Technical drafting may render FSG exemption ‘almost entirely redundant’

Under the Treasury Laws Amendments (Delivering Better Financial Outcomes and Other Measures) Act 2024 (DBFO), as of 10 July 2024, financial product providers are permitted to forego providing clients with an FSG and instead make the information traditionally given in an FSG publicly available on their website, if they so choose to.

In a webinar by law firm Cowell Clarke, financial services specialist lawyer Zac Mizgalski explained how financial advice firms can go about utilising the website disclosure information exemption, introduced by the DBFO, in place of an FSG.

“Essentially, licensees and authorised representatives are not required to provide their clients with a financial services guide if they’re providing financial product advice and if they’ve made disclosure information publicly available on their website and if they have not provided their clients with something that purports to be a financial services guide or is a financial services guide,” Mizgalski said.

He added: “It is certainly limited and there is some controversy in terms of which licensees and authorised representatives are actually allowed to rely on this exemption.”

However, senior associate Richard Hopkin noted in the webinar that there is what appears to be a significant drafting error that essentially mitigates the positive impacts of this legislation.

“The exemption is drafted so that it is connected to, specifically, the provision of financial product advice. So that’s covering general advice and personal advice. As you know, that’s one of many services, financial services, that someone can provide under an AFSL, depending on their authorisations,” Hopkin said.

“The issue is that the exemption is narrowed to, or is drafted in such a way, as it is narrowed to the provision of advice. It doesn’t include an exemption for dealing in a financial product.”

Given that most financial advisers not only provide their clients with advice, but also deal in financial products as part of executing the advice they give, Hopkin said that the technical drafting of the legislation could be a significant issue.

“To go back to basic principles, dealing in a financial product on behalf of a retail client, you’re providing another service like issuing a product to a retail client, that is a financial service provided to a retail client and that provision of a financial service attracts the obligation to provide an FSG,” Hopkin said.

“The issue is that most financial advisers are, nearly all financial advisers, of course, provide dealing services as well as financial advice.

“If we’re looking at the financial advice journey, you’re providing financial advice, say, in a statement of advice, then you get your authority from a client and then you are processing paperwork, you’re assisting the client to lodge forms with product providers, you are at that stage of the process dealing in a financial product.”

How might the exemption work in practice?

When it comes to the practical application of this exemption, Hopkin said that due to the wording of the legislation, it essentially becomes redundant if advisers were to follow a strict reading of it.

“For this exemption to work, you need to be providing financial product advice. You’re providing an SOA, you don’t have to provide a FSG if you’ve provided website disclosure information,” he said.

“The problem is, you then go to provide the additional financial service, being dealing in the financial product in order to execute the advice, that is not covered on a strict reading on the exception by this exemption, which would mean you would then have to provide a financial services guide at that point.

“For most advisers, the commentary that you will see is that renders the reform almost entirely redundant. There are almost no financial advice licensees, whether those are general advisers or personal advisers, that don’t provide some sort of dealing service.”

Hopkin suggested that when it comes to utilising the exemption, advice firms can either take a “purposive approach” following the actual intent of the legislation, or a more “cautious or conservative approach” following what the legislation actually says until such a time as clarity is given by Treasury or the Australian Securities and Investments Commission (ASIC).

‘Quite worrying’: Intentional decision or a mistake?

Hopkin further argued that due to the wording of the legislation, it also fails to achieve the chief intentions of these reforms, providing little benefit for most advisers.

“The issue here is that the purpose of the DBFO and QAR and the explanatory memorandum is to make it easier for financial advisers to operate, to make it easier for the provision of financial advice,” Hopkin said.

“So, the intent of this legislation was so that financial advisers would not have to provide an FSG if they provided website disclosure information. That was the aim of this legislation. The technical drafting of it hasn’t reflected that.”

Hopkin said the profession requires clarification regarding the exemption, and answers as to how and why it was drafted in such a way.

“Now, why that is has not been made clear. Treasury obviously hasn’t explained themselves, and ASIC hasn’t yet come out with its guidance, which I believe is due in the next month or so. So, we don’t actually have clarity from government or the regulator about why the legislation is drafted this way.

“If it was done so deliberately, Treasury needs to explain why. If it was done by accident, it portrays a misunderstanding of what financial advisers are actually doing because it is limited to the provision of financial advice.

“It doesn’t actually understand the whole client journey and the services that financial advisers are routinely providing, which, from a legislative perspective, from a government perspective, is quite worrying.”

At this time, ASIC is expected to provide clarification regarding the new legislation on FSGs in November 2024.