ASIC Class Order 14/923
This month ASIC issued Class Order 14/923 to give effect to new record-keeping obligations for Australian financial services (AFS) licensees. The class order inserts a new section 912G into the Corporations Act 2001 (Corporations Act) which requires AFS licensees to keep records to prove that the licensee and its representatives have complied with the Future of Financial Advice (FOFA) best interests duty and related obligations when giving personal advice to retail clients.
In summary, the records are required to cover the following matters:
- the information relied on and the action taken which indicates the adviser has acted in the best interests of the client
- if safe harbour provisions in the Corporations Act have been relied on, the information relied on and the action taken to satisfy the safe harbour provisions
- the advice given and the reasons why it is appropriate to the client
- where a conflict of interests is involved, the information relied on and the action taken to indicate that priority has been given to the client's interests.
These records are required to be kept for a period of at least seven years after the day the personal advice is provided to the client. ASIC has given AFS licensees a transitional period of six months to comply with the record-keeping requirements.
Purpose of the class order
According to the Explanatory Statement accompanying the class order, ASIC believes it is important for AFS licensees to keep records of personal advice provided to clients by the licensee or its representatives because having good record keeping systems in place will support the on-going provision of quality advice to clients. Keeping records will also help licensees supervise their representatives who are involved in providing advice.
In addition, ASIC believes that keeping records will help consumers hold advice providers accountable for the quality of advice they give, because it would be difficult for external dispute resolution bodies such as the Financial Ombudsman Service to consider and resolve disputes between licensees and their clients without reviewing records kept by the licensee.
ASIC has also stated that where AFS licensees do not have reliable records demonstrating compliance with the best interests duty and related obligations, ASIC may need to interview the licensee's clients to assess whether the adviser has complied with these requirements.1
The class order contains a number of exceptions to the recording keeping requirements. For example, the new subsection 912G (4) specifies that the record keeping obligations do not apply where the modified best interests duty applies and the subject matter of the advice relates only to a basic banking product or a general insurance product (see subsections 961B (3) and 961B (4) Corporations Act).
Subsection 912G (5) also states the requirements do not apply to personal advice where a Statement of Advice is not required to be provided, or to further advice for which a record of advice is kept in accordance with subsection 946B (3A) of the Corporations Act.
Impact on AFS licensees
ASIC has stated the new section 912G is a technical update rather than a substantive new obligation. According to ASIC, the effect of the class order is to update the previous record-keeping AFS license condition for personal advice so that it refers to the new best interests duty and related obligations, rather than the previous advice obligation in section 945A of the Corporations Act.
Currently, the standard AFS licence conditions in ASIC Pro Forma 209 paragraph 57(b) require licensees to keep records of the following matters (amongst others) in relation to the provision of personal advice to retail clients:
- " the client's relevant personal circumstances within the meaning of subparagraph 945A(1)(a)(i); and
- the inquiries made in relation to those personal circumstances within the meaning of subparagraph 945A(1)(a)(ii); and
- the consideration and investigation conducted in relation to the subject matter of the advice within the meaning of paragraph 945A(1)(b); and
- the advice, including reasons why advice was considered to be "appropriate" within the meaning of paragraphs 945A(1)(a) to (c)."
Although the classes of information required to be recorded under the new section 912G are potentially broader than those under the AFS licence conditions, industry has reportedly supported the requirements. ASIC stated that during its industry consultations the majority of submissions expressed support for ASIC issuing a class order to update the existing record keeping obligations so they refer to the new best interests duty and related obligations.2
ASIC has stated that in practice, the documents required to be kept will not generally change under the class order. ASIC explains that licensees can continue to keep the following documents to demonstrate that the licensee and its representatives have complied with the obligations:
- the advice document
- fact-finding documents used when making inquiries into the client's relevant circumstances
- file notes, including records of conversations and records of research or analysis of financial products.3
ASIC has also clarified that the class order will accommodate existing industry arrangements where authorised representatives maintain client files and AFS licensees have a contractual right to access those files when required:
"We will update our guidance in RG175 to clarify that we do not expect the record-keeping obligations to require AFS licensees to change existing arrangements with authorised representatives for keeping records.
At the same time, we remind AFS licensees that, because the obligation to retain records remains with them, licensees will need to assess their ability to satisfactorily access client records under their contractual arrangements to ensure that they can meet their regulatory obligations." 4
Superannuation trustees and intra-fund advice
ASIC originally proposed including a class order requirement specifically for trustees of regulated super funds that provide personal advice to members. Under the proposal, trustees would be required to keep records of the following additional matters:
- " the advice, including a note to identify whether the cost of the advice is allowed to be charged to a member or members other than the recipient and, if so, on what basis—unless the cost is in fact wholly charged or borne in certain circumstances; and
- if the cost of the personal advice is not allowed to be charged to members (other than the recipient), a record of how much the advice cost to provide, and how much the member receiving the advice was charged."5
During the consultation process, respondents reportedly expressed concern that this proposal would be impractical to implement. In particular, respondents believed it would be impractical for trustees to separately cost individual pieces of advice.
Following the consultation, ASIC decided not to impose the additional recording-keeping obligations on trustees:
"We have decided not to modify the law at this stage to impose a record-keeping obligation on the trustees of regulated superannuation funds (as AFS licensees) in relation to providing intra-fund advice, because to do so would impose new regulation that would be inconsistent with the Government's current moratorium on new financial services regulation.
we expect that superannuation trustees, under their general duties (including their general obligations as an AFS licensee), will ensure that adequate records are kept of the intra-fund advice provided, the charging decision and the reasoning for this decision in order to justify how trustees charge for this advice directly or indirectly"
1Australian Securities and Investments Commission, Report 409: Response to submissions on CP 214 Updated record-keeping obligations for AFS licensees, September 2014, p4.
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