FOFA BEST INTERESTS DUTY & SAFE HARBOUR Technical Day – June 2013 Presenter: Spiro Politis

What has changed? Advisers will be required to act in the ‘best interests’ of their clients, and place their clients’ interests ahead of their own and their licensee or employer Best interest duty is not a defined term

Summary of Changes Who do they apply to? Old – Appropriate Advice requirement applies to licensees New – Best interests requirement applies to ‘the advice provider’ i.e. the adviser What are the obligations? Old – to provide appropriate advice to warn client if advice based on incomplete or inaccurate information New - to act in client’s best interests - to provide appropriate advice - to warn client if advice based on incomplete or inaccurate information - to give priority to the interests of the client Liability for Non-compliance Old – criminal offence requiring burden of proof of beyond reasonable doubt New – civil penalty based on balance of probabilities

Best Interest Duty This is not a defined term in the legislation Prescribed steps to be followed provide a ‘safe harbour’ ASIC have also provided a ‘reasonableness test’ ie would a ‘reasonable adviser’ have determined that the client would be better off if they followed the advice? – This is an objective test

Safe Harbour To comply with the best interest obligation, advisers need to act in the best interests of their clients, which can be demonstrated by following seven steps: 1.Identified the objectives, financial situation and needs of the client; 2.Identified the subject matter of the advice that has been sought by the client (whether explicitly or implicitly) and the objectives, financial situation and needs of the client that would reasonably be considered as being relevant to the advice sought on the subject matter (i.e. the client’s relevant circumstances) 3.Where it was reasonably apparent that the information relating to the client’s relevant circumstances was incomplete or inaccurate, made reasonable enquiries to obtain complete and accurate information 4.Assessed whether they have the expertise required to provide the client with advice on the subject matter sought, and if not, declined to provide advice 5.If, in considering the subject matter of the advice sought, it would be reasonable to consider recommending a financial product,  conducted a reasonable investigation into the financial products that might achieve the objectives and meet the needs of the client, that would reasonably be considered relevant to providing advice on the subject matters, and  Assessed the information gathered in the investigation 6.Based all judgements in advising the client on the client’s relevant circumstances and 7.Taken any other step that at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances.

Summary of Safe Harbour Meeting the best interest obligation is about ensuring that your advice meets the standard of a ‘reasonable adviser’ being able to determine that the client, having acted on your advice at the time the advice was given, would have been better off.

Practical Tips Avoid “cookie cutter” advice – Storm Financial Ask yourself: ▫ Did I get to know the client? ▫ Did I clearly define the task I was asked to do? ▫ Did I follow a process? ▫ Did the advice address the goals and objectives of the client? Also, there are two more questions you should ask yourself to ensure that your advice meets the requirements of the best interests duty and its associated obligations: ▫ Would a reasonable adviser believe that the client is likely to be in a better position by following my advice? ▫ If I was the client relying on my advice and trusting me to act in my best interests, is this what I would recommend?

Practical Tips (cont) Switching – will only be acceptable if reasonable to conclude that the net benefits likely to result from the new product are better than the existing product. Remember overall cost savings can override the loss of other benefits – but you must take into account switching and adviser’s fees. Priority – think carefully about whether your advice process prefers your interests to your clients’. You may not be the best person to judge this. If in doubt ask. Over servicing – don’t recommend a product or over service the client to create extra revenue. ASIC will see through this.

What changes will TAE make Fact Find – will be reworked to remind advisers of the safe harbour steps when collecting information and scoping the client’s needs Advice Process – SOA’s will include guidance on acting in the client’s best interests, including navigating into the ‘safe harbour’. APL – is it broad enough? And review of procedures for advising on products that aren’t on the APL. SoA – amend your template to include information about why the client will be in a better position as a result of the advice. Training – ongoing Monitoring – monitoring and supervision checklists will add the obligation to act in the client’s best interests. PI Insurance –­ impact yet to be known.