The car dealer's dilemma

THE BEST interests duty requires financial advisers, when providing personal advice to retail clients, to act in the best interests of their clients.
However, whether this duty requires advisers to consider products offered by competitors or tell clients about those products is a matter of some uncertainty.

This duty is a recent development, having only applied from 1 July 2013, and at this stage there is no judicial guidance on its application. However, instruction can be taken from Australian Securities and Investments Commission (ASIC) Regulatory Guide 175 (RG 175) which sets out what ASIC thinks is required of financial advisers to meet the duty.

In general, ASIC suggests that a financial adviser will need to consider a competitor’s financial products where their own products do not satisfy the client’s objectives, financial situation and needs.

WHAT IS THE BEST INTERESTS DUTY?

The best interests duty is set out in section 961B(1) of the Corporations Act 2001.

The expression ‘best interests’ is not defined, but ASIC, when assessing whether an advice provider has complied, will consider whether a reasonable provider would believe the client is likely to be in a better position if they follow the advice.

A financial adviser recommending a product that involves greater cost than a similar competitor’s product, but with some other benefit that the client wants, may nonetheless comply with the best interests duty.

Indeed, in some circumstances the best interests duty may require a financial adviser to advise the client to do nothing. Also, ASIC has stated it does not expect advice providers to give ‘perfect advice’.

SAFE HARBOUR FOR COMPLIANCE

The Corporations Act provides a ‘safe harbour’ that financial advisers may rely on to prove they have complied with the best interests duty. If a financial adviser proves they have taken certain steps, the Act deems them to have met their obligations to act in their client’s best interests.

The safe harbour requires a financial adviser to:
a) identify the objectives, financial situation and needs of the client that the client disclosed;
b) identify the subject matter of the advice sought and the objectives, financial situation and needs of the client that would reasonably be considered as relevant to that advice (the “client’s relevant circumstances”);
c) if it is reasonably apparent that information relating to the client’s relevant circumstances is incomplete or inaccurate, make reasonable inquiries to obtain complete and accurate information;
d) assess whether they have the expertise to provide the client with the relevant advice and, if not, decline to do so;
e) if recommending a financial product, conduct reasonable investigation into products that might achieve those of the objectives and meet those of the needs of the client that would reasonably be considered as relevant to the advice and assess the information gathered in the investigation;
f) base all judgements in advising the client on the client’s relevant circumstances; and
g) take any other steps that would reasonably be seen as being in the client’s best interests, given their circumstances.

THE REASONABLE INVESTIGATION STEP

The ‘reasonable investigation’ step required for a financial adviser to satisfy the safe harbour requirements is particularly relevant to the topic at hand.

ASIC has stated that a reasonable investigation does not require an investigation into every product available to the client. For example, where a product on a financial adviser’s approved product list (APL) satisfies the client’s relevant circumstances, then the financial adviser need not consider competitors’ products.

However, if this is not the case, or if the client requests that the financial adviser consider a specific financial product not on their APL (or if the client’s relevant circumstances otherwise include competitors’ products), then they must consider competitors’ products or recommend the client see another adviser.

A financial adviser cannot avoid this element of the best interests duty through disclosure or by obtaining the consent of clients to breach it.
Where consideration of a competitor’s products is required, financial advisers should be aware that the AFS licence they operate under may be limited to the provision of advice in relation to specific products. Therefore, they may not be able to recommend competitors’ products (although, this does not mean that they do not need to consider them).

HOW EXTENSIVE MUST INQUIRIES BE?

The reasonable investigation step is scalable. This means that more extensive inquiries are required as the level of complexity of a product increases.

Therefore, although ASIC has stated in two examples in RG 175 that if personal advice is provided, the advice provider would not be expected to consider competitors’ products, this should not necessarily be considered to be ASIC’s position for all products as the products considered in these examples were basic bank deposit products.

In the absence of any similar guidance in relation to more complex products, it is likely that financial advisers providing advice on such products would be expected to conduct reasonable investigation into competitors’ products (except as discussed above).

THE IMPORTANCE OF BENCHMARKING

One way a financial adviser can conduct a reasonable investigation into financial products is by benchmarking at appropriate intervals the product against similar products to establish its competitiveness on key criteria, such as performance history, features, fees and risk.

The benchmarking must be reasonably representative of the market for similar products to the product investigated that are offered by a variety of competitors.

Importantly, benchmarking may mean that financial advisers do not need to specifically name competitors’ products. Instead, benchmarking can allow the adviser to be satisfied that the product they are advising on satisfies the client’s relevant circumstances.

We now turn our attention to our fictional car dealer and whether they would need to inform a purchaser that they could buy a similar car at a competitor’s dealership for a lesser price.

The answer, in the absence of some other benefit which satisfies the client’s objectives, financial situation and needs, is that they probably would. Indeed, if the price differential is truly significant, it may be that few other benefits could absolve the car dealer of the need to consider the competitor’s car.
However, the car dealer may not need to mention the competitor dealer’s car if satisfied, based on benchmarking it conducted, that its car satisfies the client’s relevant circumstances

About Bill Fuggle and Sam Appleton

Bill Fuggle is a partner and Sam Appleton is a senior associatie in Baker & McKenzie's Sydney financial services practice group.