One of the very memorable catch phrases from the Animals’ song repertoire goes along the lines of “Oh Lord, please don’t let me be misunderstood.” These words could be applied, respectfully, to the proposed “Good Advice” duty – specifically, the central pivot which links “good advice” to the test of whether the advice would be “reasonably likely to benefit the client”.

Let it be said that the concept of Good Advice is good, as indeed is most of the Quality of Advice Proposals Paper (on that, you can read our submission here and the Australian Financial Review’s latest take here).

However, the new formulation has the propensity to be misunderstood and create uncertainty. In our view, the focus of Good Advice should be centred on fitness for purpose, combining both inputs and outputs-based elements.

The Originals before the Remix

This new formulation hearkens back to various ASIC formulations. It is perhaps noteworthy that ASIC progressed from a “better off” formulation to one focused on suitability.

ASIC started off with a formulation centred around being in a “better position” (in 2012); namely that ASIC expected that the processes for an advice provider to follow in acting in the best interests of their client would “result in the client being in a better position, if the client acts on the advice provided”.[1] This sees the best interests duty as imposing an objective standard going to the substance of the advice rather than process and procedure, measured by what the provider would believe.

ASIC then reverted to a formulation centred around “reasonably believe” (in 2017); namely “whether a reasonable advice provider would believe that the client is likely to be in a better position if the client follows the advice.”[2]

By 2021, this had morphed into “whether the advice, if followed by the client, would be reasonably likely to meet the client’s relevant circumstances”.[3] A key issue is that the new formulation of the duty becomes overly centred on the outcomes that the advice should achieve. As this is consistent with the theme of quality of advice, it is at least superficially attractive. This contrasts with the traditional legal interpretation of the duty, which is rather centred on the proper process being employed in the provision of the advice. Quality of advice is seen to flow from adherence to the proper processes.

The reality is that a well-formulated duty should no doubt have both inputs and outputs based on elements. It is noteworthy that the current duties have this characteristic viz inputs (in the form of both limbs of section 961B of the Corporations Act) as well as outputs (in the form of the requirement that the advice be appropriate as set out in section 961G of the Corporations Act).

Back to the Future?

The new (or old) approach is to zoom in on the outputs that must be achieved by the advice. There are several conceptual and practical issues with this approach. The main one relates to the benefit element itself; the problem is that this outputs-based formulation could be interpreted (and easily interpreted) as requiring the advice to produce a superior financial result. To be fair however, the word “benefit” should not necessarily be given this gloss. It could equally refer to some other type of benefit, such as the advice assisting the client to better manage their financial affairs. However, the new formulation is intrinsically fluid and potentially uncertain in this regard. In addition, the proposed formulation does not address another key accessibility issue; namely, the proper scoping of advice which goes to affordability and access issues. Advice that is excessive in its scope would, prima facie, satisfy the new formulation.

Bottom line is that in the absence of some further explanatory test, there is a real risk of the new formulation being interpreted as requiring the client to be in a superior financial position. This could lead to unfair liability attaching to the duty or reduction in access to the advice, as advisers will decline to accept or engage with the new duty and (increasingly) leave the industry.

A possible solution would be to add an ancillary limb to the new duty to the effect that the duty will be satisfied if it was reasonable to believe that the advice would benefit the client or else, specifically state that the concept of “benefit” can include any benefit. There would still be potential glitches in the view of the authors, a principal one being that “good advice” should be able to be satisfied where the advice simply results in a position of neutrality for the client, for example, where the advice is aimed at assisting the client to avoid pitfalls and maintain their current financial status quo.

For the authors’ money, however, a superior solution would work as follows:

  • retain the concept of good advice; this is a sensible intuitive measure as commented on above; and
  • contrary to the current position, load the new duty with some specific elements designed to address matters of certainty.

The loaded elements would unfold as follows:

  • a first element of (properly) scoped advice; this addresses, among other things, the point that the current proposed duty would be satisfied even where the advice is excessively scoped and excessively expensive;
  • a second element of skilled advice; this would no doubt be implied anyway but its inclusion would very much be consistent with the quest for certainty; and
  • a third element of suitable advice.

It should be noted, as previously commented, that this formulation will combine both inputs-based criteria, i.e. the scope and the skill elements, as well as an outputs-based criterion, i.e. suitable advice. This third criterion coupled with the first criterion can address the point raised concerning affordability of advice.

It is submitted that such an alternative formulation would help deliver the certainty which the industry, advisers, clients, professional advisers, and regulators so desperately crave and need.

 

[1] ASIC, Future of Financial Advice: Best Interests Duty and Related Obligations – Update to RG 175, Consultation Paper No 182 (2012) [43].

[2] ASIC, Licensing: Financial Product Advisers – Conduct and Disclosure, Regulatory Guide No 175 (2017) RG 175.225.

[3] ASIC, Licensing: Financial Product Advisers – Conduct and Disclosure, Regulatory Guide No 175 (2021) RG 175.378.

 

 

Michael Vrisakis
Michael Vrisakis
Partner
+61 2 9322 4411
Fiona Smedley
Fiona Smedley
Partner
+61 2 9225 5828
Maged Girgis
Maged Girgis
Partner
+61 2 9322 4456
Andrew Bradley
Andrew Bradley
Partner
+61 2 9322 4455
Tamanna Islam
Tamanna Islam
Senior Associate
+61 2 9225 5160
Abby Sutherland
Abby Sutherland
Solicitor
+61 2 9225 5312