Written by Michael Vrisakis

General issue

The issue has been raised as to if and how advisers can satisfy the best interests duty (BID) when selling annuity products, particularly in a low interest rate environment and in the context of intra-fund advice.

As noted below, the general issue here is the extent to which selling single financial products, or a single type of financial product, under a personal advice model is consistent with the BID under Chapter 7 of the Corporations Act (ie “scoped advice” or “scaled advice”).

 

Context

The issue has received some prominence in a recent article appearing in Money Management.

This follows on from, or was occurring concurrently with, an article in the Australian Financial Review where the key concern raised by commentary was that scoped advice limited to one area, such as a person’s existing superannuation interest, may not satisfy the BID as it applies to personal advice.

 

Legal dimensions

At the heart of the legal issue is whether scoped advice can alleviate or circumscribe the extent of the reasonable investigations that an adviser must conduct if he or she is relying on the second limb of the BID. As we know, section 961B(2)(e) of the Corporations Act envisages that an adviser would consider alternative financial products that could achieve the objectives and needs inherent in the underlying instructions attaching to the advice sought by the client, based on his or her instructions.

In addition, the same Part of the Corporations Act goes on to require that the advice be appropriate in section 961G.

 

Legal solution

Section 961B(2) contains a note which explains that advice can be scoped through the instructions of the client. Tellingly, the note does not specifically contemplate that scoping could occur at the instance and initiative of the adviser, even if the adviser and the client agree the scope of the advice (for example, that it should be limited to a specific area, such as superannuation or a specific topic, such as life risk cover or annuities).

This is despite:

  • an industry push at the time for the above mentioned note to specifically address a scenario where the adviser may initiate or suggest a scope of advice limited to an area or a specific financial product or type of financial product;
  • an expansion to the note that would have provided some clarification, but which was drafted and passed, to only then be disallowed by Parliament as part of the rejection of amendments dealing with personal advice; and
  • ASIC guidance in its Regulatory Guide 175, which contains examples consistent with the paradigm outlined above (viz limited scope envisaged and initiated by the adviser, and then agreed by the client).

In our strong opinion, this paradigm:

  • is legally sound;
  • would satisfy the BID; and
  • would enable a sales scenario comprising a conversation limited to a single product, such as risk life cover or an income stream.

The legal logic and underpinnings of this position are:

  • the instructions of the client, and hence the scope of the advice sought by the client, are an iterative process in practice and, translated in legal terms, means that the adviser and the client are free (consistent with the principle of freedom of contract ) to agree on a scope for the advice;
  • this agreed scope then circumscribes the extent of the reasonable investigation exercise required by the BID to be conducted by the adviser; and
  • this in turn affects what is appropriate advice for the purposes of the compendious best interests obligations of the adviser.

This legal position is subject to several qualifications as might be expected, namely:

  • the scoping, which may be initiated by the adviser, cannot be inconsistent with any instructions and objectives put forward by the client unless these are worked through by the adviser and fully informed consent to the narrower scope is forthcoming from the client;
  • appropriate disclaimers are given about the limited nature of the scope of the advice; and
  • there is no breach of fiduciary duty by the adviser, such as an intent to corral the client into a product in circumstances where it is either manifestly not appropriate for the client’s circumstances or the adviser’s actions are conflicted by self-interest (eg seeking to prioritise his or her own interests in receiving a monetary benefit, rather than prioritising the interests of the client consistently with the duty of priority under the broader suite of BID obligations contained in the Corporations Act).

 

Conclusion

There is undoubtedly some doubt and uncertainty about the ability of an adviser to initiate scoped advice limited to an area of examination (such as a client’s superannuation interest in a particular fund, usually referred to as intra-fund advice) or equally, a particular or specific financial product such as risk life cover or an income stream).

This manifested itself in the two concurrent articles referred to above, and the Parliamentary enquiries on this subject referred to in the article appearing in the Australian Financial Review.

This said, in our strong view, the above analysis clarifies, and supports the ability of an adviser to initiate and implement a limited scope of advice strategy of the kind described.

 

Where to from here

Given the above uncertainty, it would seem logical for the matter to be the subject of clarification. This might be fruitfully channelled through industry bodies in the first instance, with the benefit of formal legal advice and the possibility of Counsel’s opinion to support that initial legal advice.

 

Michael Vrisakis
Michael Vrisakis
Partner
+61 2 9322 4411