FOFA amendments a step in the wrong direction

Section 961B(2)(g) of the safe harbour for the best interests duty provides that an adviser needs to take ‘any other step that at the time the advice is provided would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances’.

This clause has received significant criticism by sections of the industry and as a result is one of the amendments that the Government is proposing as part of its wind back of FOFA.

The section of our industry that believes they are true professionals have no problem with this clause. It’s a critical part of any professional relationship that the professional takes the greatest care to ensure the advice is in their clients’ best interests. Good planners believe it is their fundamental duty to take reasonable steps to ensure their advice is in their client’s best interests every time.

This obligation undoubtedly adds some risk to the adviser and their employers if they are sloppy or incompetent and don’t take “reasonable” steps. If the client is disadvantaged then it is likely that it will come back to bite the adviser. But if the adviser is thorough with their data gathering and provides advice tailored to clients needs then I believe the risk of breaching is entirely manageable when providing “scaled advice”. It’s just the process will take a little longer and cost a little more.

The risk advisers will take is certainly no more than a medical specialist assumes every time he diagnoses and operates on a patient. He is expected to find out everything relevant about a clients health and lifestyle before operating and cannot cut corners in order to abbreviate the process and save himself (and perhaps the client) time and money. Health is considered too important to take such risks with.

Likewise when an engineer designs a bridge he is under obligation to test every assumption in its design not make assumptions that certain things like traffic crossing the bridge, or likely corrosion of materials due to location will be fine and limit his process to keep the cost down. As a professional he is required to do the job properly to ensure no harm is done.

Quite simply, as financial services professionals our responsibility is to our clients financial futures and this responsibility should necessitate compliance with Section 961B9(2)(g) whether it is law or not. To attempt to avoid an obligation to take reasonable steps to know our client’s overall circumstances is to want to significantly lower the bar on what financial advice is about.

Those who have sought to have this step in the safe harbour provisions removed argue based on the uncertainty and open ended nature of the requirement it is too difficult to know whether is has been complied with or not. I would argue that most of the true professionals operating under AFSLs ensure all the advice they give is based on reasonable steps having been taken and are not at all fearful of this clause.

The agenda by critics is largely based around facilitating the sale of products and unburdening this process from having to provide more in depth advice or having to consider matters that may make it harder to justify the sale of products to clients for whom there are better strategic or product alternatives.

Yes, the removal of this requirement will facilitate much more advice as the Assistant Treasurer Arthur Sinodinos has argued – but it will also facilitate an inferior type of advice. It will give a green light to the advice-based distribution of products and ensure the industry remains beholden to product manufacturers and vested interests.

This is disappointing to those who believe it is only when we put client outcomes first that we can gain the trust of the community at large and the respect and title of a profession. As I have argued before change will only happen when government puts interests of consumers ahead of financial services product providers and encourages business models that focus on advice over funds under management.

After health, financial security is one of the most important things in life and the regressive step taken by removing requirements to take reasonable steps to ensure financial services providers have acted in their client’s best interests will be another step away from professional recognition for our industry and this is an unfortunate outcome for the larger community.

.

About Jason Bragger

Jason Bragger CFP is principal of Brisbane-based financial advice firm Dolfinwise. All views expressed are his own.

Jason has a background in Applied Mathematics and gained several years actuarial experience at National Mutual/AXA, as well as completing studies in Economics at Melbourne University before commencing his advisory practice in January 2000.

Jason currently serves as a member of the Financial Planning Association’s Policy and Regulations committee.