FAAA: ‘Vast majority’ of members treat all clients as retail

In its submission to the Australian Law Reform Commission’s (ALRC) Background Paper FSL11 – Superannuation and the Legislative Framework for Financial Services, the Financial Advice Association Australia (FAAA) said the “vast majority” of FAAA members treat all clients as retail, even if they qualify as wholesale.

“For those clients who might qualify as wholesale, this avoids the inefficiency, complexity, and confusion of complying with different legal obligations for the superannuation component of the advice they provide, as opposed to the remainder,” the FAAA submission said.

“A significant number of larger financial advice licensees also do not permit authorised representatives to operate on a ‘wholesale client only’ basis.”

The ALRC’s review of the Legislative Framework for Corporations and Financial Services Regulation has been underway since 2020, and in June 2023, it tabled its third report, Financial Services Legislation: Interim Report C.

In the report, the ALRC suggested restructuring and reframing provisions concerning financial advice in the Corporations Act.

“Proposal C6 would see the creation of a single legislative chapter, bringing together all provisions that only regulate financial advice. This restructure seeks to reflect the needs and expectations of users of the law, and thereby enable the law to communicate more effectively,” the report reads.

ALRC emphasises the importance of avoiding the “curse of knowledge” and ensuring that when it comes to new or infrequent users, the law should not assume any prior knowledge regarding the application of provisions such as “conflicted remuneration” or “best interests duty” to specific types of financial advice.

“The law’s structure should communicate how it applies to specific persons, services, and circumstances,” it said.

The FAAA submission said that it is the duty of financial advisers to “understand the regulations and ensure clients are protected and can make informed financial decisions based on their circumstances”.

“FAAA members have raised concerns about whether clients understand the difference between wholesale and retail client rights and requirements,” the submission said.

“Most importantly, there is concern that many wholesale clients may not be aware or do not understand that they lose all the protections of a retail client; that wholesale client status is promoted by some as better for clients as they can access more investments options.

“It would be very confusing for consumers to understand why and how different rules and obligations apply to the advice they are receiving depending on the product class the advice includes.”

The FAAA also recommended that it remains appropriate to retain the obligations to treat a client as a retail client for superannuation advice, to protect consumers’ retirement savings.

“While many financial planners/advisers apply the retail client obligations to all their clients and financial advice services, there may be a small number of financial planners/advisers who provide superannuation advice through the required SOA, however, address additional advice needs through a wholesale client engagement, where appropriate,” the FAAA submission said.

“However, FAAA’s members are concerned about the potential for poor consumer outcomes from providers who rely on the wholesale client obligations and exemptions by excluding the client’s superannuation needs from the scope of their wholesale client advice, because of the requirement in the act to meet the retail client obligations when providing superannuation advice.

“This issue is significantly exacerbated by the out-of-date threshold for wholesale clients, and the potential misuse of this wholesale client pathway.”