Skip Ribbon Commands
Skip to main content

Further regulation of advice and distribution - What can we expect?

Speaking at IFSA’s annual conference recently, Tony D’Aloisio, Chairman of ASIC said that the economic crisis would lead to further regulatory changes: “a case for no change or leave it to industry will not stand up”. He was not confident that the [financial services] industry will deal with all advice issues and he identified “front end commission” as causing problems for the quality of financial advice provided to consumers. Mr D’Aloisio said that financial advisers have a duty to act in the best interests of their clients. He implied that it should be imposed by statute.

At the same conference, Bernie Rippoll, MP, Chair of the Parliamentary Joint Committee on Corporations and Financial Services gave very little away but he did indicate that self-regulation by the industry was unlikely to be sufficient. In his view there is a need to regulate behaviour around fees, commission and disclosure and to provide consumers with clarity around the nature of the advice (or service) they were getting.

The PJC’s report and recommendations are due in November this year.

FSA Consultation Paper “Distribution of retail investments”

In this context it is useful to consider the recommendations by the UK’s Financial Services Authority in the Consultation Paper “Distribution of retail investments” (09/18). (These are also being considered by the PJC.) The proposals were developed in response to a review of the industry by the FSA which identified structural and systemic problems that affect the quality of advice provided to consumers.

The paper identified three proposals for improving the quality of investment advice given to retail consumers:

  • First, improving clarity for consumers about the nature of the services they receive by clearly identifying the nature of the advice
  • Second, addressing the potential for adviser remuneration to distort consumer outcomes by banning commissions, and
  • Third, increasing the professional standards of advisers by improving education, training and ethics.

In Australia, FSR has gone some way to increasing levels of education and experience among financial advisers. While it is likely that the Rippoll enquiry’s report will recommend measures to further improve education and training standards for advisers, the primary focus on this point will likely be on ethical standards. Ethical standards are compromised by the fact that overwhelmingly financial advisers in Australia, as in England, are paid through commissions. In Tony D’Aloisio’s words “if you are giving personal advice, isn’t the duty to give advice in the best interests of the client? …nothing else is relevant”.

Mr D’Aloisio has publicly expressed what the industry and its advisers have been tiptoeing around for years: commission based remuneration is inconsistent with an obligation to act in your client’s best interests.

Consistent with that view, a key element of the FSA’s proposals for improving financial advice in the UK is to ban commission based remuneration of advisers. Michael Mathieson considers the FSA’s proposal on banning commission in his article also published in this publication.

Describing the nature of the financial advice - independent or restricted?

In the rest of this article I look at the FSA’s first proposal - to improve clarity for consumers around the nature of the financial advice they are receiving. As noted above, this is one of the things Mr Rippoll identifies as needing attention in Australia.

The FSA’s proposal is, of itself, extremely simple: whenever a person recommends an investment product to a retail client they must describe their service as providing independent advice or restricted advice. The consequences of doing so may be more interesting, and difficult.

The intention of the proposal is to draw a clear distinction between independent advice and advice which is not independent or advice that is limited in any way and to ensure that consumers understand what they are getting.

Independent advice

A financial planning firm or adviser could only identify itself as independent if the advice it provides is:

  • Based on a comprehensive and fair analysis of the ‘relevant market’, and
  • Unbiased and unrestricted.

Comprehensive and fair analysis of the relevant market

The first limb goes to the range of products which can be considered and recommended by the adviser. The relevant market is defined as “all retail investment products that are capable of meeting the investment needs and objectives of the client”.

An independent adviser must review the whole market for the field in which they provide advice - generally this will be all retail investment products, but specialist firms can consider whole of relevant market.

The requirement would prevent a financial adviser using an approved product list unless it could be demonstrated that the list itself comprised the best in the market.

The proposal does not, of itself, prevent an adviser recommending its own firm’s product, but advisers cannot limit themselves to recommending (or providing advice about) it.

Advice must be unbiased and unrestricted

The second limb of the test for independence proposed by the FSA is that the advice must be unbiased and unrestricted.

In order to provide unbiased and unrestricted advice a firm or its advisers must not have any agreement, constraint or obligation with any service or product provider which would restrict their ability to act in their client’s best interests. In particular, a product provider’s actions must not be able to influence the advice given in any way. This requirement of itself would be sufficient to bring to an end commission based adviser remuneration. However, the obligation applies only to an adviser providing “independent advice”.

Under the FSA’s proposal, advisers providing independent advice will not be prevented from being financed, owned or part-owned by product providers. However, they will need to consider the impact of reporting lines, remuneration arrangements, including bonuses, in order to satisfy the requirement that their advice be “unbiased and unrestricted”.

Restricted advice

Advice which is not independent is restricted advice. A person may provide restricted advice because they advise on products from a restricted range of companies or just one or they may use a single platform to access a wide range of investments.

Consequences of identifying advice as independent or restricted and the duty to act in the client’s best interests

Having created a distinction between independent and restricted advice, the FSA is not clear on what impact the distinction has on the adviser’s duty to act in the best interests of the clients. In considering the duty of an adviser providing independent advice, the paper provides:

We would expect an independent adviser to assess rigorously whether [the firm’s] product is suitable for its client, compared to others in the market … The adviser must act in the client’s best interests”.

This is the touchstone: the adviser must act in the client’s best interests. In the UK, the obligation is imposed on advisers by the FSA. In Australia there isn’t, yet, a statutory obligation for a financial adviser to act in their client’s best interests. However, there is a growing body of cases which provide support for the view that equity imposes such an obligation. A recent example is Calvo v Sweeney [2009] NSWSC 719 in which an accountant, acting as a financial adviser, was held to have owed, and have breached, a fiduciary duty to his client. Justice White said: “I conclude that Mr Sweeney owed an obligation of loyalty to the Calvos and stood in a fiduciary relationship to them” [at paragraph 218].

The more difficult issue is what is the content of the duty. In the FSA’s view, a duty to act in the best interests of the client requires an independent adviser to recommend the most suitable (or the best) product in the market. In Australia, it is the writer’s view that the law does not go this far. For example, in Calvo v Sweeney, Justice White described the adviser’s duty in the following way:

As a fiduciary, Mr Sweeney’s duty was not to put himself in a position of conflict, or sensible possibility of conflict, between his duty to the plaintiffs and his personal interest, without their informed consent.” [at paragraph 220].

If, as appears likely, a statutory duty is imposed on financial advisers in Australia to act in their client’s best interests, the most pressing concern for the industry will be to work out what the content of the duty is. Further, if there is a distinction drawn in Australia between independent and restricted advice, should the duty only apply where the adviser provides independent advice.

Clearly, an adviser who is providing restricted advice cannot be required to recommend the most suitable product in the relevant market (the test imposed on an adviser providing independent advice). Nevertheless, it is not clear that a lesser standard is being proposed by the FSA. In the consultation paper, the FSA says:

All firms have a responsibility to act in the best interests of their clients and, for firms that offer advice, this responsibility means making the best available recommendation for the client (including, where appropriate, making a recommendation not to buy a product at all or to take alternative action). Where firms offer restricted advice, relating only to a limited range of products or providers, they must still make their recommendations in their clients’ best interests - for example they must recommend paying off debt, rather than buying any of their products, where this would be in the client’s best interests.” [paragraph 4.6]

What is left unclear in this example and the consultation paper is whether an adviser who is providing restricted advice can comply with their duty to act in their client’s best interests if they recommend a product on their approved product list notwithstanding that there is another product, not on the list, which is more suitable for the client. Without amending the duty, it is not clear that the adviser could. In that case, they would be required to decline to recommend any product to their client.

If a similar model is adopted in Australia, the industry should be prepared to lobby hard for any statutory obligation to recommend the best product to be restricted to those advisers who provide independent advice. In the United States, brokers providing limited (or restricted) advice do not owe their clients a fiduciary duty, instead they must comply with a “suitability standard”. A suitable advice requirement could provide a workable standard for financial advisers providing restricted advice in Australia and at the same time provide consumers with protection against poor financial advice.




 Local contact(s)

Key developments in financial sector regulation


Banning commissions - a crystal ball?

In recent times, the business pages of Australian newspapers seem to have carried almost daily articles about commissions paid to financial planners. The press coverage has been almost uniformly negative. Two Federal government inquiries are currently considering the matter. Two industry bodies have announced self-imposed bans on commissions. It is also a focus for ASIC, both in terms of policy development and dealing with headline cases. Comments by the Chairman of ASIC at the recent IFSA conference have reinforced the sense of the policy tide turning against commissions.

Read more

Michael Mathieson, Senior Associate

The end of the Australian funds management industry as we know it?

The Australian funds management industry, the fourth largest in the world, could potentially become subject to many regulatory reforms. If all of the possible reforms are implemented and the Australian regime is brought closer in line with more prescriptive regimes around the world, Australian funds will need to undergo radical change.

Read more

Jim Boynton, Partner
Will McCosker, Senior Associate

The GFC and hedge funds - What does the future hold?

The GFC has seriously tested investor trust and confidence in the capital markets. Frozen credit combined with corporate and investment product failures have curbed investor appetite. It has also led to governments, regulators and international bodies around the world scrutinising more closely what Prime Minister Rudd calls, “a plethora of new, unregulated financial institutions that arises out of financial liberalisation”.

Read more

Damien Richard, Partner
Michael Hung, Solicitor