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FINANCIAL ADVICE REFORMS INSIGHTS SERIES 9 – THE NEW STATUTORY CONDUCT OBLIGATIONS
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Under the financial advice reforms, conduct-based duties will apply both to those giving advice and those engaging others to give advice on their behalf.

In brief:

In this ninth in our Series of Financial Law Insights working through the detail of the Financial Services Legislation Amendment Bill we discuss the revised statutory conduct obligations, including:

  • when duties will apply
  • the changes to be made to existing duties when they are carried across into the new regime
  • the new duties applying to those giving financial advice and those engaging others to provide advice.

In the Series so far:

1 – confirmation of the proposed reforms
2 – key concepts
3 – the FAP conundrum
4 – key changes to the FSP Act
5 – transitioning to the new regime
6 – offshore advisers
7 – the Code of Conduct and Code Working Group
8 – the new regime for custodial services

In full: 

Many of the duties have been carried across from the Financial Advisers Act 2008 (‘FAA’) regime. However, there are a number of new duties, and some subtle changes to existing duties, which providers and advisers will need to take into account in planning for the new regime.

Application of duties

Under the new regime, duties only apply where ‘regulated financial advice’ is given. This term is defined to include any financial advice given in the ordinary course of a business, unless expressly excluded. That scope includes advice to wholesale clients.

Although the majority of these duties are not onerous, it is notable that the new duty to give priority to client interests (outlined below) will apply to advice given to all clients, regardless of the disclosures made, nature of the client, and the type of advice they wish to be given.

Changes to existing duties

Some of the existing duties from the FAA have been carried across to the Financial Markets Conduct Act 2013 (‘FMC Act’) with modifications. For example, the duty to exercise the care, diligence, and skill that a reasonable financial adviser would exercise in the same circumstances has been adjusted to refer to the care, diligence, and skill that a ‘prudent person’ engaged in the business of giving regulated financial advicewould exercise.

This is consistent with the existing use of the ‘prudent’ standard throughout the FMC Act. However, it does raise questions as to whether there is a difference between a ‘reasonable’ adviser and a ‘prudent’ person.

It is also interesting that no duty to act in the ‘best interests’ of clients has made its way into the Bill. This contrasts with obligations applying to supervisors and managers of registered schemes and debt securities, but, in our view, appropriately reflects the different role of those who have direct control and supervision of assets. It also leaves the door open for the Code Working Group to prescribe appropriate standards of conduct relating to client interests.

Offers in the course of unsolicited meetings

The Bill will also amend the existing prohibition on offers of financial products in the course of unsolicited meetings. Any financial advice provider that is acting in the ordinary course of business as a provider will be exempt from the prohibition – which is arguably broader than the existing exemption.

The prohibition still only applies to ‘financial products’ and does not extend to the broader class introduced by the Bill of ‘financial advice products’. This means that insurance contracts and DIMS facilities, among other products, can still be offered in the course of unsolicited meetings without needing to rely on the financial advice provider exemption.

The new duties

A number of new duties will be introduced by the Bill, including:

Giving priority to client’s interests

All persons who give regulated financial advice will be required to give priority to a client’s interests where there is a conflict between the interests of that client and the interests of the adviser (or any person associated with the adviser). This requires the adviser to take all reasonable steps to ensure that the advice is not materially influenced by the interests of the adviser, the provider on whose behalf advice is given, or anyone associated with either.

This is, in essence, a conflict management duty. While the scope of the duty has been narrowed since the original consultation version, its application, and how it should be discharged in practice, is not entirely clear. Guidance, either in the new Code of Conduct (‘Code’) or a separate FMA publication, will likely be required. In the meantime, providers can look to the existing ASIC guidance on the equivalent Australian duty for direction.

Compliance with code of conduct

Any person giving regulated financial advice to a retail client will be required to comply with the standards of ethical behaviour, conduct, and client care, and to meet the standards of competence, knowledge, and skill, required by the Code. The extent of these additional conduct obligations will not be known until the Code is finalised (see our earlier Financial Law Insight for more information on the Code).

Client understanding of nature and scope of advice

Any person giving regulated financial advice to a retail client will be required to take all reasonable steps to ensure that the client understands the nature and scope of the advice given. This is far more pragmatic than the consultation drafting, which required prior agreement on the nature and scope of the advice to be given – highly problematic for those providing bulk client updates and marketing materials!

Financial advice providers’ obligations

Providers will be subject to a duty to take all reasonable steps to ensure that financial advisers and nominated representatives comply with the conduct duties set out in the Bill.

Providers engaging nominated representatives will also be subject to further duties to put appropriate processes, controls and limitations in place, and avoid giving incentives that encourage non-compliance. While this is not the express prohibition on commission payments some had been hoping for, the absolute nature of these duties could present challenges for those rewarding nominated representatives for meeting sales or funds-under-advice targets.

Conclusion

Other than the imposition of a statutory conflict management duty on those advising wholesale clients, there are relatively few surprises in the statutory conduct regime to be introduced under the reforms. Changes in approach to managing conduct obligations will be required, although the full extent of those changes will not be known until the Code is finalised.  

Start a conversation

If you would like a specific briefing on the Bill, what the proposed reforms may mean for your business, or would like advice on how the current regime applies to your business, please contact Catriona Grover on +64 4 498 0816, David Ireland on +64 4 498 0840, Nick Summerfield on +64 9 915 3357, Karen Mace on +64 4 496 5941, or Tom McLaughlin on +64 4 498 0886, or email the team at financialmarkets@kensingtonswan.com.

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