Financial Advisers – Best Interest Duty

The best interests duty and related obligations apply to financial advisers who provide personal advice to retail clients. The duty has applied since 1 July 2013 and applies to the individual adviser providing the advice (rather than the AFS licensee). There are some instances where the AFS licensee may be responsible for complying with the obligations, for instance, where the advice is provided via a computer program.

The best interests duty applies to the provision of all personal advice, except where an agent or employee of an Authorised Deposit-Taking Institution (ADI) provides advice sought by the client that is solely in relation to a basic banking product or general insurance products – then a modified best interests duty applies.

Under Div 2, Part 7.7A of the Corporations Act, the obligations of the advice provider include:

  • acting in the best interests of the client
  • providing appropriate personal advice;
  • obligation to warn the client if advice is based on incomplete or inaccurate information; and
  • prioritising the interests of the client.

 

The best interests duty and related obligations require advice providers to act in the best interests of their retail clients and place their clients’ interests ahead of their own when developing and providing personal advice.

ASIC provides guidance on the modified best interests duty in Regulatory Guide 175 Licensing: Financial product advisers—conduct and disclosure.

 

Best Interests Duty – What is required?

Advice providers are required to provide advice which would leave the client in a better position. This will depend on a number of factors, such as:

  • the position the client would have been in if they did follow the advice,
  • the facts at the time the advice is provided,
  • the client’s objectives, financial situation and needs, and
  • the product features.

 

Section 961B(2) includes safe harbour provisions – procedural steps that an advice provider can take to show they have met the best interests duty.

The safe harbour requires an advice provider to:

  • Identify:
    • the financial situation, objects and needs of the client that were disclosed to the advice provider;
    • the subject matter of the advice sought;
    • the financial situation, objects and needs of the client that would reasonably be considered relevant to the advice sought;
  • make reasonable inquiries to seek complete and accurate information;
  • assess whether they have the required expertise to provide the advice;
  • if it would be reasonable to recommend a product:
    • conduct a reasonable investigation into products that might achieve the client’s objectives and meet their needs;
    • assess information gathered;
  • base all assessments and judgements on the client’s relevant circumstances;
  • take any other step that would reasonably be regarded as being in the client’s best interests.

 

Providing Appropriate Advice

This obligation is concerned with providing quality financial product advice to clients.

This means that the advice provided to the client must:

  • Be fit for purpose and satisfies the client’s relevant circumstances;
  • Leave the client in a better position, if they were to follow the advice.

 

The appropriate advice obligation is closely connected with the steps the adviser takes the steps to meet the best interests duty. Particularly the requirements to

  • base all assessments and judgements on the client’s relevant circumstances; and
  • take any other step that would reasonably be regarded as being in the client’s best interests.

 

Where the adviser has taken steps to meet the best interests duty, the advice should only be provided where it is reasonable to conclude that the advice is also appropriate for the client.

 

Obligation to Warn

A key part of the best interests obligation is that the adviser must make reasonable inquiries about the client’s personal circumstances. In some instances however, the client will not provide all relevant information required that the adviser has sought. In these circumstances, the adviser has a duty to warn the client that:

  • the advice is based on incomplete or inaccurate information relating to the client’s own personal circumstances; and
  • the client should therefore consider the appropriateness of the advice, taking into consideration their personal needs, objectives and financial situation.

 

Prioritising the Interests of the Client

Section 961J of the Corporations Act is the conflicts priority rule, meaning that the adviser must prioritise the interests of the client where they know a conflict exists between the client and:

  • the advice provider or their associate;
  • the adviser’s AFS licensee, and associate of the AFS licensee;
  • an authorised representative who has authorised the adviser, or an associate of the authorised representative.

 

Advisers are not required to investigate and identify each and every conflict that may exist. Rather it is sufficient for the adviser to simply act and provide the advice as if no conflict existed. ASIC’s guidance notes that advisers are likely only to be aware of conflicts disclosed in the Financial Services Guide or Statement of Advice provided to the client and that this should not prevent the adviser from meeting this obligation. However, ASIC has also noted that the more material the conflict, the more the adviser will need to do to ensure they prioritise the interests of their client.

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