Scaled Advice 2.0: The Proposed FOFA Amendments

May 2014

Proposed amendments to the best interests duty under the Government’s Future of Financial Advice amendments Bill target perceived issues with the current formulation of the duty - in particular with respect to scaled advice.


These amendments adjust the “safe harbour” steps (which can be relied on to satisfy the duty) and remove the catch-all provision at the end of the steps. As the FoFA amendments are paused for further consideration, thought should be given to the view taken by the changes and associated commentary on scaled advice.

The Bill’s explanatory memorandum justifies the changes as being needed to facilitate the provision of scaled advice and to address uncertainty around the scope of the catch-all. However, there are potentially broader implications arising from the FoFA amendments. Not only do they adjust the relationship between the best interest duty and scaled advice, they also revisit the concept of scaled advice itself.

The existing safe harbour steps for the best interests duty begin by providing that the advice provider must have identified their client’s objectives, financial situation and needs. The amendments propose reordering the steps so that, instead, the first requirement would be to identify the subject matter of the advice sought by the client (which is currently the second step). This is seen as better aligning the steps with a scaled advice scenario, on the basis that a provider and their client will discuss the scope of any scaled advice required by the client in their initial discussion.

The primacy of that initial scoping is reinforced by a related new provision. This new section provides that the client and advice provider can agree on the scope of the advice sought. This position contrasts with ASIC’s guidance on the current law, which states that while either the provider or the client can suggest limiting the subject matter of the advice, advisers must nevertheless use their judgment when deciding on the scope of the advice. ASIC’s view is that advice providers must determine the scope of the advice in a way that is consistent with the client’s relevant circumstances and the subject matter of the advice they are seeking. In other words, advisers cannot arbitrarily scope down their advice, to suit their interests over those of their client.

The perceived difficulties with accommodating scaled advice within a statutory best interests duty are arguably also illustrated by the tensions around the catch-all provision. The catch-all provides that the adviser must take any other step that would reasonably be regarded as being in the best interests of the client. This was widely criticised as being too open- ended and undefined when the duty was introduced into law.

A partial attempt to address this uncertainty and accommodate more limited advice solutions came in the form of the drafting note, which currently features after the safe harbour steps. This note seeks to clarify that the subject matter of the advice and the client’s relevant circumstances may be broad or narrow and so the safe harbour anticipates that a client may seek scaled advice. This note is reinforced by Proposed amendments to the best interests duty under the Government’s Future of Financial Advice amendments Bill target perceived issues with the current formulation of the duty - in particular with respect to scaled advice.

ASIC’s current guidance which states that the catch-all does not prevent advisers from giving scaled advice. However, perceived issues remain with the catch-all and the proposal to remove it completely from the safe harbour may prove to be the final nail in the coffin for this provision.

Technical interpretation aside, the proposals to adjust the best interests duty reveal a fundamental issue with how scaled advice is seen by the lawmakers. This matters not only in terms of how the law is developed, but also in terms of how the industry is perceived to operate.

The previous public exposure draft of the explanatory memorandum to the FoFA Bill described scaled advice as being about a specific issue or issues. This contrasted with what was described as a “holistic” advice model offered by advisers, whereby the adviser makes extensive enquiries about their client’s circumstances, needs and objectives and provides advice to their client on all aspects of their financial circumstances in a full financial plan. The language used in this previous version appeared to be in this sense binary. It saw the advice industry as being divided into ostensibly two dominant models of advice: scaled and holistic.

Contrast this view of the industry with that taken by ASIC, which states in its guidance that all personal advice is scaled or limited in scope to some extent. On this alternative view, advice is either less or more comprehensive in scope along a continuous spectrum. This recognises advice as being flexible to cater for a wide range of needs and circumstances. A subsequent revised version of the explanatory memorandum has been released with more detailed commentary on the subject of scaled advice and now acknowledges the “spectrum” concept put forward by ASIC.

Limited advice solutions are recognised as having a critical role to play in the future delivery of cost-effective advice to a broader cross-section of the population. The proposed amendments to the best interests duty have been challenged from a consumer protection perspective and criticised as likely to lead to an erosion in the quality of advice.

However, regardless of the technical drafting merits of the proposed changes, there is arguably a more fundamental need to ensure that the laws which govern the advice industry are interpreted in a way which reflects commercial reality and how the industry needs to develop. If laws evolve in a way which result in binary perceptions about how advice may be delivered, in a worst case scenario this could polarise the market and limit the range of potential advice models. Ultimately, this would lead to a poorer outcome for consumers. This arguably places an even greater responsibility on Treasury and ASIC to ensure that their guidance accurately describes the advice industry in general and scaled advice in particular. In this way legislative and regulatory guidance may allow the developing legal framework to deliver appropriate consumer- and industry-facing outcomes.
 

wrap up

  • The FoFA amendments propose removing the best interests “catch-all” provision and clarify that clients and advisers can agree on the scope of advice
  • These amendments are directed at facilitating the provision of scaled advice
  • However, shifting views in the explanatory commentary have exposed uncertainty around the concept of scaled advice
  • The pausing of the FoFA amendments may provide space to ensure that the law and regulation reflect thereality of scaled advice
Jon Ireland

I constantly strive for technical excellence and commercial outcomes that add real value for my clients.

Jon Ireland Partner

Jon provides advice to leading Australian and international financial services clients on the full range of corporate, commercial and regulatory issues facing these businesses. He has considerable experience advising them on establishing, buying into, selling and restructuring their businesses.

Jon regularly advises on funds management issues including fund structuring, disclosure, investment management and outsourcing arrangements. He has particular expertise in the area of investment distribution and has advised on key projects for platform operators and advice providers.

Recently, Jon has advised on the establishment of a fully digital investment platform, the negotiation of a material outsourcing arrangement for a global investment bank and a scheme modernisation project for a leading Australian fund manager. Jon has also recently advised on the establishment of the Australian operations of a global diversified financial services business, including regulatory and corporate issues related to its expansion.

Jon's clients value his advice on recent law reforms, including around product disclosure statements and the digital provision of financial services. Jon is consulting to the Committee for Sydney and is a regular participant on Financial Services Council working groups.

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