Amendments to Future of Financial Advice reforms will leave the advice industry open to significant potential future litigation, according to a legal advice got by Industry Super Australia.
ISA said in a statement this morning that the advice, from law firm Arnold Bloch Leibler, concluded if the more significant amendments were implemented by regulation, they risk being declared “invalid” and “susceptible to challenge in the courts”.
According to ISA, their legal advice states, “a court declaration of invalidity would operate retrospectively… financial advisers who relied on the regulations could be found to have acted unlawfully. The regulations would therefore create significant uncertainty…and could well become the subject of protracted litigation between financial advisers and their clients”.
ISA CEO David Whiteley said the legal opinion indicates the Government's amendments to FOFA would likely increase uncertainty for the industry and risk litigation.
“The advice indicates that there is significant doubt regarding the Government's regulation-making power to make changes on ‘opt in’, fee disclosure and best interests.
“In light of this, industry super funds would suggest that the FOFA laws be given time to settle in and that they be reviewed as a part of the upcoming financial systems inquiry.”
However, adviser representative groups such as the Financial Planning Association think any litigation likely to happen is if the amendments do not get passed.
“The industry pushed for the safe harbour steps to provide some criteria for how a financial planner could be judged otherwise it would have to wait until the courts decide on what best interest looks like by setting a precedent,” FPA CEO Mark Rantall said.
He accused product providers such as the ISA of unnecessary scaremongering and political posturing in order to throw doubt on whether the FOFA amendments adequately protect consumers.
Association of Financial Advisers COO Phil Anderson said the only litigation likely to happen is between now and when the amendments are passed, due to lack of clarity.
Amendments to the opt-in provision will “not be an issue”, as it only becomes law on 1 July 2015.
Changes to the fee disclosure statements may become an issue until the amendments are passed, but Anderson points to ASIC’s declared position not to take any enforcement action.
“If a client took their adviser to court because they didn’t get a fee disclosure statement, then technically the adviser will be exposed. But it’s difficult to say what position the courts would take on this.”
“Until any amendments come in we’ve got a lack of clarity and level of uncertainty and anything reviewed by an external disputes committee will be difficult.”
There may be some action taken in court with the best interests duty until amendments are passed, but that is why the AFA are calling for Section 961 (b)(2)(g) – the much-maligned ‘catch-all’ provision of the best-interests duty safe-harbour – to be removed, Anderson said.
“We’ll just have to play it out and see what happens.”