal obligations in giving advice is more or less onerous depending on the nature of the advice given. However, as a safeguard when advisers provide clients with scaled advice, the adviser should make their intention to scale clear to their client and act accordingly.

The Minister for Financial Services and Superannuation Bill Shorten summarised the obligation this way: "if a client seeks to receive more targeted advice on a matter that is particularly concerning them rather than comprehensive advice... as long as the provider acts reasonably in this process and bases the decision to narrow the subject matter of the advice on the interests of the client, the provider will not be in breach of their obligation to act in the client's best interests".

How can advisers ensure they meet their legal obligations when giving scaled advice?

ASIC guidance articulates four main requirements for advisers who want to ensure that they meet their legal obligations and the best interests duty safe harbour requirements when providing scaled advice:

  • identify the client's relevant circumstances regarding the subject matter being advised on, which includes making relevant inquiries into their client's circumstances and not merely rely on the information that is provided to them;
  • implement appropriate processes that assist the adviser with deciding if they can provide the advice requested and how to scale the advice accordingly. This may include creating a checklist of questions to assist the adviser in deciding if a particular client is suited to receiving scaled advice;
  • implement an appropriate filtering or triage process to ensures that all relevant client circumstances are collected; and
  • appropriately explain to the client the nature of the scaled advice that will be provided, including a simple and accurate explanation about why the scope of the advice was limited.

In the next edition we'll look at the governance, risk and compliance implications of the FOFA reforms, including practical implications and challenges which might arise in implementing the changes.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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