On Monday night, Treasury released the Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014, which makes some significant changes to the FOFA reforms that commenced last year. Some of the most controversial amendments were to the 'best interest' obligations. So what were the main changes to the best interest obligations?

Removal of the 'catch-all' provision

The best interest duty established by subsection 961B(1) of the Corporations Act 2001 remains unaltered in the legislation – advisers must still act in the best interests of the client in relation to the advice. However, the regulations remove the controversial 'catch-all' provision from the list of steps an advice provider may take to show that they have satisfied the best interest obligations, also known as the 'safe harbour' steps (subsection 961B(2)).

The previous 'catch-all' provision provided that, in addition to the other steps set out in subsections 961B(2)(a)-(f), the adviser must also prove they had 'taken any other step that, at the time of the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client's relevant circumstances.'

It is important to note that the 'catch-all' provision still applies to advice provided before 1 July 2014 and after 31 December 2015. Further, other related obligations remain unchanged in the legislation, including the requirement for advice to be appropriate, to provide warnings if there is any incomplete or inaccurate information, to prioritise the client's interests and to ensure representatives are complying with the law.

Additional exemptions for agents or employees of ADIs

Currently, an agent or employee of an ADI is not required to satisfy the 'safe harbour' steps in subsections 961B(2)(d)-(g) if the advice relates solely to a basic banking product or general insurance product. The regulations expand this exemption to consumer credit insurance products (in some circumstances), and also broaden the definition of a 'basic banking product' to include non-cash payment facilities that are not related to a basic deposit product.

Facilitating scaled advice

To satisfy the best interest obligations, advice providers must still identify the objectives, financial situation and needs of the client. However, the regulations insert a number of provisions that facilitate scaled advice by clarifying that:

  • an adviser is able to agree with their client regarding the subject matter of the advice sought;
  • any investigations into the client's circumstances are only those that would reasonably be considered as relevant to the agreed subject matter; and
  • the best interest obligations apply to the agreed subject matter.

Where to from here?

The changes to the FOFA best interest obligations will not only affect financial planners. The changes will affect all financial services licensees that provide personal financial product advice to retail clients including banks, superannuation funds, responsible entities, foreign exchange dealers and CFD/margin forex providers.

We have prepared a one page MindMap which sets out the best interest obligations and related provisions.

It is important to note that the Senate has the power to disallow the regulations, so further changes may occur. We will provide updates on our blog if the regulations are disallowed by the Senate.

We will also be publishing a number of blogs outlining the other changes introduced by the regulations, so stay tuned!

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.