Advisers could face more cases of litigation if a proposal to amend FoFA’s best interest duty is passed into legislation, a superannuation organisation says.
Industry Super Australia (ISA) obtained legal advice from firm Arnold Bloch Leibler which indicates that amending the best interests duty as proposed could have negative consequences for both advisers and their clients.
The firm advised that the amendments are inconsistent with the nature of best interests and add to legal uncertainty associated with financial advisers attempting to reduce the scope of duty by agreement with their clients.
The proposal for advisers and clients to agree to determine the scope of best interests is “inherently problematic” due to a disparity in the level of knowledge or understanding of what they are agreeing to and its consequences, Arnold Bloch Leibler stated.
Legal action could potentially be an issue if there are disputes about what the client understood and agreed to due to this different level of understanding.
On ABC's Lateline, host Emma Alberici also blasted Assistant Treasurer Senator Arthur Sinodinos with the firm's findings, which she quoted as stating: "Never before has the law allowed an adviser to avoid responsibility for ensuring the scope of advice is consistent with a client's needs and circumstances. This proposed change would be open to significant abuse and could be used, for instance, to get a client to agree to receive advice which ignores important relevant factors such as their existing debt levels or only considers products that pay commissions to an adviser."
Sinodinos, who replied that Arnold Bloch Leibler are "good friends" of his, dismissed the advice and said all the changes he is making are based on the best legal advise in the Commonwealth.
The firm found that the removal of the “catch all” provision, which is the seventh step in a process that advisers must take to prove they have discharged their duty to their client, will allow advisers to act without having to exercise judgement.
“This would likely reduce the overall quality of financial advice given in Australia, with advisers focused on carrying out the remaining steps in the safe harbour as efficiently as possible,” it stated. “In other words, going through the motions and reducing the best interests duty to a mechanical checklist.”
Robbie Campo, ISA’s deputy chief executive, said the removal of the catch all renders the best interests duty pointless.
“[It] was the only part of the test which referred to acting in a client’s best interests. It would be preferable to remove the other steps and leave in place the catch all,” she said.
Professionalisation of the advice industry needs a straight forward best interests duty without any fine print, similar to that of doctors and lawyers, Campo said.
“It’s not going to be helping in terms of the aspirations that financial advisers have to be acting as professionals,” she said. “[The amendments] will damage the progress that’s been made towards professionalisation.”