Australia regulator begins enforcing Oz version of fiduciary rule
As US insurance brokers, financial advisers and financial services companies await word as to whether president-elect Donald Trump really will go ahead with rumoured plans to derail a proposed, legally-binding “fiduciary rule” affecting retirement product sales, Australia’s regulator has begun enforcing a similar rule.
Although it wasn’t widely noticed outside of Australia, that country recently adopted a concept roughly identical to America’s fiduciary rule, as part of its Future of Financial Advice reforms, which came into force in 2013.
It’s known there as the “Best Interests Duty” – although, like the American rule, it assigns to advisers the requirement to “act in the client’s best interests”.
As reported, Registered Investment Advisors (RAs) in the US have been held to a “fiduciary standard” since 1940, and many of them say they see no reason why they should not being obliged to put their clients’ interests ahead of their own when selling them financial products – which is what the fiduciary rule, due to begin coming into force next April – will require of retirement product salespeople.
However, US insurance brokers, who currently are required to meet a lesser “suitability standard” when selling retirement products, oppose the introduction of the fiduciary rule for the same reason that Australian financial services businesses took issue with the Best Interests Duty when it was first proposed, as part of a sweeping package of rule changes known as the Future of Financial Advice (FoFA): They argue that it will increase their costs.
And consumers will be less well off, the American insurance brokers add, because they will have to pay for more advice, as the fiduciary rule will make products that pay commission potentially seem inherently suspect, and thus they will have to move away from a commission-based remuneration model.
Many US firms are in the process of doing this now, according to recent press reports, which note the uncertainty created by Trump campaign talk of repealing the Fiduciary Rule.
First action in June
In Australia, meanwhile, the Australian Securities & Investments Commission took its first action against an Australian business for failing to comply with the Best Interests Duty in June, three years after it came into force, when it began proceedings against a Melbourne-based advisory firm, NSG Services Pty.
That matter is still with the regulator, and a hearing is set for next month.
A few months later, on 3 November, ASIC said it had banned a Brisbane-based life insurance adviser from providing financial services for a period of five years, for, in ASIC’s words, “fail[ing] to act in his clients’ best interests when providing advice”, in addition to failing to comply “with several financial services laws”.
ASIC said it was taking that action against the adviser following two years of “surveillance” it had carried out, beginning in 2013, “which included a review of a number of his client files from the time he was an authorised representative” of the company he worked for, Affinia.
Most recently, last Thursday, the regulator said it had banned another a financial adviser – a former authorised representative of Sentinel Private Wealth Pty Ltd – from providing financial services for five years for failing to comply with financial services laws “on a number of occasions”, including failing to act in the best interests of his clients.
In a statement, ASIC said the adviser had “recommended clients change superannuation and insurance products in circumstances where there was little benefit, but significant cost, to the client in changing”, advice which benefited the adviser “through increased adviser fees and commissions he received from insurers”, but which represented a failure “to act in the best interests of his clients”.
ASIC said the adviser had also failed to provide appropriate advice to his clients or to accurately disclose the fees associated with his advice. It noted that his banning would be recorded on ASIC’s register of financial advisers, and that he retained a right to appeal the decision.
Consumers ‘should be confident’
In each case involving a finding of a failure to adhere to the Best Interest Duty, ASIC deputy chairman Peter Kell issued a statement noting that consumers “should be confident that their financial adviser is acting in their best interests”.
In the 3 Nov case, Kell added: “The business model of simply ‘selling’ life insurance without complying with the legal and regulatory obligations will not be tolerated by ASIC. Advisers who do so will be removed from the industry.”
‘Three duties of FoFA’
According to Brett Evans, managing director of Atlas Wealth Management, a Queensland-based advisory firm which looks after Australian expatriates around the world, the FoFA legislation actually assigns three duties to financial advisers in Australia: “A duty to act in the client’s best interests, a duty to provide advice that is appropriate, and a duty to prioritise the client’s interests in the event of a conflict”.
Evans said that he personally “would like to see some form of Best Interests Duty being incorporated by regulators and advisers around the world”.
“As a financial adviser, we should always be working towards the client’s best interests, so this piece of legislation won’t change the advice we’re providing, [it just ensures] that it gets done by me and every other adviser in Australia.
“Due to the fragmented nature of the offshore IFA market, there needs to be more structure and supervision provided, and the regulator [in each jurisdiction] has to be able to enforce the client’s rights as well by using the appropriate legislation”.