1. Conduct and Disclosure In the Investment Advisory Process
Chapter 7 Corporations Act

2. This topic will cover: 1. Provider’s Conduct Obligations
2. Conflict of Interest and Conflicted Remuneration
3. Disclosure Through Documentation
3.1 Financial Services Guide – FSG
3.2 Statement of Advice – SOA
3.3 Financial Product Disclosure – PDS
4. Liability for Non-Compliance
4.1 Criminal liability
4.2 Civil liability
4.3 Banning orders
4.4 Disclaimers

3. Who is a ‘provider’?
A ‘provider’ is an individual who provides personal advice to a retail client (s. 961(1)& (2))
A ‘provider’ could be an authorised representative (s. 961(4))

4. What is the Provider’s Duty to Act in the client’s Best Interest?
Section 961B
(1) The provider must act in the best interests of the client in relation to the advice.
(2) The provider satisfies the duty in subsection (1), if the provider proves that the provider has done each of the following:
(a) identified the objectives, financial situation and needs of the client that were disclosed to the provider by the client through instructions;

5. (b) identified:
(i) the subject matter of the advice that has been sought by the client (whether explicitly or implicitly); and
(ii) the objectives, financial situation and needs of the client that would reasonably be considered as relevant to advice sought on that subject matter (the client's relevant circumstances );

6. (c) where it was reasonably apparent that information relating to the client's relevant circumstances was incomplete or inaccurate, made reasonable inquiries to obtain complete and accurate information;
(d) assessed whether the provider has the expertise required to provide the client advice on the subject matter sought and, if not, declined to provide the advice;

7. (e) if, in considering the subject matter of the advice sought, it would be reasonable to consider recommending a financial product:
(i) conducted a reasonable investigation into the financial products that might achieve those of the objectives and meet those of the needs of the client that would reasonably be considered as relevant to advice on that subject matter; and
(ii) assessed the information gathered in the investigation;

8. (f) based all judgements in advising the client on the client's relevant circumstances;
(g) 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 .

9. Example of complying with s.961B
A 60 year old asks an advice provider for advice on whether they will have enough money to retire at 65.
The advice provider examines the client’s finances and expected lifestyle in retirement.

10. The provider tells the client they will not have enough money
The provider tells the client they will not have enough money. The provider gives the client several options for saving for and living in retirement, such as working longer, increasing super contributions, downsizing to smaller house, or travelling less after retirement.
The provider tells the client how much super income the client can afford in retirement, given the super balance.

11. What is the ‘appropriate advice’ obligation?
The provider must only provide the advice to the client if it would be reasonable to conclude that the advice is appropriate to the client, had the provider satisfied the duty under s. 961B. (s 961G)

12. Examples of Inappropriate advice – Storm Financial
Storm advised clients to mortgage their homes and invest in the sharemarket using risky margin loans.
When the market fell by more than 50 per cent, the investors’ margin loans were called up (“margin call”), leading to large financial losses.
Many commentators argue that this is not appropriate advice (would not satisfy s 961B & 961G) for a large proportion of Storm’s clients.

13. What is the duty to warn clients?
If it is reasonably apparent that information relating to the objectives, financial situation and needs of the retail client on which the advice is based is incomplete or inaccurate, the provider must warn the client. (s 961H)

14. What is duty to give priority to client’s interests?
If the provider knows, or reasonably ought to know, that there is a conflict between the interests of the client and the interests of: (a) the provider; or (b) an associate of the provider; or (c) a financial services licensee of whom the provider is a representative; or (d) an associate of a financial services licensee of whom the provider is a representative; or

15. (e) an authorised representative who has authorised the provider, or (f) an associate of an authorised representative the provider must give priority to the client's interests when giving the advice. (s 961J).

16. What is the Consequence of breaching 961B,961G,916H,961J?
A responsible licensee or an authorised representative may contravene a civil penalty provision if a provider fails to comply (s. 961K and 961Q).
The provider may be subject to a banning order (see s 920A).

17. 2. Conflict of Interest and Conflicted Remuneration
Licensee must have in place adequate arrangements for the management of conflict of interest. (s 912A(1)(aa))
Conflict of interests are circumstances where some or all of the interests of clients are inconsistent with, or diverge from, some or all of the interests of licensees or representatives. (RG 181)

18. What are some examples of Conflict of interest?
Product issuer A provides a high commission to a financial planner. Product B provides a low commission to a financial planner.
The financial planner may be tempted to recommend product A because of the high benefit, even if product B is more appropriate for the client than product A.

19. Disclosure of a conflict of interest (for example, disclosing commissions in a SOA and a FSG) plays an important part of managing a conflict of interest.

20. What is Conflicted Remuneration ?
FOFA reforms commenced operation on 1 July 2013 to ban certain types of commissions or benefits called “Conflicted Remuneration”.

21. Conflicted remuneration means any benefit, whether monetary or non-monetary, given to a licensee, or a representative, who provides financial product advice to retail clients that, because of the nature of the benefit or the circumstances in which it is given:
(a)  could reasonably be expected to influence the choice of financial product recommended by the licensee or representative to retail clients; or
(b)  could reasonably be expected to influence the financial product advice given to retail clients by the licensee or representative. (s. 963A)

22. Volume-based payments (payments dependent on the total number or value of financial products of a particular class or classes) will be presumed to be conflicted remuneration but it will be open to advisers to prove that they are not. (s 963L)
This reform intends to encourage financial advisers to become more client-focused, as more of their fees will be paid directly by the client rather than indirectly through product commissions. 

23. 3. Disclosure Through Documentation

24. What is a Financial Services Guide (FSG)?
A FSG is a document that contains basic information that any retail client is entitled to receive. It is provided at the outset of dealing with clients.

25. When should a Financial Services Guide be provided?
When the provider will be or is likely to be providing a FS, and before the FS is provided. (s 941D) unless the service is “time critical”.
A licensee or A.R. who provides a FS to a retail client must provide a FSG (ss 941A and 941B). The requirement applies to both personal and general advice.

26. What must be included in a FSG when the licensee provides it
What must be included in a FSG when the licensee provides it? Sections 942B
(a) the name and contact details of the providing entity; and
(b)  a statement setting out any special instructions about how the client may provide instructions to the providing entity; and
(c)  information about the kinds of financial services (the authorised services ) that the providing entity is authorised by its licence to provide, and the kinds of financial products to which those services relate; and
(d)  information about who the providing entity acts for when providing the authorised services; and
(e)  information about the remuneration (including commission) or other benefits
                      

27. (f)  information about any associations or relationships between the providing entity, or any related body corporate, and the issuers of any financial products, being associations or relationships that might reasonably be expected to be capable of influencing the providing entity in providing any of the authorised services; and
     

28.   (g)  if the providing entity provides further market‑related advice (see subsection 946B(1)) or advice to which subsection 946B(7) applies--a statement about that
     
  (h)  information about the dispute resolution system that covers complaints by persons to whom the providing entity provides financial services, and about how that system may be accessed; and
(i) Binder information
(j)licensed market or CS facility
(k) any other info required by Regulations

29. What must be included in a FSG provided by an Authorised Representative?
When A.R issue FSG, a similar list of content must be included (see s 942C)

30. What is a Statement of Advice (SOA)?
It is a document detailing the advice given, the reasons and other information including remuneration.

31. When should a SOA be provided?
When a retail client is given personal advice, the licensee and authorised representatives must give the client a SoA. (s 946A) exceptions include s 946AA.
SOA can be the means by which the advice is given or a record of the advice.
If the SOA is a record, then it must be provided to the client when, or as soon as practicable after, the advice is provided and in any event, before any further service that arises out of or is connected with the advice ( s. 946C)

32. What must a SOA contain?
Must include info about client’s circumstances;
descriptions of the range of products/strategies considered;
Statement setting out the advice, and Reasons why advice is appropriate.
(s 947B and RG175)
Name and contact details of providing entity.
Information about fees, commissions or associations that might have affected the advice
(s 947B- licensee, 947C- AR, 947D- additional info if advice recommends replacement)

33. What is a Product Disclosure Statement (PDS)?
It is a document to inform the retail client about the product;
Promote the understanding of the client
Allow comparison of financial products and help them make an informed choice

34. When must a PDS be provided?
A PDS must be provided to a retail client by a regulated person
when personal advice includes a recommendation that the client acquire a particular financial product. (s 1012A)
When they make an offer to issue or arrange th issue, or client makes an offer to acquire (s 1012B)
The seller controls the issuer and sale is off-market issue (s 1012C)
Some exceptions apply ( see ss 1012D, 1012E , etc)

35. What must a PDS contain? S 1013D
A Product Disclosure Statement must include the following statements, and such of the following information as a person would reasonably require for the purpose of making a decision, as a retail client, whether to acquire the financial product:
                     (a)  a statement setting out the name and contact details of:
                              (i)  the issuer of the financial product; and
                             (ii)  if the Statement is a sale Statement--the seller; and
                     (b)  information about any significant benefits to which a holder of the product will or may become entitled, the circumstances in which and times at which those benefits will or may be provided, and the way in which those benefits will or may be provided; and
                     (c)  information about any significant risks associated with holding the product; and
                     (d)  information about:
                              (i)  the cost of the product; and
                             (ii)  any amounts that will or may be payable by a holder of the product in respect of the product after its acquisition, and the times at which those amounts will or may be payable; and
                            (iii)  if the amounts paid in respect of the financial product and the amounts paid in respect of other financial products are paid into a common fund--any amounts that will or may be deducted from the fund by way of fees, expenses or charges; and                    

36.  (e)  if the product will or may generate a return to a holder of the product--information about any commission, or other similar payments, that will or may impact on the amount of such a return; and
 (f)  information about any other significant characteristics or features of the product or of the rights, terms, conditions and obligations attaching to the product; and
 (g)  information about the dispute resolution system that covers complaints by holders of the product and about how that system may be accessed; and
 (h)  general information about any significant taxation implications of financial products of that kind; and
                    

37.  (i)  information about any cooling‑off regime that applies in respect of acquisitions of the product (whether the regime is provided for by a law or otherwise); and
 (j)  if the product issuer (in the case of an issue Statement) or the seller (in the case of a sale Statement) makes other information relating to the product available to holders or prospective holders of the product, or to people more generally--a statement of how that information may be accessed; and
(k)  any other statements or information required by the regulations; and
(l)  if the product has an investment component--the extent to which labour standards or environmental, social or ethical considerations are taken into account in the selection, retention or realisation of the investment; and
(m)  unless in accordance with the regulations, for information to be disclosed in accordance with paragraphs (b), (d) and (e), any amounts are to be stated in dollars.             

38. What if there is a material change to the information in a PDS?
A retail client must be notified of material changes and significant events, eg change in fees or charges, etc (s 1017B)

39. Must there a cooling off period in the PDS?
Yes, there msut be a 14 day cooling off period for the following financial products where the products are acquired by retail clients:
Risk insurance (general insurance and life insurance)
Investment life insurance
Managed investment
FHSA
Superannuation and RSA
(s 1019A)
Some exceptions apply.

40. 4. Liability for Non-Compliance
4.1 Criminal liability
Failure to Provide Disclosure Documents
Failure to provide FSG and SoA is an offence:-- S 952C
Failure to provide a PDS is an offence : s 1012C.

41. Providing defective disclosure documents
It is an offence to provide defective FSG and SOA (ss 952D, 952E)
It is also an offence to provide defective PDS (ss 1021D, 1021E)
“Defective” means either
There is a misleading and deceptive statement Or
Ommissions from content requirements in ss 942B 942C, 947B,947C 947D 1013C OR
Any other Omissions which are materially adverse

42. What are some examples of defective disclosure?
Not disclosing the risk

43. Who are liable for failing to provide disclosure documents& for defective disclosure?
Licensee
Authorised representative
Preparers of the PDS

44. 4.2 Civil Liability
Investors suffering loss or damage may recover by taking civil action against a liable person – licensee or product issuer (ss. 953B, 1022B)

45. 4.3 Banning orders
ASIC has the power to make a banning order if the licensee has not complied with financial services laws, or obligations under s 912A. ( s 920A(1))

46. 4.4 Disclaimers
Part 7.7 & Part 7.9 requirements (the requirements discussed in this topic) can not be avoided by a disclaimer or waiver.
(s. 951A , s.1020D)