FOFABest Interests Obligations

Mindmap 1A - Best interests- Safe harbour

Provider must act in the best interests of theclient in relation to the advice - s961B(1)

Duty is satisfied if the provider provesthey have done each of the followings961B(2): (ASIC calls this the "safeharbour")

(a) identified the objectives, financial situation and needs of the clientthat were disclosed to the provider by the client through instructions

(b)(i) identified the subject matterof the advice being sought by theclient (explicitly or implicitly)

must not omit critical issues which are relevantto the subject matter of the advice (RG 244.68)

factors might include:(from RG 175.269)

client instructions

why they are seeking advice

the outcomes they want

how much the client is willing to pay

need to discuss this with the clientto arrive at an agreed scope

advice subject matter may need to change as adviser becomesaware of other relevant circumstances (RG 175.287-288)

the scope of the advice - can still provide scaled advice - see RG 244

(b)(ii) identified the objectives, financial situation and needs of the client that would reasonably be consideredas relevant to advice sought on that subject matter ("the client's relevant circumstances")

relevant circumstances for advice on investment products - see RG 175.287-288

Unlikely to be satisfied if adviser uses "one-size-fits-all" outcome (RG 175.235)

(c) where it was "reasonably apparent" that relevant information was incomplete orinaccurate, provider made reasonable inquiries to obtain complete and accurate information

(d) assessed if provider has requiredexpertise to provide advice to the client onthe subject matter and if not, declined togive advice

need to consider limits of authorisations, qualificationsand training, complexity of strategy and products

(e) if it would be reasonable to considerrecommending a financial product:

(i) conducted a "reasonable investigation"into those financial products - s961D

note link to replacement recommendations under s947Dplus ASIC's comments that replacement includes whenfunds are sourced from a bank account (RG 175.317)

(ii) assessed the information gathered in the investigationdo not need to consider every product!

strategy first, before product recommendations

role of APLs - OK but adviser may need to consider non-APL productsin order to meet best interests obligations. RG 175.326-330.

(f) based all judgements in advising the client on the client's relevant circumstances

(g) taken any other step that at the time the advice is provided would be reasonablyregarded as in the client's best interests given the client's relevant circumstances.(This step was removed by regulation. However, it was reinstated after the regulationwas disallowed in November 2014)

ASIC examples RG 175.340

explain clearly when advice is being provided and not being providedif product advice, then strategic advice also

advice review intervalsoffer to provide advice on other key issues identified

"Note: the matters that must be proved under subsection (2) relate to the subject matter of the advice sought bythe client and the circumstances of the client relevant to that subject matter (the client's relevant circumstances).That subject matter and the client's relevant circumstances may be broad or narrow, and so the subsectionanticipates that a client may seek scaled advice and that the inquiries made by the provider will be tailored to theadvice sought."

But remember, as was the casewith 945A, the resulting advicemust also be appropriate to theclient - s961G. See MM 1B

It is in the best interests of theclient to take a step if - s961E:

objective test: i.e.:

a person with a reasonable level of expertise in the subject matter of the advice being sought;exercising care and objectively assessing the client's relevant circumstances;

would regard it as in the client's best interest to take that step.

Warnings must be given if - s961HIncomplete informationInaccurate information

Advice Provider =individual who is toprovide the advice

compare other conduct anddisclosure obligations in Part 7.7which apply to "providing entities"

Advice provider cannot "contract out"this obligation but the advice isscaleable by identifying a clear scopeof the advice. (RGs 175.339, 244.83)

The Act does not answer thequestion of what is "the advice?".

s961G Appropriateness of advice (see MM 1B)

s961J - Provider must prioritise the interests of the client in conflict of interest situations (for more detail - see MM 1B)

Does not apply when advice solely about basic banking product and provider = Aust ADI or general insurance

Note also RG 244 - giving information, general advice and scaled advice

What is regarded as being in theclient's 'best interests'? - s961E

objective test

a person with a reasonable level of expertise in the subject matter of the advice being sought;

exercising care and objectively assessing the client's relevant circumstances;would regard it as in the client's best interest to take that step.

ASIC takes the view that the adviceshould leave the client in a betterposition

but will not examine investmentperformance retrospectively

"better position"might include:(RG 175.230 )

improved financial positionimproved understanding

aligning financial position to appetite for riskreassuring client to "hold the course"

increasing confidence to spend or donate money

This diagram is a summary only intended to promote andassist discussion. The document is subject to a Creative

Commons Licence - www.creativecommons.org. The authoris Holley Nethercote Commercial & Financial Services

Lawyers. To attribute the author, please provide this link towww.hnlaw.com.au. This diagram does not constitute legal

advice, and is current as at February 2015

KEY:

Comments in Blue boxes are fromRG 175 issued in October 2013.

All Act references refer to theCorporations Act unless otherwise stated

Bests interests applies to "personal advice"to a "retail client" provided on/after 1/7/2013

these definitions have not changed

FOFA Legislation: Corporations Amendment(Further Future of Financial Advice Measures) Act2012 (Division 2 of part 7.7A of Corporations Act)

These steps satisfy the duty when advice on basic banking product and provider =Australian authorised deposit taking institution (ADI) or general insurance product

A note of caution: the Corporations Act does not codify or cover allthe law in relation to the provision of financial product advice. Ascases before the courts remind us, the law relating to financialadvice also includes causes of action such as negligence,misleading or deceptive conduct, misrepresentation and breach ofcontract. See for example, CFP v Couper [2013] NSWCA 444 andSwansson v Harrison & Ors [2014] VSC 118.

FOFABest Interests Obligations

Mindmap 1A - Best interests- Safe harbour

Provider must act in the best interests of theclient in relation to the advice - s961B(1)

Duty is satisfied if the provider provesthey have done each of the followings961B(2): (ASIC calls this the "safeharbour")

(a) identified the objectives, financial situation and needs of the clientthat were disclosed to the provider by the client through instructions

(b)(i) identified the subject matterof the advice being sought by theclient (explicitly or implicitly)

must not omit critical issues which are relevantto the subject matter of the advice (RG 244.68)

factors might include:(from RG 175.269)

client instructions

why they are seeking advice

the outcomes they want

how much the client is willing to pay

need to discuss this with the clientto arrive at an agreed scope

advice subject matter may need to change as adviser becomesaware of other relevant circumstances (RG 175.287-288)

the scope of the advice - can still provide scaled advice - see RG 244

(b)(ii) identified the objectives, financial situation and needs of the client that would reasonably be consideredas relevant to advice sought on that subject matter ("the client's relevant circumstances")

relevant circumstances for advice on investment products - see RG 175.287-288

Unlikely to be satisfied if adviser uses "one-size-fits-all" outcome (RG 175.235)

(c) where it was "reasonably apparent" that relevant information was incomplete orinaccurate, provider made reasonable inquiries to obtain complete and accurate information

(d) assessed if provider has requiredexpertise to provide advice to the client onthe subject matter and if not, declined togive advice

need to consider limits of authorisations, qualificationsand training, complexity of strategy and products

(e) if it would be reasonable to considerrecommending a financial product:

(i) conducted a "reasonable investigation"into those financial products - s961D

note link to replacement recommendations under s947Dplus ASIC's comments that replacement includes whenfunds are sourced from a bank account (RG 175.317)

(ii) assessed the information gathered in the investigationdo not need to consider every product!

strategy first, before product recommendations

role of APLs - OK but adviser may need to consider non-APL productsin order to meet best interests obligations. RG 175.326-330.

(f) based all judgements in advising the client on the client's relevant circumstances

(g) taken any other step that at the time the advice is provided would be reasonablyregarded as in the client's best interests given the client's relevant circumstances.(This step was removed by regulation. However, it was reinstated after the regulationwas disallowed in November 2014)

ASIC examples RG 175.340

explain clearly when advice is being provided and not being providedif product advice, then strategic advice also

advice review intervalsoffer to provide advice on other key issues identified

"Note: the matters that must be proved under subsection (2) relate to the subject matter of the advice sought bythe client and the circumstances of the client relevant to that subject matter (the client's relevant circumstances).That subject matter and the client's relevant circumstances may be broad or narrow, and so the subsectionanticipates that a client may seek scaled advice and that the inquiries made by the provider will be tailored to theadvice sought."

But remember, as was the casewith 945A, the resulting advicemust also be appropriate to theclient - s961G. See MM 1B

It is in the best interests of theclient to take a step if - s961E:

objective test: i.e.:

a person with a reasonable level of expertise in the subject matter of the advice being sought;exercising care and objectively assessing the client's relevant circumstances;

would regard it as in the client's best interest to take that step.

Warnings must be given if - s961HIncomplete informationInaccurate information

Advice Provider =individual who is toprovide the advice

compare other conduct anddisclosure obligations in Part 7.7which apply to "providing entities"

Advice provider cannot "contract out"this obligation but the advice isscaleable by identifying a clear scopeof the advice. (RGs 175.339, 244.83)

The Act does not answer thequestion of what is "the advice?".

s961G Appropriateness of advice (see MM 1B)

s961J - Provider must prioritise the interests of the client in conflict of interest situations (for more detail - see MM 1B)

Does not apply when advice solely about basic banking product and provider = Aust ADI or general insurance

Note also RG 244 - giving information, general advice and scaled advice

What is regarded as being in theclient's 'best interests'? - s961E

objective test

a person with a reasonable level of expertise in the subject matter of the advice being sought;

exercising care and objectively assessing the client's relevant circumstances;would regard it as in the client's best interest to take that step.

ASIC takes the view that the adviceshould leave the client in a betterposition

but will not examine investmentperformance retrospectively

"better position"might include:(RG 175.230 )

improved financial positionimproved understanding

aligning financial position to appetite for riskreassuring client to "hold the course"

increasing confidence to spend or donate money

This diagram is a summary only intended to promote andassist discussion. The document is subject to a Creative

Commons Licence - www.creativecommons.org. The authoris Holley Nethercote Commercial & Financial Services

Lawyers. To attribute the author, please provide this link towww.hnlaw.com.au. This diagram does not constitute legal

advice, and is current as at February 2015

KEY:

Comments in Blue boxes are fromRG 175 issued in October 2013.

All Act references refer to theCorporations Act unless otherwise stated

Bests interests applies to "personal advice"to a "retail client" provided on/after 1/7/2013

these definitions have not changed

FOFA Legislation: Corporations Amendment(Further Future of Financial Advice Measures) Act2012 (Division 2 of part 7.7A of Corporations Act)

These steps satisfy the duty when advice on basic banking product and provider =Australian authorised deposit taking institution (ADI) or general insurance product

A note of caution: the Corporations Act does not codify or cover allthe law in relation to the provision of financial product advice. Ascases before the courts remind us, the law relating to financialadvice also includes causes of action such as negligence,misleading or deceptive conduct, misrepresentation and breach ofcontract. See for example, CFP v Couper [2013] NSWCA 444 andSwansson v Harrison & Ors [2014] VSC 118.

FOFABest Interests Obligations

Mindmap 1A - Best interests- Safe harbour

Provider must act in the best interests of theclient in relation to the advice - s961B(1)

Duty is satisfied if the provider provesthey have done each of the followings961B(2): (ASIC calls this the "safeharbour")

(a) identified the objectives, financial situation and needs of the clientthat were disclosed to the provider by the client through instructions

(b)(i) identified the subject matterof the advice being sought by theclient (explicitly or implicitly)

must not omit critical issues which are relevantto the subject matter of the advice (RG 244.68)

factors might include:(from RG 175.269)

client instructions

why they are seeking advice

the outcomes they want

how much the client is willing to pay

need to discuss this with the clientto arrive at an agreed scope

advice subject matter may need to change as adviser becomesaware of other relevant circumstances (RG 175.287-288)

the scope of the advice - can still provide scaled advice - see RG 244

(b)(ii) identified the objectives, financial situation and needs of the client that would reasonably be consideredas relevant to advice sought on that subject matter ("the client's relevant circumstances")

relevant circumstances for advice on investment products - see RG 175.287-288

Unlikely to be satisfied if adviser uses "one-size-fits-all" outcome (RG 175.235)

(c) where it was "reasonably apparent" that relevant information was incomplete orinaccurate, provider made reasonable inquiries to obtain complete and accurate information

(d) assessed if provider has requiredexpertise to provide advice to the client onthe subject matter and if not, declined togive advice

need to consider limits of authorisations, qualificationsand training, complexity of strategy and products

(e) if it would be reasonable to considerrecommending a financial product:

(i) conducted a "reasonable investigation"into those financial products - s961D

note link to replacement recommendations under s947Dplus ASIC's comments that replacement includes whenfunds are sourced from a bank account (RG 175.317)

(ii) assessed the information gathered in the investigationdo not need to consider every product!

strategy first, before product recommendations

role of APLs - OK but adviser may need to consider non-APL productsin order to meet best interests obligations. RG 175.326-330.

(f) based all judgements in advising the client on the client's relevant circumstances

(g) taken any other step that at the time the advice is provided would be reasonablyregarded as in the client's best interests given the client's relevant circumstances.(This step was removed by regulation. However, it was reinstated after the regulationwas disallowed in November 2014)

ASIC examples RG 175.340

explain clearly when advice is being provided and not being providedif product advice, then strategic advice also

advice review intervalsoffer to provide advice on other key issues identified

"Note: the matters that must be proved under subsection (2) relate to the subject matter of the advice sought bythe client and the circumstances of the client relevant to that subject matter (the client's relevant circumstances).That subject matter and the client's relevant circumstances may be broad or narrow, and so the subsectionanticipates that a client may seek scaled advice and that the inquiries made by the provider will be tailored to theadvice sought."

But remember, as was the casewith 945A, the resulting advicemust also be appropriate to theclient - s961G. See MM 1B

It is in the best interests of theclient to take a step if - s961E:

objective test: i.e.:

a person with a reasonable level of expertise in the subject matter of the advice being sought;exercising care and objectively assessing the client's relevant circumstances;

would regard it as in the client's best interest to take that step.

Warnings must be given if - s961HIncomplete informationInaccurate information

Advice Provider =individual who is toprovide the advice

compare other conduct anddisclosure obligations in Part 7.7which apply to "providing entities"

Advice provider cannot "contract out"this obligation but the advice isscaleable by identifying a clear scopeof the advice. (RGs 175.339, 244.83)

The Act does not answer thequestion of what is "the advice?".

s961G Appropriateness of advice (see MM 1B)

s961J - Provider must prioritise the interests of the client in conflict of interest situations (for more detail - see MM 1B)

Does not apply when advice solely about basic banking product and provider = Aust ADI or general insurance

Note also RG 244 - giving information, general advice and scaled advice

What is regarded as being in theclient's 'best interests'? - s961E

objective test

a person with a reasonable level of expertise in the subject matter of the advice being sought;

exercising care and objectively assessing the client's relevant circumstances;would regard it as in the client's best interest to take that step.

ASIC takes the view that the adviceshould leave the client in a betterposition

but will not examine investmentperformance retrospectively

"better position"might include:(RG 175.230 )

improved financial positionimproved understanding

aligning financial position to appetite for riskreassuring client to "hold the course"

increasing confidence to spend or donate money

This diagram is a summary only intended to promote andassist discussion. The document is subject to a Creative

Commons Licence - www.creativecommons.org. The authoris Holley Nethercote Commercial & Financial Services

Lawyers. To attribute the author, please provide this link towww.hnlaw.com.au. This diagram does not constitute legal

advice, and is current as at February 2015

KEY:

Comments in Blue boxes are fromRG 175 issued in October 2013.

All Act references refer to theCorporations Act unless otherwise stated

Bests interests applies to "personal advice"to a "retail client" provided on/after 1/7/2013

these definitions have not changed

FOFA Legislation: Corporations Amendment(Further Future of Financial Advice Measures) Act2012 (Division 2 of part 7.7A of Corporations Act)

These steps satisfy the duty when advice on basic banking product and provider =Australian authorised deposit taking institution (ADI) or general insurance product

A note of caution: the Corporations Act does not codify or cover allthe law in relation to the provision of financial product advice. Ascases before the courts remind us, the law relating to financialadvice also includes causes of action such as negligence,misleading or deceptive conduct, misrepresentation and breach ofcontract. See for example, CFP v Couper [2013] NSWCA 444 andSwansson v Harrison & Ors [2014] VSC 118.

Wednesday 21 October 2015