You web browser may not be properly supported. To use this site and all its features we recommend using the latest versions of Chrome, Safari or Firefox

Many of you will have heard about the federal ‘Future of Financial Advice’ legislation that commenced on 1 July 2012. The legislation changed the obligations that financial planners have under the Corporations Act when advising retail clients.

The amendments were made by the Government at that time with the objective of enhancing trust and confidence in the financial services industry. Since the introduction of the legislation, however, successive federal parliaments have sought to change or add to elements of the legislation. These changes have had a chequered history; some amendments have been made, while others have been disallowed by the Senate. The latest round of amendments became law on 18 March 2016. These changes can be found in the Corporations Amendment (Financial Advice Measures) Bill 2016 and are outlined below.

Conflicted remuneration

The FOFA legislation provides for a general ban on conflicted remuneration. This means that financial planners are prevented from receiving a benefit from advice provided that could reasonably be expected to influence the choice of financial product recommended or the financial advice provided.

The ban does not apply to some products and services, including general insurance, basic banking products financial product advice given to wholesale clients and some fee for service arrangements. The new changes, however, include a new mechanism that allows the government to prescribe circumstances where benefits will be considered ‘conflicted remuneration’ and will be caught by the provisions.

This means that financial planners will need to keep up to date with any government regulations relating to the conflicted remuneration provisions in order to ensure they stay compliant.

Prioritising the client's interests

When issuing advice, the FOFA legislation requires financial planners to give priority to their client’s interests where the advisor knows or reasonably ought to know that those interests conflict with their own interests.

Under the previous law an exception applied where advice was provided by an agent or employee of an Australian Authorised Deposit-taking Institution (ADI) and where the advice was in relation to a basic banking product.

The new changes extend this exception to advice carried out by an agent or employee of an ADI where the advice is in relation to a general insurance product, consumer credit insurance, or a combination of any of the three above mentioned financial products.

The amendment means that the exceptions to the ‘client priority interests provisions’ have been broadened. Agents or employees of ADIs should review the products they advise on to ascertain whether those products fall within the exception and are thus exempt from the ‘client priority interests provisions’.

Time extensions

Where the client is charged ongoing fees, the FOFA legislation requires financial planners to provide annual fee disclosure statements, setting out the amount of the fees paid and services rendered, every 12 months, usually from the day the arrangement with the client was entered into. Financial planners are also required to renew their agreement with clients every two years – called the ‘opt in provisions’.

Under the previous FOFA legislation, once the documents were due, advisors were given 30 days to provide clients with the document. In relation to both types of document, this time period has been extended to 60 days.

The additional time will allow advisors more time to ensure the documents they provide to clients are accurate and of a high quality.

Client’s best interest

The Corporations Act requires advisors to provide advice to a retail client that is in their best interests subject to a ‘reasonable steps’ qualification.

An advisor must demonstrate that they have taken the following steps, including:

  • Knowing the client by identifying their objectives, financial situation and needs (the relevant personal circumstances);
  • Where it is apparent to the advisor that he or she has incomplete information on the client’s relevant personal circumstances, taking steps to obtain complete and accurate information;
  • Identifying the subject matter of the advice that has been sought by the client (whether explicitly or implicitly);
  • Knowing the product, by conducting a reasonable investigation into the financial products that might achieve the objectives of the client;
  • Making an assessment on whether the advisor has the expertise required to provide appropriate advice to client; and
  • Basing all judgements and advice on the client’s relevant circumstances.
  • Take any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client's relevant circumstances (emphasis added).

This requirement set out in this last dot point has been referred to as the ‘catch all’ provision and has been the subject of some controversy. While the current Government was committed to removing the ‘catch all’ provision, the Senate has refused to allow the amendment to pass and as such the ‘client’s best interest’s provisions’ remain unchanged. As such, subsection 961B (2) (g), remains in force and requires financial advisors to take any step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client's relevant circumstances.

There has been a lot of legislative activity in the financial advisory space over the last few years. This trend is likely to continue so long as the media spotlight remains firmly fixed on the financial advice industry. With this in mind, it is important that for both financial advisors and their clients to be aware of their legal rights and obligations. If clients believe that their financial planner is not providing services in accordance with their obligations, they should consider their options, which may include obtaining independent legal advice.

The contents of this blog post are considered accurate as at the date of publication. However the applicable laws may be subject to change, thereby affecting the accuracy of the article. The information contained in this blog post is of a general nature only and is not specific to anyone’s personal circumstances. Please seek legal advice before acting on any of the information contained in this post.

Thank you for your feedback.

Related blog posts

Consumer and the Law
Liar loans: how mortgage brokers are putting clients at risk

The term ‘liar loans’ has been coined on the back of the Banking Royal Commission. This is because studies have shown almost 40 per cent of loan applications completed through mortgage brokers contained at least one factually incorrect statement. Whether mortgage brokers are providing lenders with incorrect information, or information that is out-of-date, they are putting themselves – and their clients – at risk. A recent study conducted by the Consumer Credit Legal Centre in New South Wales identified some mortgage brokers were breaking the law when filling out loan applications for their clients. Common examples included brokers suggesting their clients provide a different answer...

Planning desk close up documentresize
Consumer and the Law
How to lodge a complaint with Australian Financial Complaints Authority

The Australian Financial Complaints Authority (AFCA) acts as the middleperson between financial firms and consumers or small businesses, offering free and independent dispute resolution services. It deals with complaints about financial advice, insurance, banking and superannuation products and services. While the time limit to lodge a complaint to AFCA is usually between two and six years, the Australian Government recently created the opportunity for those with complaints up to 10 years old to come forward. This means consumers and small businesses have until 30 June 2020 to lodge complaints dating back to 1 January 2008. To lodge a complaint, you must follow AFCA’s process. It is...

How to lodge a complaint with Australian Financial Complaints Authority
Business Law
Proposed Changes to the Franchising Code of Conduct

Franchising is big business in Australia, with approximately 1,120 franchise systems and 79,000 franchise units operating nationally1. As franchising is a diverse sector with characteristics that are unique from other business models, franchises are governed by a mandatory Franchising Code of Conduct (Franchising Code).2 The Parliamentary Joint Committee on Corporations and Financial Services recently completed an inquiry into the operation and effectiveness of the Franchising Code and has released the Fairness in Franchising Report (Report).3 Some of the key findings and recommendations of the report are discussed below. The Committee recommends that the Australian Government establish an...

Waitress In Black Apron Upload

We're here to help

Start your online claim check now. Or, if you have a question, get in touch with our team.