Here we go again… FOFA puts brokers in the firing line

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5 September 2011

Ever since the Wallis Report of the 1990s which led to the Financial Services Reform Act 2001, general insurance brokers have blamed their financial planning counterparts for bringing down on their heads new controlling legislation that wasn’t really intended for them at all.

In the minds of the Canberra bureaucrats, brokers seem to occupy the same “intermediary” category as financial planners, no matter how different their work is.

Last week brokers seemed at first glance to have done well out of the draft Future of Financial Advice (FOFA) Bill when it was announced.

After all, they have been allowed to sell insurance through superannuation and keep the commissions, and they’ve been excluded from the ban on soft-dollar payments. That includes overseas trips.

But the reforms extend to more than that, and as ever the brokers’ devil has emerged in the detail.

Included in the bill is a new obligation to provide advice in the best interests of the client – and this will include brokers.

Under the FOFA bill the Australian Securities and Investments Commission (ASIC) will have new powers on licensing that will also affect brokers because it applies to all holders of an Australian financial services licence (AFSL).

Under the Corporations Act, there is no requirement for a broker to act in the best interests of the client.

“This meant that as long as the advice met the standard of being appropriate and the necessary disclosures were made, the adviser was not prohibited by the Act from giving advice that benefitted the adviser,” the draft FOFA bill states.

The Federal Government is proposing to amend the Act by requiring individuals who provide personal advice to retail clients to “act in the best interests of the client when providing that advice”.

It also states the broker must give priority to the client’s interests when there is a conflict.

Legal expert Richard Batten says the “best interests” clauses will apply to brokers and they will need to meet the detail and prescriptive requirements.

“Brokers will be caught up by the new regime and will face higher levels of compliance which means higher costs for them,” Mr Batten, a partner at national law firm Minter Ellison, told insuranceNEWS.com.au.

“Certainty the best interests duty has been more prescriptive than I was expecting.”

The legal firm has laid out 12 steps a broker must meet to comply with their duty of acting in the best interests of the client. These are:

1. Identify the client’s objectives, financial situation and needs as disclosed by the client;
2. Identify the subject matter of the advice requested;
3. Make reasonable enquiries where the information provided by the client is incomplete or inaccurate;
4. Warn the client if the advice still ends up being based on incomplete or inaccurate information;
5. Give a written warning if the client’s objectives or needs could be better met;
6. Decline to advise where the adviser does not have the relevant expertise;
7. Assess whether the client’s objectives and needs could be met other than by acquiring financial products;
8. Conduct reasonable investigations into the financial products that the adviser is aware of that might achieve the client’s requirements;
9. Where no product on the approved product list meets the client’s requirements, tell the client of that in writing and not recommend any product on the list; 
10. Only recommend the acquisition of a new product if the client’s requirements will be better met after assessing the disadvantages against the advantages of not doing so;
11. Ensure all judgments are based on the client’s circumstances;
12. Only provide the advice if it is reasonable to conclude that the advice is appropriate to the client.   

Mr Batten says any of these tests could apply to a broker including an approved product list if one existed within a group.

Mark Radford of Radford Lawyers told insuranceNEWS.com.au there are “some concerns” about how the FOFA legislation is drafted.

“There are significant issues to be considered with this legislation and the issue of the drafting of the ‘best interests’ section,” he said.

Of even greater concern to brokers will be the proposed fines for breaches of the obligations under this section.

The maximum penalties will be $250,000 for authorised representatives or licensees and $1 million for corporate entities. 

Mr Batten says the breaches will be civil offences and not criminal acts, but he doesn’t rule out damages also being awarded as a result of any misdemeanour.

Brokers will also have to contend with ASIC’s increased powers under the bill. It is intended to have new powers to refuse or cancel a licence where the individual is “likely to contravene” their obligations.

ASIC will also be given extra powers to ban a person who is “not of a good fame or character or adequately trained or competent” to provide financial services advice.

The regulator will also have the power to ban somebody who is “likely to contravene” a financial services law.

While brokers can continue to blame financial advisers for doing all the wrong things and causing all this legislation, the Government doesn’t seem to have accepted this argument.

As a result FOFA is turning into an all-encompassing piece of legislation that will affect everybody who holds an AFSL.

They can blame financial planners for this mess – and the second tranche of FOFA reforms has still to be released – but they will apparently still have to accept they’ve been shoved into the same position again.