The Advisor/Client Relationship in Financial Advice. M. Arnold, G. Wright, A. Knipping, S. Duffield & P. Gill

Transcription

1 The Advisor/Client Relationship in Financial Advice M. Arnold, G. Wright, A. Knipping, S. Duffield & P. Gill

2 Investment Disputes at FOS * Investment % Advice % Disclosure Managed Investments 41% 17% Superannuation 37% 10% Securities 25% 23% Derivatives/ Hedging 12% 25% Real Property 45% 0%

3 Corporations Act 2001 (the Act) s.945a Requirement to have a reasonable basis for the advice (1) [Where advice must be provided] The providing entity must only provide the advice to the client if: (a) the providing entity: (i) determines the relevant personal circumstances in relation to giving the advice; and (ii) makes reasonable inquiries in relation to those personal circumstances; and (b) having regard to information obtained from the client in relation to those personal circumstances, the providing entity has given such consideration to, and conducted such investigation of, the subject matter of the advice as is reasonable in all of the circumstances; and (c) the advice is appropriate to the client, having regard to that consideration and investigation.

4 FSP s also have an obligation under section 912A(1)(a) of the Act to do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly. - The meaning of efficiently, honestly and fairly was considered in the decision of Story v NCSC (1988) 13 NSWLR 661 where the judge noted that the ultimate question was whether the AFSL holder s performance of its functions fell short of the reasonable standard of performance which the public was entitled to expect of an AFSL holder. The circumstances in which an AFSL holder may be held liable for breach of a duty to use reasonable care and skill have been described as follows: A financial services licensee may be held liable for loss suffered by its client under the tort of negligence. In order to succeed in a claim in negligence, that client must establish that the licensee owed the client a duty of care; and that the client suffered loss or damage as a result of that breach, which was not too remote.

5 A financial services licensee which holds itself out as having a special skill and expertise in offering advisory services to clients or potential clients may also be held liable in negligence for losses resulting from a client s reliance on advice given by that licensee without reasonable care. In Hedley Bryne v Heller & Co Ltd, Lord Reid observed that a person who offered advice in circumstances without a qualification that he or she accepted no responsibility for the advice, must be held to have accepted some responsibility for his or her answers being given carefully, or to have accepted a relationship with the inquirer which requires him or her to exercise such care as the circumstances require. Securities and Financial Services Law, by Baxt, Black & Hanrahan, 7 th Ed at paragraph 15.11

6 ASIC guidance RG All personal advice must comply with the suitability rule (or reasonable basis for advice rule ): s945a. Under this rule, where a providing entity provides personal advice to a retail client, each of the following three elements must be satisfied: (a) the providing entity must make reasonable inquiries about the client s relevant personal circumstances; (b) the providing entity must consider and investigate the subject matter of the advice as is reasonable in all the circumstances; and (c) the advice must be appropriate for the client. RG To comply with the Act, personal advice does not need to be ideal, perfect or best, but it must satisfy each of the three elements set out in RG

7 FPA Code of Professional Conduct & Practice Standards The legislative requirements are also reflected in industry standards. These standards are regarded by FOS as best practice for the industry as a whole (applied by the Panel/Ombudsmen accordingly). PS 1: Engagement PS 2: Collecting the client s information PS 3: Analyse and assess the client s financial status PS 4: Identify suitable financial planning strategies and develop the financial planning recommendations

8 What does FOS look for? Know your client Collecting client information: - Identifying client s needs and objectives; - Collecting information about the client s values, attitudes, expectations and financial experience and literacy (including understanding of and tolerance to risk). - Examination of the quantitative information and documents about the client s personal and financial situation collected by the FSP. The Panel may also consider if the information collected sufficiently reflects the recommendation(s) provided; - The nature and extent of enquires may vary from client to client and are dependent on an FSP s scope of engagement; - Record keeping (i.e. are there detailed file notes reflecting the FSP s enquiries into the client s financial situation, objectives and needs

9 What does FOS look for? (continued.) Risk profiling - Consideration of the risk profiling tools used by the FSP and its effectiveness (there is no mandated method and the Panel considers the method used in individual disputes on its own merits). - The steps taken by the FSP take to address the limitations of its preferred risk profiling tool? - Does the FSP s risk profiling tool address both the client s attitude to and capacity for loss? - In the case of joint investors, was each individual investor risk profiled separately? - In the case of clients acting in different capacities, were they risk profiled separately, reflecting their respective capacities? (e.g. where advice is for an SMSF, it is important the FSP consider both the personal circumstances of the

10 What does FOS look for? (continued.) - members of the fund and the fund itself (expectation that the FSP should obtain a copy of the SMSF s investment strategy). - Did the client(s) self assess their risk tolerance?

11 What does FOS look for? (continued.) Analysing and assessing the client s information - Consideration of the discussions between the FSP and the client regarding their resources, objectives and goals (including whether the goals and realistic and achievable); - Discussions regarding the risks involved to achieve the client s objectives and goals.

12 What does FOS look for? (continued.) Know your product The FSP has a duty to not only consider asset allocation in constructing a client s portfolio but also to consider the appropriateness of individual investments. Approved product list (APL): - how is it created; - how often is its composition reviewed? Quality of internal research into a product. The use of external research. Payment of commissions by product providers

13 Future of Financial Advice (FoFA) ss. 945A and 945B obligations will be replaced by the following new obligations from 1 July 2013: to act in the best interests of the client: best interests duty (s.961b); to provide appropriate advice (s.961g); to warn the client if advice is based on incomplete or inaccurate information (s.961h); and to prioritise the interests of the client (s.961j). New obligations will apply to advice providers (the individual who provides the personal advice unless not possible, then the new obligations will apply to the legal person that provides the advice (e.g. a corporate licensee or authorised representative: s.961b)).

14 FOFA (continued.) ASIC RG 175 will be amended to provide guidance around the new obligations: ASIC Consultation Paper 182 (August 2012). - Some of the new obligations use the same language as that is used in ss.945a and 945B. - To the extent ASIC s guidance on ss.945a and 945B is relevant to the new obligations, ASIC will retain its existing guidance in providing advice.

15 Contact Premjeet Gill Case Manager Investments, Life Insurance & Superannuation Financial Ombudsman Service Limited (03)