Hey financial adviser; Are you acting in your client's best interests?

I've recently provided guidance to financial advisers about what they can expect under the new proposed statutory obligation that appears in the Financial Advisers Law reform . 

The obligation is expressed as needing to give priority to the client's interests, including taking all reasonable steps to ensure that the financial adviser's own interests or the interests of any associated person do not materially influence the advice.  

Fortuitously for us, there has been a case decided by the Federal Court of Australia on 27 October 2017 in relation to the penalty for the breach of the obligation of advisers to act in the best interests of their clients in ASIC v NSG Services Pty Ltd.

The Federal Court imposed a civil penalty of $1 million against Melbourne-based financial advice firm NSG for breaches of the best interests duty introduced under the Future of Financial Advice reforms. This is the first Australian civil penalty imposed on a financial services licensee for breaches of the best interests duty. The penalty relates to financial advice provided to retail clients by NSG advisers on eight occasions between July 2013 and August 2015. The clients were commonly sold insurance and advised to roll over superannuation accounts that committed them to costly, unsuitable and unnecessary financial arrangements.

The Court found that the failures by NSG to ensure compliance by its representatives were systemic in nature and in his reasons, Justice Moshinsky said, “I regard the contraventions as very serious ones”.

I won't go into the NSG facts further, you can read the case for yourself.  However, I have put together some lessons from the case that will assist licensees in NZ to understand what actions may be included in the obligation to take … "all reasonable steps to ensure that the financial adviser's own interests or the interests of any associated person do not materially influence the advice".  Below is a list of seven lessons for licensees. This is not an exhaustive list, as not all financial services firms are the same, and these lessons will need to be modified or added to depending on the nature of your advice business.

1. Your advice processes matter

Licensees need to ensure that their advice processes are robust and stand up to scrutiny.  They need to be designed for proper fact-finding and consideration of all relevant factors.  They should not be designed as a sales-process. They need to promote engagement and understanding. If the licensee employs new or inexperienced advisers then there needs to be additional checks and balances to ensure processes are being followed.

2. Conflicts need to be identified and managed

NSG created a sales environment and commission based remuneration which was not consistent with an adviser's obligation to put a client’s interests first.  This encourages conflicted behaviour.  Establish benefits for your advisers that reward compliant behaviour and are not sales focused.

3. You need a compliance program

These programs prove that your compliance policies and procedures are being followed.  Internal and external audit functions and additional training for identified lapses with policy and procedure are a must.

4. External compliance consultants matter

The Court will take special notice of external compliance experts reports.  Undertake regular reviews by qualified professionals, act in good faith in implementing their recommendations, demonstrate a compliance culture and real commitment to improving your licence’s compliance practices, treat compliance as a dynamic thing that requires continual as a dynamic thing that requires continual review and improvement.

5. Licensees need to monitor and supervise their representatives effectively

Identify high-risk activities and monitor those effectively.  It should identify and rank high risk activities, products, situations, people and the like and focus greater time and attention on those higher risk areas.  For example, replacement product advice should typically always be treated as high risk and monitored accordingly.

6.  You need to consider more than just one product

All reasonable financial products solutions should be considered, communicated, and documented to ensure the client's options are being fully considered, and you can prove that they have been.

7.  Tone from the top is important

NSG was aware of its failings from a number of external advisers, but did nothing to remedy them.  The tone was sales-focused not ‘best interests of the client’ focused.  This tone from the top theme is particularly important given the Financial Markets Authority's Strategic Risk Outlook identifies that this year's priorities are regulating “Governance and Culture - because ineffective governance leads to poor conduct in organisations and has a negative impact on investors" and “Conflicted conduct, Conflict management procedures need to be designed to put customer interests first”.

Merran Keil

7 November 2017