The revised version of ASIC’s Regulatory Guide 175 released just before Christmas 2012 has comprehensively reviewed the entire advice process in the light of the FOFA reforms.
Here’s a quick snapshot of what’s new…..
Who provides the advice?
The conduct and disclosure obligations apply to “providing entities”. Some groups have treated individual advisers as the providing entity – confusing the mechanics of who provides the advice with the contractual relationship between clients and licensees / CARs.
It’s now clear that the “providing entity” is the AFS licensee or CAR with whom the client contracts to provide advisory services. There are lots of implications flowing from this including who provides the FSG and SoA, legal liability to the client, the need for fresh SoAs when an adviser or CAR moves dealer groups and even GST!
Changes to SoAs
New SoA requirements require advisers to include information about why your advice will leave the client in a better position. And now you’ll need to address all aspects that are relevant to the client including tax and social security – even just to say the client should obtain specialist advice. There are stronger warnings than ever about the need for SoAs to be clear and concise (see RG 244 for some excellent examples).
Scope of advice
Determining the scope of advice that a client requires is often an iterative process because clients’ needs are not always clear. Advisers who worry that they’ll be exposed if they don’t give full financial advice will find some reassuring advice on how to handle this difficult situation.
Indeed, advisers can be comforted that they can do exactly what other professionals do in this situation. Work out what the client can pay for and help them prioritise their needs – without being responsible for the areas on which the client then chooses not to take advice.
Conflicts priority rule
Going forward advisers will need to demonstrate additional benefits to the client when recommending a product or a strategy that creates extra revenue, over servicing clients to generate fees is forbidden. Even maximising non-grandfathered sources of remuneration will be a conflict if it’s done in priority to the client’s interests.
Platforms don’t escape scrutiny. Beware of recommending a platform if it’s not in the client’s best interests. Instead consider whether the client should acquire financial products directly.
APL
Advisers will now need to look at products that are not on their APL in some situations – regardless of whether the non-approved product will be covered by their PI insurance.
Switching
There’s some helpful examples of where switching to a higher cost product can be justified by the benefits to the client. And what benefits an adviser need to be shown to justify a switching recommendation. The good news is that it’s not all about cost. If the new product features are of value to the client, then increased cost may well be justified.
At the end of the day, the clear message is: it’s all about substance. The guidance clearly demonstrates the need to look behind the form of advice or a remuneration arrangement to its substance. And that’s before we start looking at the guidance on conflicted remuneration….
More on that soon!
