The provision of financial services and advice to retail clients came under scrutiny following the global financial crisis in 2007/2008. A joint Parliamentary Committee on Corporations and Financial Services was established in 2009 and its recommendations have now been introduced in the form of draft amendments to the Corporations Act 2001.
The draft reforms focus on four main areas:
- Introduction of a duty to act in the best interests of the client;
- Requirements for annual fee disclosure and 'opt in' arrangements;
- Extension of the Australian Security and Investment Commission's (ASIC) powers; and
- Prohibitions against 'conflicted remuneration'.
Under the new provisions, the over-arching duty of financial advisors will be to act in the "best interests" of the client. However, the new draft provisions do not contain a definition of "best interests". Rather, there are a number of prescribed steps financial advisers are expected to follow in fulfilment of this duty. This duty is intended to apply to the provision of advice to retail clients only.
In circumstances where financial advisors have ongoing fee arrangements, the amendments require advisors to provide annual disclosure statements of their fees. In addition to disclosure, every 2 years advisors must provide a notice to their clients that requires them to "opt in" to the existing fee arrangement. These duties apply to the provision of both general and retail advice.
The existing law gives ASIC certain powers in relation to the grant, suspension, cancellation or refusal to renew an Australia Financial Services Licence (AFSL). The proposed amendments are intended to extend these powers by enabling ASIC ban a person from holding an AFSL who is not of "good fame and character" or persons who are in breach or deemed likely to be in breach of financial service laws.
In keeping with the new duty to act in the best interests of the client, new prohibitions are being introduced to ensure that advisors are not put in a position of 'conflicted remuneration'. The draft amendments define 'conflicted remuneration' as obtaining "monetary or non-monetary benefit which might influence advice or product recommendations..." For example, product issuers must not give a benefit to licensees or their representatives with a view to inducing them to offer/recommend that product over another.
The Government is currently considering public submissions in relation to these draft amendments.
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