Chances are, you're reading this article on an electronic device. You may have used the same device to video-chat with others, message your team and create or send documents - in the last hour. Navigating the device and its various software tools is complicated. Really complicated.
Financial products are also becoming more complicated, and this creates a new problem: vulnerable clients. The Commissioner of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission), the Honourable Kenneth Hayne QC, considered that the complexity of financial services required by people to live in modern society put them at a disadvantage when dealing with financial service providers. 1 Notably, the Commissioner considered this an issue not just for vulnerable clients, but also clients who, because of their circumstances, are in a more vulnerable situation. 2
As professionals we trade on being the most knowledgeable people in a room on a specific topic, and sought out for our advice and assistance. This advice (be it personal advice or general advice) is generally required for people who do not fully understand our field or who are not able to conduct business without our guidance. This reliance puts us in a position of power and trust. While this power can provide great benefit to us and our clients, misuse, either deliberately or negligently, can have significant impacts on clients, us, our business and ability to practice. These impacts can be both professional and financial.
So, as regulated entities, we need to look carefully at how we need to treat vulnerable clients.
Where to look
To get a steer on what to do about vulnerable clients, we need to look to a number of sources:
ASIC makes it clear that licensees need to do something about vulnerable clients. In its Corporate Plan for 2020-2024, ASIC notes that it is focusing enforcement activities on conduct that harms vulnerable consumers. 3 There are plenty of examples, including:
- Using its product intervention power to target providers of continuing credit contracts. 4 .
- Shifting its regulatory priorities in light of COVID-19 to protect "vulnerable consumers." 5
Vulnerable clients are also an issue in the financial planning context. Providers of personal advice to retail clients in relation to relevant financial products, must comply with the FASEA Code of Ethics. 6 It is the responsibility of the Licensee to ensure that all advisers comply with the code. 7 As an adviser, the code of ethics requires you to:
- act with integrity and in the best interests of each of your clients; 8
- not advise, refer or act in any other manner where you have a conflict of interest or duty; 9
- provide to a client any advice or financial product recommendations that are in the client's best interest and appropriate to the client's individual circumstances; 10
- be satisfied that the client understands your advice and the benefits, costs and risks of the financial products you recommend;11
- consider the broader effects arising from the client acting on your advice, and actively consider the client's broader, long-term interests and likely future circumstances. 12
Design and Distribution obligations
The theme of vulnerability is embedded in the new Design and Distribution reforms enacted by the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019. The requirement for product issuers to make a target market determination, requires the issuer to consider the likely objectives, financial situation and needs of a retail client in the target market. 13
As a product issuer and distributor of a product for which a target market determination has been made, you are obliged to ensure that you take reasonable steps to ensure the product is reasonably likely to be distributed consistent with the target market determination. 14 ASIC, in its draft regulatory guide on the Design and Distribution obligations, advises that it expects this to include provision of how a distributor would deal with vulnerable clients within the target market. 15
AFCA has seen a spike in vulnerable client-related complaints due to COVD-19 16 , and has released lots of guidance on the topic.
AFCA considers the timely and open treatment of complaints to financial services providers is a key focus area. 17 Delays in responding to and dealing with complaints will be called out. This is of particular concern with vulnerable clients who may not be as proactive in driving their complaint, requiring more active monitoring by financial service providers.
AFCA has also raised a concern for financial services firms dealing with domestic or family violence situations to develop processes for ensuring the adequate protection of information about vulnerable clients. 18 AFCA also notes that where two clients are interviewed together, vulnerable members of the partnership are unlikely to disclose accurate information in front of their abuser. 19
Who are vulnerable clients?
In order to define vulnerable clients for our Vulnerable Client Policy, we had to bolt together a number of different definitions. 20 There is no single point of reference. Client vulnerability can be caused by many things, including age and levels of stress. This can be permanent or just a point in time concern. A vulnerable person can be: 21
- elderly or suffering an age-related impairment;
- suffering any form of cognitive impairment;
- suffering from elder or financial abuse;
- experiencing family or domestic violence;
- experiencing specific life events, including:
- job loss;
- death of a close relative;
- accident or sudden illness; or
- having a baby; 22
- suffering from mental or other forms of serious illness;
- suffering from any form of addiction; or
- any other personal or financial circumstances causing significant detriment.
Vulnerability can also be indicated by factors including clients: 23
- living in rural or remote areas;
- where English is not their first language; or
- who are unable to readily produce standard identification documents.
Dealing with vulnerable clients
Having a vulnerable client does not always mean that you cannot provide services to them. Generally, when dealing with a vulnerable client, you should consider taking extra steps to ensure they are not disadvantaged. These could include: 24
- Allowing a longer time for the client to make a decision;
- Providing more education tools before allowing the client to trade;
- Encouraging the client to ask questions of the adviser;
- Asking extra questions of the client to test the client's level of understanding of the recommendations being made, and the basis for making them;
- Ensuring as far as possible that the client feels equally free to reject the recommendation to reduce the risk that the client may be substituting trust in the adviser for rational decision-making; and
- Recommending the client undertake education tailored to the client's capacity to understand.
- In personal advice situations,
- Encouraging the client to seek input from a trusted friend or family member with no conflicting interest in the outcome, and offering to meet and explain the recommendations to the family member;
- Asking questions to the client to test the client's level of understanding of the recommendations being made, and the basis for making them;
- Asking the client to explain back key elements of the advice to the adviser;
- Presenting lower risk options to the client in the advice to facilitate comparison and effective choice in the client's decision-making.
To ensure that you can show that you have based your advice on the client's relevant circumstances, you should:
- Show that you had concerns with the vulnerability of the client, and the steps you took to address this. This may mean refusing to provide your services to the client;
- Consider if simpler or lower-risk products would be more appropriate to the level of the client's understanding;
- Do not recommend products that require client control or intervention (for example, SMSFs);
- If you're providing trading services, don't allow clients to trade using their SMSFs unless they can show a high degree of financial literacy;
- Embed vulnerable client behaviours into your Key Risk Indicators (KRIs). Your monitoring and supervision program should identify KRIs unique to your business. When they're triggered, your monitoring and supervision program will delve deeper into the representative behaviours connected with that KRI.
- Document every step and action you have taken.
Conflicts of interest and vulnerable clients
Licensees are required to manage conflicts of interest. 25 Also, if you provide personal advice to a retail client, you must prioritise the interests of the client, if a conflict exists. 26 When dealing with vulnerable clients there may be other circumstances where a conflict may arise, including if:
- you are pressured to provide advice for a vulnerable client by an existing client;
- you recognise that the client is vulnerable and proceed with the advice without taking the appropriate precautions;
- you provide advice to a couple and you are concerned one of them is a vulnerable client.
As an AFSL holder, it is important that you:
- Have a clear policy in place for how vulnerable clients are to be identified and assisted.
- Conduct training with staff on how to identify vulnerable clients, and the factors that may make a client vulnerable.
- Monitor and supervise representatives using KRIs that consider client vulnerability.
- Develop a clear process for identifying and servicing vulnerable clients, which may include refusing to provide certain services to a vulnerable client.
- Ensure when dealing with vulnerable clients that all file notes and process are documented.
1 Royal Commission Final
Report page 491.
2 Royal Commission Final Report page 89.
3 ASIC Corporate Plan 2020-2024 page 17.
6 s921E Corporations Act 2001.
7 Corporations Amendment (Professional Standards of Financial Advisers) Act 2017; s921J and s921K Corporations Act 2001.
8 FASEA Code of Ethics Standard, standard 2.
9 FASEA Code of Ethics Standard, standard 3.
10 FASEA Code of Ethics Standard, standard 5.
11 FASEA Code of Ethics Standard, standard 5.
12 FASEA Code of Ethics Standard, standard 6.
13Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019 994B(8).
14Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019 994E(1).
15 ASIC Draft Regulatory Guide 000: Product design and distribution obligations example 16.
17 Speech by Helen Coonan March 2019, https://www.afca.org.au/news/media-releases/helen-coonan-afca-is-bringing-a-fairness-revolution-to-the-banks/
18 AFCA paper Joint Facilities and family violence section 2.3.
19 AFCA paper Joint Facilities and family violence page 6.
20 The policy is available at https://www.hnlaw.com.au/hn-hub-home/
21 Banking Code of Practice 2019 (1 March 2020 Release) p.22.
22 ASIC Corporate Plan 2019-23 p.12
23 Final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Volume 1 p.89
24 FASEA Financial Planner Code of Ethics 2019 Guidance p.27
25 s912A(1)(aa) Corporations Act 2001.
26 s961J Corporations Act 2001.
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.