Who provides the advice?

At The Fold, we have long taken the view that although an individual delivers advice and ongoing services to clients, legally speaking, the client contracts with either an Australian Financial Services (AFS) licensee or a corporate authorised representative to provide those services. And ASIC has recently confirmed this.
There are lots of implications of this. Let’s look at a few of them.

Financial services guides (FSG)

AFS licensees and corporate authorised representatives are required to provide a Financial Services Guide (FSG) to the client – individual employees are not. Only individual authorised representatives who service clients in their own right need to provide their own FSG. So check the FSG that you provide – does it correctly identify the ‘providing entity’?

Best Interests Duty

On the other hand, the Best Interests Duty applies to the individual who provides the personal advice.

What if there is no individual – for example, advice on a website? There, the legal entity providing the advice must comply with the Best Interests Duty. Generally, that will be the owner of the website or author of the advice – or both.

Or what if the advice is outsourced? The Best Interests Duty falls on the shoulders of the individual within the outsource service provider who provides the advice.

Statements of Advice (SOAs)

As with FSGs, the ‘providing entity’ should provide the statement of advice (SOA) – that is, the AFS licensee or corporate authorised representative who contracts with the client to provide the services.

What if they don’t? What if your practice requires individual advisers to provide SOAs to your clients?

In this situation, the individual adviser will need to provide an SOA every time they give further advice to the retail client. They can’t rely on the regulation that enables them to simply keep a record of the advice (and only give it to the client if they ask for it (see reg 7.7.10AE).

This is because, technically, the corporate authorised representative or AFS licensee won’t have ever given the client an SOA which sets out the client’s personal circumstances. It is one of those senseless legal points that lawyers love to pick up on – sorry!

This becomes particularly relevant if a corporate authorised representative sells its business or changes licensees. The new licensee will be entitled to insist that an SOA is provided to the client when advice is next given - whereas if the corporate authorised representative had given the previous SOAs, there would be no need to do so.

Note: if you buy a portfolio of clients (as opposed to a share purchase), regardless of whether the selling AFS licensee / corporate authorised representative (or their advisers) provided the earlier SoAs to the client, you’ll have to provide an SoA to the client the next time you give personal advice. Again, that is because you, as the ‘providing entity’, haven’t previously provided an SOA which sets out their personal circumstances to the client.
Technical, but true.

Fee disclosure

And to add to the confusion, the fee disclosure obligations apply in yet a different way.

Fee disclosure statements and opt in (or renewal) notices must be provided by the ‘fee recipient’. The fee recipient is, “the AFS licensee or their representative who enters into the ongoing fee arrangement with the client” (or anyone to whom those rights have been assigned – for example, if the portfolio is sold).

Although it is defined differently, this will in effect be the same as the ‘providing entity’, - that is, the AFS Licensee or corporate authorised representative which contracts with the client to provide the services.
So check your FDS template to ensure it is provided by the right person.

Tax invoices

How does all this operate consistently with the GST regime? Now that AFS licensees and corporate authorised representatives must charge clients for their services, tax invoices will need to be provided. They will need to reflect the fact that the services are supplied by the corporate authorised representative, permit the AFS licensee to collect the fees on behalf of the corporate authorised representative (if they continue to require this) and allow tax credits to be claimed by the appropriate entity.

Are you an employed authorised representative?

The FOFA reforms massively increase the exposure for employed authorised representatives. Here’s why and what to do about it.

A surprising number of advisers employed by AFS licensees are appointed as an authorised representative (AR) when there is no legal requirement to do so. It’s not necessary, because employees can provide financial services under their employer’s AFS licence without being an AR.

While AR status can be useful to demonstrate credibility to clients and to identify who has authority to give advice, it might be time to rethink whether the risks are worth it.

The FOFA reforms impose the Best Interests Duty on individual advisers. From 1July, ASIC can impose fines of up to $200,000 on individual authorised representatives for serious breaches of the FoFA obligations. The fines are even higher for companies (up to $1m!).

This means that employed advisers who have been appointed as ARs could be liable for a penalty if they:

• Don’t act in the best interests of the client
• Give advice that is not appropriate for the client
• Fail to warn the client during the “needs analysis” phase about the impact of incomplete or inaccurate information; or
• Don’t prioritise the client’s interests.

And the fines won’t be covered by professional indemnity (PI) insurance – as most PI policies exclude fines and penalties. So, the exposure is significant – potential bankruptcy or loss of personal assets.

There’s a defence if they use the advice documents, compliance procedures and systems provided by their licensee - but not, if they disregard them. Some licensees might think this is fair - they’d say, “If the adviser follows their rules then everything will be ok!” or “Why shouldn’t the adviser be more accountable?”

What happens if the licensee’s FoFA procedures and systems are inadequate? How can an employee be more accountable if they don’t have any control over those procedures and systems?

The Fold’s tip to employed advisers – ask your licensee to terminate your appointment as an AR. Now! Is it time to talk to your regulatory specialist – and your accountant?

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About Claire Wivell Plater and Charmian Holmes

Claire Wivell Plater is managing director and Charmian Holmes is solicitor director at The Fold Legal